Torygraph:boe Data Points To Depression.

[aa3]

Compare the UK and our £200 billion QE.. to Ireland which did not do QE.

The policy makers were wrong imo to expect a self-sustaining recovery to happen. Even after the first big dose of QE. I personally did not expect the private economy to become self-sustaining. I doubt if we'll ever see the private economy become self-sustaining again. The private sector just isn't the mass jobs producer that it once was. And most of the new jobs are low paying which don't have the disposable income which can really drive an economy.

If they use QE to do something stupid like buy longterm corporate bonds to drive down the yield even further, or buy stocks.. I doubt it will help the economy or avoid deflation. It has to be funding a massive fiscal deficit, then the state spending the money widely.

[aa3]

Irelands deflation is jsut occuring more quickly,they will recover before us.

the notion that govt stimulus trumps private sector tax cuts is not substantiated by the evidence.

QE can be used to fund tax cuts. But sadly not many governments did that.

A negative income tax could really help low income Brits get money, while also encouraging work.

[interestrateripoff]

QE was to help the bankers balance sheet, so it has had a positive effect because their insolvency is still hidden.

[Godley]

QE was to help the bankers balance sheet, so it has had a positive effect because their insolvency is still hidden.

precisley, except to say that their insolvency was averted rather than hidden. QE provided the liquidity.

Just to go on to say, all this talk of deflation is complete bs it really is. It's spin because the western governments fancy having another printing fest.

[easy2012]

http://blogs.telegraph.co.uk/finance/jeremywarner/100007465/impotence-of-policy-in-the-face-of-moribund-private-demand/

Yields at these levels point very strongly to deflation or a depression. Central bankers continue to think such an outcome unlikely, but the markets say otherwise. In a deflationary environment, even QE becomes impotent, for when prices are falling and the economy is contracting, even cash seems preferable to higher risk alternative asset classes.

Which yield anyway. If Fed/BoE tells everyone that if they buy gilts/T Bill at 2.5% and Boe/Fed will buy it from them at 2.49% using QE money then people will buy the gilts/T Bill. A BoE article I posted few weeks back said that in private, BoE and their friends believed that the gilts will be 1% higher than it is now without the QE. A lot of these Gilts buying are done by the banks doing carry trade, borrowing at 0.5% - 1.5% buying Gilts paying 3%. Since Bernake and the lots are hinting that the low base rates will be there for 'extended' period, the trade becomes no brainer (and even it if blows up, it is the employer's capital which are at risk and the traders are happy to collect bonus in the mean time).

Further, UK is still in a high inflationary period (RPI 4.x%). Also, if US inflation is measured using the same methodology as UK's, it is still +ve (and we see another thread today saying movie ticket prices are much higher).

[lowrentyieldmakessense(honest!)]

QE was to help the bankers balance sheet, so it has had a positive effect because their insolvency is still hidden.

and to hide the fact that the country is bust for a bit longer

what did they do with the money

[interestrateripoff]

precisley, except to say that their insolvency was averted rather than hidden. QE provided the liquidity.

Just to go on to say, all this talk of deflation is complete bs it really is. It's spin because the western governments fancy having another printing fest.

They've found the magic printing press, used it once and appear to have gotten away with it. So they will undoubtedly try it again, at some point it will implode.

[aa3]

Those prudent savers I take it you mean depositors at the banks. Depositors are the most junior creditors to the bank. So in the case that the institution failed, depositors would be first to be wiped out to satisfy the more senior creditors(the various bondholders).

In banking the other side of savers is debtors. If millions of people default on their debts it means the savers money has been lost. So either they have to take losses or the central bank prints money to fill in the gap. This was a bailout of both debtors and savers(creditors).

[interestrateripoff]

"When Money Dies" has just been reprinted. A new paperback is about £10.

And is well worth reading.

