Why Hasn't The Bond Market Attacked Pound Sterling?

[RichM]

I am just staggered that they seem to be able to get away for raging inflation for so long, with no discernable effects. It seems we can just post IRs at clear for eternity, as .5% rates with inflation at 4% is fine with all and sundry.

Why doesn't the bond market react? Is this simply because the BoE bought a lot of gilts last year with QE?

Thanks!

[Game_Over]

Because everyone else is even more screwed than we are?

[Executive Sadman]

I dont know. I must say a 10% GDP deficit, awful though it is, is far below what it was last time i looked (14% or so)

AFAIK most UK debt is long term and fixed rate, i guess that gives us some leeway. Who knows, maybe Osbourne will put it off - I doubt it, but you never know.

Japan looks a train wreck, Germany has its own vast pension problems, Obama and the congress seem even worse than liebour when it comes to 'deficit denying', and rising oil typically hurts the US economy far more than europe.

[scepticus]

I am just staggered that they seem to be able to get away for raging inflation for so long, with no discernable effects. It seems we can just post IRs at clear for eternity, as .5% rates with inflation at 4% is fine with all and sundry.

Why doesn't the bond market react? Is this simply because the BoE bought a lot of gilts last year with QE?

Firstly, inflation isn't raging.

Secondly, the bond vigilantes are a myth. When QE started in the US, US yields rose. Then when it stopped, yields fell again, even though none of the QE money had been removed from the economy. If the bond vigilantes exist, what have they been doing while interest rates have trended down for 30 years? Or perhaps it was the bond vigs driving the yields down?

Thirdly, if you remove a whole bunch of long bonds by monetizing them, that means supply of bonds has declined, so unless demand declines by even more, yields would fall wouldn't they?

[Milton]

I am just staggered that they seem to be able to get away for raging inflation for so long, with no discernable effects. It seems we can just post IRs at clear for eternity, as .5% rates with inflation at 4% is fine with all and sundry.

Why doesn't the bond market react? Is this simply because the BoE bought a lot of gilts last year with QE?

Thanks!

Very Simple. Our debt may be higher, but we have longer to pay it back.

Twice as long as PIGS countries. About 14 years.

This makes the UK much less vulnerable to short term rises in interest rate's.

[Or Read, if you are mid to late thirties and didnt get onto the housing ladder, late nineties, youve been screwed for the last 12 years, and will be for the next 12 years. You will probably work your entire life for nothing. No capital. But please remember, we are all in this together...]

All because of government sponsored theft, corruption, fraud, incompetence, etc etc etc......

Depressed yet? Me too.

Edited May 3, 2011 by Dan1

[Game_Over]

Inflation is raging by anyone other than the BOE's standards.

That's why the economy is stagnating - because after people have bought their food and filled up their cars they haven't got any money left to spend.

Given that we import far more than we export this was inevitable.

Still - everyone else is even more screwed than we are

So perhaps we will 'get away with it'

But I doubt it.

[Democorruptcy]

Is it because the Bank of England is the bond market now?

[mfp123]

I am just staggered that they seem to be able to get away for raging inflation for so long, with no discernable effects. It seems we can just post IRs at clear for eternity, as .5% rates with inflation at 4% is fine with all and sundry.

Why doesn't the bond market react? Is this simply because the BoE bought a lot of gilts last year with QE?

Thanks!

with quantitive easing, the government is printing money to buy up bonds which keeps bond values high. (and essentially drives down the interest rates at which banks borrow)

if you want to know why sterling isnt toast, this is relative, and the statement that its because everyone else is in a bad state, if not worse, is true.

the us dollar is doing badly, the euro is struggling, because everyones in the same boat, the rate is maintained.

however compare that to a currency that is doing faily well e.g australia, the aussie dollar to pound has gone from £1:$2.5 in 2007 to 1:$1.5 today.

so you can see it is collapsing, but compared to the dollar and euro, its relatively the same becuase the euro and dollar are screwed too.

now compare it to gold and oil and you can see how far sterling has been devalued by comparing it to physical commodities as well.

Edited May 3, 2011 by mfp123

[Milton]

with quantitive easing, the government is printing money to buy up bonds which keeps bond values high. (and essentially drives down the interest rates at which banks borrow)

is you want to know why sterling isnt toast, then the statement that because everyone else is in a bad state, if not worse, is true.

the us dollar is doing badly, the euro is struggling, because everyones in the same boat, the rate is maintained.

however compare that to a currency that is doing faily well e.g australia, the aussie dollar to pound has gone from £1:$2.5 in 2007 to 1:$1.5 today.

so you can see it is collapsing, but compared to the dollar and euro, its relatively the same.

now compare it to gold and oil and you can see how far sterling has been devalued by comparing it to physical commodities as well.

How much of our own debt have we bought now, with forged money?

Bring on the Black Swan.

