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LuckyOne

So Here Is A Question About The Unintended .......

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So let's imagine that you are a foreign buyer of Gilts.

Most foreign buyers of Gilts "own" them by financing them through the repo market rather than paying cash for them

Over time, we have seen two things happen :

- Financing rates have collapsed as the Base Rate has approached zero.

- Gilt prices have risen as the authorities have telegraphed their intention to purchase Gilts irrespective of price.

If you are an offshore leveraged buyer of Gilts, you have seen a massive capital appreciation in Gilt prices and are immune to the weakening of Sterling (apart from your profits) as the purchases of Gilts are financed by borrowing Sterling through the repo market rather than paying cash for them which would be raised by selling your own currency.

In this situation, you would sell your Gilts at a huge profit, repay your effective Sterling loan through settling your repo trade and walk away from the UK market by selling your large profits denominated in Sterling and never return.

If this view of the way that the market works is correct, the QE process has resulted in a massive transfer of wealth to the offshore buyers of Gilts at the expense of the currency which weakens as foreigners repatriate their profits.

As Gilt yields drop, the incentive for offshore players to try to repeat the game decreases so all that QE has done is enrich offshore buyers of Gilts, reduced the pool of possible buyers of Gilts going forward and weakened Sterling.

This does not appear to be a viable long term strategy .....

Edited by LuckyOne

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I think we all wonder how we will 'exit' it

Although IIRC Japans ran from 2001 to 2006, so it must be documented.

Japan cannot give us any clues about how we "exit" the situation just yet.

The BOJ and MOF are pushing on a string. The supply of credit continues to expand. The demand for credit continues to collapse. Asset prices continue to stagnate (the Nikkei is only at around 26% of its peak value at the height of the bubble).

Conditions are scary as the pump is so primed that one match could set off an inflationary conflagration but it has been unable to do so for nearly a decade.

I am not brave enough to try to predict what will happen to the rest of the world based on the Japanese experience .......

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If this view of the way that the market works is correct, the QE process has resulted in a massive transfer of wealth to the offshore buyers of Gilts at the expense of the currency which weakens as foreigners repatriate their profits.

Devaluation is always expensive.

It does help exporters though.

If of course we have any who are selling goods other countries want to buy.

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Devaluation is always expensive.

It does help exporters though.

If of course we have any who are selling goods other countries want to buy.

Good point.

It will be interesting to see whether Sterling depreciates quickly enough that the last barrel of crude that comes out of the North Sea sells for enough that it can repay all of our accumulated debt.

I doubt it ......

Edited by LuckyOne

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Good point.

It will be interesting to see whether Sterling depreciates quickly enough that the last barrel of crude that comes of of the North Sea sells for enough that it can repay all of our accumulated debt.

I doubt it ......

Believe it or not (I'm guessing you know this),

There were those who saw the north sea fields as a threat to our economy, as they put upward pressure on the value of the pound.

Crazy days.

edit: spellink

Edited by Timm

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