Ultimately, the source of hyper-inflation is the desire of an overburdened government to avoid public unrest, rioting, hardship, AND the danger of extremist agitation arising from high rates of unemployment and poverty. The overwhelming need of the wartime German to obtain funds, and of the Weimar government to void hardship, and unemployment led to a policy of full employment, with industry subsidised by the government. The fear of communist insurrection led to the government and industry giving in to all union demands for wages to be increased in line with increase of costs of living. Remember that this was only a few years after the Russian revolution and the formation of the USSR. As the extremists on the left and right rose in power, it became more and more critical for the government to maintain law and order, and hence to pay whatever people required. The physical printing of money because a major logistic challenge.

Post from daedalus

[eejit]

Post from daedalus

When money dies: The nightmare of the Weimar collapse

by: Adam Fergusson

it is available as 1Mb PDF download, if you hunt for it.

[interestrateripoff]

Free to read online here

http://university.unitedstatesliberty.org/654/textbooks/adam-fergusson-when-money-dies-nightmare-of-the-weimar-collapse/

That evaporation was inevitable. In March, April and May the government’s income was a mere 30 per cent of its expenditure; and during May the working classes actually paid more to the Reich in tax than the assessed tax payers of the higher social classes, for the reason that whereas the former could be tapped at source, the others had to fill in returns which were long out of date by the time the administrative machine could deal with them. Between May Day and May 31 the mark fell from 220,000 to 320,000 to the pound. The First of June was celebrated with the issue of the first five-million-mark note.

I think further on the income vs expenditure got even wider to ridiculous levels.

[MinceBalls]

I think further on the income vs expenditure got even wider to ridiculous levels.

On Newsnight last night some US guy said the USA was borrowing 47 cents in every dollar... if this is true then the poopoo is going to hit the fan.

[Realistbear]

If credit is vanishing and demand collapses as jobs are lost it may lead to lower prices for things.

And that means deflation may be on its way.

[MinceBalls]

This was a bailout of both debtors and savers(creditors).

I think this is a little simplistic… Banks - due to lax rules - are able to take in cash from savers and then lend that out at enormous multiples to often risky debtors. This is the risk. The system used was the problem so it is incorrect to say 'This was a bailout of both debtors and savers (creditors).' when actually it was a bail out of the failed system banks have been using. A system that led to systemic risk and ultimately the wiping out of their creditors

[interestrateripoff]

On Newsnight last night some US guy said the USA was borrowing 47 cents in every dollar... if this is true then the poopoo is going to hit the fan.

As the circulation swelled and the value of the mark fell, less and less importance attached to revenue from taxation. The increase in the floating debt recorded on June 27 — the 1,500 milliards which had so startled Addison — was more than the Exchequer’s total revenue (1,400 milliards) for the entire month of May. Although the Finance Ministry was working on plans to bring taxes up to a level proportionate to the mark’s depreciation, the Reichsbank’s policy of discounting and printing was bound to keep the mark far ahead of the game. In two and a half months-government expenditure had totalled the equivalent of £15.5 million against a revenue of only £5 million. In sterling terms these sums were trifling enough: but the truth was that a nation of 60 million people was going bankrupt because (at, say, 500,000 marks to the pound) she could not raise even £30 million a year to meet expenditure of only £80 million.

....

Between July 11 and July 20,. the floating debt increased from 28,000 milliard marks to 40,000 milliard, a daily issue, excluding Sundays, of 2,000 milliards. The taxation system had entirelybroken down. Living from day to day, the government did not seem to care. Of the expenditure during those few days of 12,000 milliard marks, only 4 per cent was found from taxation — at just over 500 milliards not even enough to cover the interest (570 milliards) on the debt for the same period.

.......

These appalling figures were no more than a foretaste of the chaos of the following weeks.”The Ruhr railways, which had once provided a third of Germany’s: revenue from the Ruhr, now accounted for one-fifth of her outgoings, in wages and compensation. ‘Wir schiessen,’ a high financial official told the British Ambassador, ‘dieselben Bocke wie die Osterreicher’– (,’We shoot the same goats as the Austrians’). Between August 1 and August 10, the records show, the floating debt almost doubled. But during those latter ten days, the government’s general administrative expenditure rose to 40,000 milliards: a sum somewhat greater than the total nominal expenditure during the first four months of the year.

