Gilts Sales By Foreigners Fuels Deficit Fears

[interestrateripoff]

http://business.timesonline.co.uk/tol/busi...icle6605502.ece

A record sell-off of UK government debt by overseas investors is fuelling City anxieties over the Treasury’s ability to fund soaring public borrowing that is set to top £150 billion over this year and next.

The surge in foreign selling of gilt-edged bonds and short-term UK Treasury bills is also reinforcing growing fears over the effectiveness of the Bank of England’s controversial quantitative easing (QE) scheme to pump newly created money through the economy.

Bank of England figures released on Monday highlighted record overseas sales of UK government debt during the three months from March to May.

Foreign investors dumped a total of £22 billion in their holdings of UK gilts and Treasury bills, mainly selling these to the Bank itself, through its QE scheme.

In May alone, foreign institutions sold £3 billion in Treasury bills and £900 million in gilts. In March there were record net overseas disposals of gilts worth £7 billion; in April, selling reached a record £10.9 billion.

With the Bank expected to wind up its huge purchases of gilts under QE in the next few months, some economists fear that, without this vast £125 billion asset-buying drive, the scale of foreign dumping of government debt signals that the Treasury might struggle to meet its future funding needs through finding enough buyers for fresh gilt issues.

Michael Saunders, of Citigroup, said that the Treasury could be forced to make gilts appear better value by paying out more in interest to “tempt back foreign investors, without whom the funding arithmetic looks impossible to meetâ€. He added: “The gap left by foreign net sales of UK public sector debt is being filled at present by the Bank of England. But the Bank’s gilt-buying programme is likely to end soon.â€

Those concerns come as the Organisation for Economic Co-operation and Development called yesterday for “more explicit†spending cuts and tax increases to curb Britain’s vast budget deficit, which it expects to reach 14 per cent of GDP in 2010-11. That implies £30 billion more borrowing than Alistair Darling, the Chancellor, has already factored into Treasury forecasts.

Mr Saunders and other analysts also believe that, with foreign investors exploiting the Bank’s asset-buying under QE as an easy route to sell part of their gilt holdings, this, in turn, is undermining the effectiveness of the radical measures that are aimed at jump-starting the economy.

The only ones that believe it appears are Brown and his cronies.

We are blessed to have someone so delusional.

[Harry Sacks]

When a consensus is reached on this forum it is only a matter of time until it becomes reality.

[Laura]

The surge in foreign selling of gilt-edged bonds and short-term UK Treasury bills is also reinforcing growing fears over the effectiveness of the Bank of England’s controversial quantitative easing (QE) scheme to pump newly created money through the economy.

Sterling is stronger than ever, thus proving that this pumping idea works

[Deckard]

Sterling is stronger than ever, thus proving that this pumping idea works

Stronger than ever - no

Correcting the panic lows seen at the turn of the year - yes

Still undervalued - yes

[sikejsudjek]

High noon for ZanuLabour is getting closer. That IMF moment when the computer says no, and the muppets at the helm are forced into spending cuts and tax rises. At that point even the thickest of the electorate will realise that Britain is going bust, and Labour were the cause.

We are being run by a bunch of debt addicts. Irresponsible and doomed to hit the rocks.

[aa3]

Sterling is stronger than ever, thus proving that this pumping idea works

Yes QE works. Brown's plan to QE £100 billion worth of this year's budget deficit has to be the most radical plan in more than a generation. The pound is rising in relation to other major currencies because the British economy with QE is doing better than those other nations without QE to fund fiscal deficits.

And I would go way bigger than Brown has, I've been arguing for QE funded deficit of £350 billion each year for the next 5 years. It creates a virtuous circle as money gets into the hands of people they spend it buying things like cars. Then car salesmen make more money, pay more taxes, and buy more things themselves. As people spend money new jobs are created, bringing online unemployed or underemployed people.

