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Prescience

Qe Explained - Sort Of!

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Two weeks ago, M. Jean-Claude Trichet, the idiot in charge of the idiots who try and run the ECB (European Central Bank) announced he was considering further bond purchases.

This almost almost instantly "Calmed" the markets and the Euro gained some ground lost.

Which also goes to show how fickle and stupid and mindless "The Markets" actually are: he said "Considered" not "Have bought", one notes..............

So, what exactly is this Quantitative Easing process? How does it work?

Let me start by saying I am a Monetarist; unreformed, unrepentant and devout.

Money supply is king: get the ratio of money glugging around the system out of synch with GDP and it's a case of "Houston! We have a problem!"

Fiat Currency Systems are based on the single precept of the currency being backed by the underlying economic success and stability of the issuing authority: the government. And in the case of the Euro, the EB on behalf of the collective member states in the Euro Mechanism.

Way back in the distant miasma of time, banks used to issue their own bank notes: this was fine whilst they had sufficient specie (Bullion and gold and silver coinage) in their vaults to assure and guarantee the issued valued of the notes.

However banks being banks and bankers being bankers, they hit upon a cunning plan: they would issue far more notes than they could honour with specie.

Now, it won't surprise you to learn, no doubt, that this practice caused multitudinous bank collapses: and bank proprietors heading for the tall timber as fast as their fat little legs would carry them!

Thus were born banking regulations and currency only to be issued by one central authority acting for and on behalf of governments.

Trouble is it doesn't seem to apply today, as Western governments belief they can use currency as a sort of piggy bank to prop up their spending habits and profligacy.

The ECB, again is to engage in QE. They will buy back government issued bonds: and create the money to do so.

Let's consider this as a major corporation, instead of the Fed, or the ECB or the Bank of England.

The corporation, ABC Inc is in big trouble: its market share is dwindling; it has spent far too much cash on unwise acquisitions and flag waving. It faces a liquidity crisis; worst of all, its stock has plummeted on the market.

So the directors happen on a cunning plan!

They will buy back issued common stock: this means the same core value will be owned by less people. If the outfit is worth say $1 million and it has 1,000,000 shares issued then each share is worth a nominal $1.

If it buys back 500,000 shares then each outstanding share is worth $2.

It will also redeem loads of corporate bonds it issued: thus it is De-Leveraging: it owes less debt.

With less shares issued the annual dividend would increase: since if there is say $500,000 in the dividend pot, that's 50 cents per share on 1,000,000 shares: but a whole $ if there are only 500,000 shares issued!

All sounds great: so far............

However, how, exactly does the company plan to pay for these share buy-backs and bond redeems?

Err.... it plans to issue more shares!

And this is precisely what the ECB's QE programme is about: printing money to redeem ECB MEMBER'S DEBT INSTRUMENTS!

It is rather like offering your bank manager to pay off your overdraft by giving him one of his own checks!

By diluting the unit of currency, then that currency is instantly less worthy than before.

The action is also eventually, inflationary.

No wonder we're all in such a damned mess!

:(

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<snip>

It is rather like offering your bank manager to pay off your overdraft by giving him one of his own checks!

<snip>

:(

When I was working in a bank (quite a few years ago), one customer did actually offer to do this!

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  • 276 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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