The US is merely playing at the minute.

Edit to add:

A milliard talked about here is the modern day billion.

Edited September 1, 2010 by interestrateripoff

[MinceBalls]

The US is merely playing at the minute.

Oh good, I was worried for a minute. It is contained after all.

[interestrateripoff]

Oh good, I was worried for a minute. It is contained after all.

Yes it's revenues are are only 50% of expenditure, it's when revenues are 4% of expenditure we really need to get worried.

I'm sure that won't happen as we have the greatest experts in the world managing the problem, plus the Germans didn't have a recovery to boost revenues....

[aa3]

I think this is a little simplistic… Banks - due to lax rules - are able to take in cash from savers and then lend that out at enormous multiples to often risky debtors. This is the risk. The system used was the problem so it is incorrect to say 'This was a bailout of both debtors and savers (creditors).' when actually it was a bail out of the failed system banks have been using. A system that led to systemic risk and ultimately the wiping out of their creditors

The money the banks create out of thin air becomes a deposit somewhere else in the system.

[MinceBalls]

The money the banks create out of thin air becomes a deposit somewhere else in the system.

Yep, true enough... but it is the system of money creation in it's current guise not the principle of 'saving - borrowing' that is the problem.

[interestrateripoff]

The money the banks create out of thin air becomes a deposit somewhere else in the system.

It doesn't appear to be being deposited in my account.

[goldbug9999]

Those prudent savers I take it you mean depositors at the banks. Depositors are the most junior creditors to the bank. So in the case that the institution failed, depositors would be first to be wiped out to satisfy the more senior creditors(the various bondholders).

Indeed, its why keeping cash in a bank seems like a waste of time, I'm taking all that risk for no yield.

[winkie]

Indeed, its why keeping cash in a bank seems like a waste of time, I'm taking all that risk for no yield.

Name anything that is maintaining it's value and paying a yield in excess of inflation.

[CHF]

not necessarily.

money gets destroyed on a regular basis.

using Karl Denningers rolex/pawn shop example.

pawnbroker takes $5000 rolex as collateral for a $3000 loan.customer wanders off p1sses it up wall.Doesn't pick up watch.Pawnbroker goes to sell watch can only get$1500.effectively he jsut wiped $1500 off his personal balance sheet in destroyed cash.Now play the game with houses being used as collateral for MEW loans

Hasnt the barman got the money?

[needsleep]

Indeed, its why keeping cash in a bank seems like a waste of time, I'm taking all that risk for no yield.

Absolutely. I been trying to explain exactly this to the missus who is hell bent on keeping £50k windfall from a relative in a savings account in a high street bank (one of the bailed out ones) just because there is a £50k deposit guarantee.

Me: "put some of it into gold and silver"

Missus: "No way, I'll lose it all"

Me: "ok then, spread it around a few different institutions, bury some in the garden"

Missus: "no it's fine, they guarantee it up to £50k"

Me: "that's nice. Do you fancy waiting months or years to be compensated if there is a banking system collapse?"

Missus: "that won't happen"

Me: "feck it, I give up"

[easy2012]

aa3, on 01 September 2010 - 11:15 AM, said:

In banking the other side of savers is debtors. If millions of people default on their debts it means the savers money has been lost. So either they have to take losses or the central bank prints money to fill in the gap. This was a bailout of both debtors and savers(creditors).

take your point to a degree but.........

you assume that savers hold their assets in cash in banksa nd not in a myriad of otehr ways.

if millions default,the bank taskes the hit on it's capital.post basels 1/2/3,that includes a lot more than depositors funds.

This post has been edited by Pedro for the Fed: Yesterday, 12:50 PM

In the UK, , depositors are general creditors and have no preference situation and so are ranked the same as the unpaid IT contractor or electric company (but before equity holders, of course)

In the US, there is a Depositor preference law where depositors are ranked just after secured creditors, administrator expenses and before everyone else.