Edited June 30, 2009 by aa3

[interestrateripoff]

Yes QE works. Brown's plan to QE £100 billion worth of this year's budget deficit has to be the most radical plan in more than a generation. The pound is rising in relation to other major currencies because the British economy with QE is doing better than those other nations without QE to fund fiscal deficits.

And I would go way bigger than Brown has, I've been arguing for QE funded deficit of £350 billion each year for the next 5 years. It creates a virtuous circle as money gets into the hands of people they spend it buying things like cars. Then car salesmen make more money, pay more taxes, and buy more things themselves. As people spend money new jobs are created, bringing online unemployed or underemployed people.

If only it was that simple, what about the blackhole?

If printing money solved all the ills why haven't we done it before?

[dryrot]

And I would go way bigger than Brown has, I've been arguing for QE funded deficit of £350 billion each year for the next 5 years. It creates a virtuous circle as money gets into the hands of people they spend it buying things like cars. Then car salesmen make more money, pay more taxes, and buy more things themselves. As people spend money new jobs are created, bringing online unemployed or underemployed people.

Why stop at £350bn? Why not print £100bn for every person in UK - we could buy up the world!

[dryrot]

If only it was that simple, what about the blackhole?

If printing money solved all the ills why haven't we done it before?

It worked in Weimar Germany, and in Zimbabwe... er...

I hope the "£350bn" poster was being ironic - if not, the problem withh QE is when those holding sterling realise it will loee all value. Been to Cuba reently? Tried to live on National Pesos? Theres nothing in the shops for the poor locals.

Edited June 30, 2009 by dryrot

[Godley]

Yes QE works. Brown's plan to QE £100 billion worth of this year's budget deficit has to be the most radical plan in more than a generation. The pound is rising in relation to other major currencies because the British economy with QE is doing better than those other nations without QE to fund fiscal deficits.

And I would go way bigger than Brown has, I've been arguing for QE funded deficit of £350 billion each year for the next 5 years. It creates a virtuous circle as money gets into the hands of people they spend it buying things like cars. Then car salesmen make more money, pay more taxes, and buy more things themselves. As people spend money new jobs are created, bringing online unemployed or underemployed people.

You are joking? Please tell me this is a joke or please tell me you are unable to vote.

[Guest Parry]

http://business.timesonline.co.uk/tol/busi...icle6605502.ece

The only ones that believe it appears are Brown and his cronies.

We are blessed to have someone so delusional.

Could this be the reason for the recent strengthening of Sterling?

Where's Noel?

[porca misèria]

What this tells us is that we're repaying a juicy chunk of national debt owed to foreigners. With newly-printed money.

The repayment I suspect means that as the printer pushes up gilt prices, the foreigners see a good selling opportunity at an above-market-value price. That could go on until after an election. As for the pound's strength, that's a reversion to something nearer the mean: the printing is not really inflationary while it's merely bringing past off-balance-sheet inflation onto the balance sheet.

Who is buying, other than the BoE? Aren't UK pension providers required to hold lots of government bonds to support annuities (and does that mean they may have no choice but to buy even when the timing stinks and they know they'll lose money on it)? That would seem to point to how our pension system really works: it relies on a big national debt, and gives the lie to the idea that "funded" pensions are any better for taxpayers than unfunded ones!

[IMHAL]

You are joking? Please tell me this is a joke or please tell me you are unable to vote.

Don't worry - aa3 is a rare species - a medium intellect but large ego and thick skin - he could be quite a good politician

[Godley]

Could this be the reason for the recent strengthening of Sterling?

Where's Noel?

I struggle with this one.

If the QE money is buying UK debt, the debt is held by a foreign investor the foreign investor is receiving £'s in exchange for the debt.

What does the investor buy with the £'s? This money has to make it's way back to the UK somehow? Doesn't it?

And if it can only buy UK goods or services is this what would fuel inflation, is this the inflationary or one of the inflationary scenarios?

Given I don't have the answers to the above, I would still offer that the money is finding it's way back to the UK and is being used to buy up equities which is why the stockmarket has seen an uptick in the last couple of months.

