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equitystasher

Gilt Yields Rising. Does It Cause Inflation Or Deflation?

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Looking at the whole sorry state of affairs and the total mishandling of our economy I can see yields rising from here and a possible failed gilt auction.

They have pushed their luck to far. We have a mountain of debt to flog to less buyers and are competing in a ever more crowded market. We are seeing the rate

of public spending increasing at a scary rate and investors are getting nervous and have been off loading gilts.

What I would like to know is how this will effect the £ in your pocket. Rates will have to rise as I understand it which will feed through to borrowing costs which must be deflationary. But then I assume the £ will drop in value which will inflationary.

So is the outlook high inflation with high interest rates?

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Looking at the whole sorry state of affairs and the total mishandling of our economy I can see yields rising from here and a possible failed gilt auction.

They have pushed their luck to far. We have a mountain of debt to flog to less buyers and are competing in a ever more crowded market. We are seeing the rate

of public spending increasing at a scary rate and investors are getting nervous and have been off loading gilts.

What I would like to know is how this will effect the £ in your pocket. Rates will have to rise as I understand it which will feed through to borrowing costs which must be deflationary. But then I assume the £ will drop in value which will inflationary.

So is the outlook high inflation with high interest rates?

IMHO imports will continue to decline and hopefully exports will rise as the £ weakens against other currencies. The inflationary effect of rising imports will hopefully be outweighed by the deflationary effects of higher interest rates.

Bearing in mind the other deflationary factors (massive falls in money supply to come as loans written off etc) then deflation over the next couple of years is inevitable.

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We have seen a reduction in the £ of about 30% compared with other currencies.Many things I like I am now seeing a increase in price on as the old stock has run out and new stock is ordered at higher import price.

WE have also seen a reduction in VAT and interest rates along with the oil price which has caused temporary deflation but as these factors will drop out soon and we will see the figures reverse.

With gilts getting harder to sell will this cause a further devaluation in the £ causing inflation?

Edited by equitystasher

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If IRs go up, so will the pound as its yield becomes more attractive vs other currencies.

So double deflationary, as will be a rise in taxes. Tax rises will affect price indices, but will depress spending over the longer term.

(All assuming a responsible government in power, which these days is asking a lot.)

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If IRs go up, so will the pound as its yield becomes more attractive vs other currencies.

So double deflationary, as will be a rise in taxes. Tax rises will affect price indices, but will depress spending over the longer term.

(All assuming a responsible government in power, which these days is asking a lot.)

Why do you make this assumption? Interest rates in the UK in the 1970's went from 5% up to nearly 16% to around 13 by 1985, and the sterling went from over 260 to 1 against the USD... Between 1983 interest rates went from 9% to 1985 to 13% yet in that period the GBP/USD lost 30% of its value...

How about the Icelandic Krona, the value of the Krona crashed even though interest rates went up from 13% to near 19%?

You are making the assumption that the UK will be raising interest rates in isolation to other countries. Also, if a country defaults on its debt, rising interest rates are rarely good for a currency.

What I would ask is which countries will be able to increase rates with least risk of damage to the economy.

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Why do you make this assumption? Interest rates in the UK in the 1970's went from 5% up to nearly 16% to around 13 by 1985, and the sterling went from over 260 to 1 against the USD... Between 1983 interest rates went from 9% to 1985 to 13% yet in that period the GBP/USD lost 30% of its value...

How about the Icelandic Krona, the value of the Krona crashed even though interest rates went up from 13% to near 19%?

You are making the assumption that the UK will be raising interest rates in isolation to other countries. Also, if a country defaults on its debt, rising interest rates are rarely good for a currency.

What I would ask is which countries will be able to increase rates with least risk of damage to the economy.

There was both a huge inflation differential and a mega dollar rise in that time span.

What I should perhaps have said is, ceteris paribus, higher interest rates tend to mean a stronger currency.

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So looking at a time span with the size of the problem we could see a couple of years of inflation just around the corner followed by long deflation.

I would say that despite what people are seeing in the current inflation figures and all the talk of deflation they should expect higher inflation even with high unemployment because higher taxes,interest rates and import costs will feed against a back drop of sustained or increasing oil prices.

Edited by equitystasher

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I think higher long term guilt yields reflect that the market expects higher inflation, they don't actually cause inflation. In fact, with all other things being equal, I think the effect of higher guilt yields is to put downward pressure on inflation because (apparently) they encourage the BoE to increase interest rates.

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But rates must also reflect risk not just inflation expectations. Its the same for individuals or nations.

We are looking pretty risky compared to other nations and maybe the Bank of England has stopped printing because the threat of a downgrade. If we have a bond crises you are presuming that just raising interest rates will cure the problem. What if it doesn't and out debt is shunned? There are alot of other coun tires offering government debt and only limited buyers.

The £ will fall and interest rates will remain high but have little effect.High unemployment,taxes and inflation?

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Looking at the whole sorry state of affairs and the total mishandling of our economy I can see yields rising from here and a possible failed gilt auction.

They have pushed their luck to far. We have a mountain of debt to flog to less buyers and are competing in a ever more crowded market. We are seeing the rate

of public spending increasing at a scary rate and investors are getting nervous and have been off loading gilts.

What I would like to know is how this will effect the £ in your pocket. Rates will have to rise as I understand it which will feed through to borrowing costs which must be deflationary. But then I assume the £ will drop in value which will inflationary.

So is the outlook high inflation with high interest rates?

currency collapse

when more realise that we are finding buyers for gilts via freshly printed money

everything to cost more in £'s

except houses - for a while anyway

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Guest Daddy Bear
currency collapse

when more realise that we are finding buyers for gilts via freshly printed money

everything to cost more in £'s

except houses - for a while anyway

not long now...

2008-07-01-dollar.jpg

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