Answer's and views from the experts amongst us would be appreciated.

[Guest sillybear2]

I struggle with this one.

If the QE money is buying UK debt, the debt is held by a foreign investor the foreign investor is receiving £'s in exchange for the debt.

What does the investor buy with the £'s? This money has to make it's way back to the UK somehow? Doesn't it?

They return the Sterling back to the UK and ask for USD or EUR in exchange, and the BoE cannot print those. BoE needs their Sterling the same way De Beers needs your diamonds.

Edited June 30, 2009 by sillybear2

[punter]

Sterling is stronger than ever, thus proving that this pumping idea works

it wont be strong for long.

[Godley]

They return the Sterling back to the UK and ask for USD or EUR in exchange, and the BoE cannot print those. BoE needs their Sterling the same way De Beers needs your diamonds.

Who do they buy the USD or EUR off? It's not the UK government, at some point the £'s have to exchange for something made in the UK or another form of investment like a UK listed company. Surely?

[punter]

the UK is buying its own debt with its own counterfeit money

this is just a fantasy process that will eventually accelerate to Zimbabwe like levels unless it is stopped.

you cannot create money out of thin air on this scale and expect it not to do any damange to the value of the currency. it will do enormous damage.

[arthurwasright]

the UK is buying its own debt with its own counterfeit money

this is just a fantasy process that will eventually accelerate to Zimbabwe like levels unless it is stopped.

you cannot create money out of thin air on this scale and expect it not to do any damange to the value of the currency. it will do enormous damage.

Which is probably why Merv went for a private chat at the Palace.

[BalancedBear]

Yes QE works. Brown's plan to QE £100 billion worth of this year's budget deficit has to be the most radical plan in more than a generation. The pound is rising in relation to other major currencies because the British economy with QE is doing better than those other nations without QE to fund fiscal deficits.

And I would go way bigger than Brown has, I've been arguing for QE funded deficit of £350 billion each year for the next 5 years. It creates a virtuous circle as money gets into the hands of people they spend it buying things like cars. Then car salesmen make more money, pay more taxes, and buy more things themselves. As people spend money new jobs are created, bringing online unemployed or underemployed people.

I have never heard such claptrap! If prnting money works, why does not every country in the world who wants to buy a few more things, just print some money? Why do African nations not just print money? Why bother with foreign aid, just ship out a printing press. Money only has value based on the productive capacity behind it. Just printing money does absolutely nothing.

[Trampa501]

Stronger than ever - no

Correcting the panic lows seen at the turn of the year - yes

Still undervalued - yes

Sorry but can't agree with this. As Huw puts it on another thread...

The pound is still overvalued; it must fall to reflect more accurately the purchasing power that we earn.

One way or another we're due a big reckoning.

[Deckard]

Sorry but can't agree with this.

snip

One way or another we're due a big reckoning.

Really, so you are selling all your £ and buying which currency exactly ?

[bogbrush]

Really, so you are selling all your £ and buying which currency exactly ?

Can you imagine how good our interest rates will be soon to a holder of sterling? Does this provide a hint to the strength of sterling?

[DabHand]

Funny that, l thought QE was never supposed to make it into wider circulation. After all multiplying M0 by a factor of 6 could give you a wee bit of nigh hyper inflation (plus 20% p/a for 3 years or more). No, apparently it will form a virtuous circle. Wow a perpetual wealth engine, how do you do it?

No don't answer, l'm not interested.

[Fairies Wear Boots]

Here we go!

I've thought for a while they can not hold the bank rate down for long and there will be a crisis and they'll be forced to put up rates. It was quite a surprise that Roger Bootle said it was quite possible that rates will stay low for five years.

Phase one of the crash, Solvency of banks. House prices slide slowly* downwards, lots of people thinking they'll sort it out. The government taking remedial action. Historical low in base rate. etc etc.

Phase two, Solvency of Government. Interest rates rising. Realisation sets in that the government can't just wave a magic wand and make things better.

*Slowly in my view. Fast compared to some corrections.