Surely It has to happen.

Edited May 3, 2011 by Dan1

[Princeofpounds]

Dan1 is right- we have a totally different maturity structure which means that we need to roll over much less debt at any given time. Given our fiscal health is not dependent on a single refinancing event and we have longer to pay it back we are seen as less risky.

George osborne's austerity plan is a critical plank of this confidence- if we make the savings over the next decade we are likely to be able to service the debt.

Unlike Greece, it is also believed that any austerity measures we face will not be so killer to our economic growth that debt as a proportion of GDP rises as GDP falls faster than the debt falls due to the austerity program.

Whether that is the right view time will tell, but that's the reason for the surprising calm right now - long maturity, tight fiscal and loose monetary policy.

[mfp123]

Dan1 is right- we have a totally different maturity structure which means that we need to roll over much less debt at any given time. Given our fiscal health is not dependent on a single refinancing event and we have longer to pay it back we are seen as less risky.

George osborne's austerity plan is a critical plank of this confidence- if we make the savings over the next decade we are likely to be able to service the debt.

Unlike Greece, it is also believed that any austerity measures we face will not be so killer to our economic growth that debt as a proportion of GDP rises as GDP falls faster than the debt falls due to the austerity program.

Whether that is the right view time will tell, but that's the reason for the surprising calm right now - long maturity, tight fiscal and loose monetary policy.

a long maturity only removes the risk of default. it makes no difference to the structural problem that the debt itself poses.

[neil324]

with quantitive easing, the government is printing money to buy up bonds which keeps bond values high. (and essentially drives down the interest rates at which banks borrow)

if you want to know why sterling isnt toast, this is relative, and the statement that its because everyone else is in a bad state, if not worse, is true.

the us dollar is doing badly, the euro is struggling, because everyones in the same boat, the rate is maintained.

however compare that to a currency that is doing faily well e.g australia, the aussie dollar to pound has gone from £1:$2.5 in 2007 to 1:$1.5 today.

so you can see it is collapsing, but compared to the dollar and euro, its relatively the same becuase the euro and dollar are screwed too.

now compare it to gold and oil and you can see how far sterling has been devalued by comparing it to physical commodities as well.

Bad example using 2007. What was EUR/GBP & GBP/USD in that year? So you say the Dollar is doing badly yet using your example, we are doing 15% more badly at this given time.

[DeepLurker]

Firstly, inflation isn't raging.

<snip>

Next you'll be claiming that we've always been at war with Eastasia.

[SNACR]

George osborne's austerity plan is a critical plank of this confidence- if we make the savings over the next decade we are likely to be able to service the debt.

This needs to be prefaced by: 'If you choose to wilfully ignore off balance sheet liabilities within both the government and, it's now largely client, private banking sector and pension commitments to an ageing population demographic'

[Game_Over]

a long maturity only removes the risk of default. it makes no difference to the structural problem that the debt itself poses.

It gives you more time to ignore the problem and hope it will go away though.

That's why the cuts they are proposing are insignificant.

They are hoping that if they just tinker with the system something will turn up

What we really need is radical action but no one has the balls to do anything that might stand a chance of actually working.

IMO

[SNACR]

Next you'll be claiming that we've always been at war with Eastasia.

No, that's finished now.

Goldstein has been killed - see 'Bin Laden Is Dead' threads for details.

We might still be at war with Eurasia but TBH I lose track.

[Milton]

a long maturity only removes the risk of default. it makes no difference to the structural problem that the debt itself poses.

My limited understanding is that One of the key differences between the bailout in this country and the USA is that the Fed directly bought private sector assets.

But if things got worse. The BOE could still do this, by issuing Treasury Bills. Tens of Billions worth if neccesary.

So, if we could not sell enough of our own debt in the future, the MPC could vote to buy assets directly. Directly supporting Bubble prices.

so potentially they can kick the can down the next street, and the next, and the next........

There is no policy plan at all for the people who have found themselves on the wrong side of this ideologically twisted, economic fascist policy.

No government plan to deflate the bubble. From any political party.

According to Tainter's Collapse of Complex Societies, societies become more complex as they try to solve problems.

When a society confronts a "problem," such as a shortage of energy, or difficulty in gaining access to it, [think peak oil] it tends to create new layers of bureaucracy, infrastructure, or social class [bourgeoisie, propertied classes] to address the challenge.

Tainter, who first identifies seventeen examples of rapid collapse of societies, applies his model to three case studies: The Western Roman Empire, the Maya civilization, and the Chaco culture.

As the Roman Empire grew, the cost of maintaining communications, garrisons, civil government, etc. grew with it.

Eventually, this cost grew so great that any new challenges such as invasions and crop failures could not be solved by the acquisition of more territory.

Intense, authoritarian efforts to maintain cohesion by Domitian and Constantine the Great only led to an ever greater strain on the population.

We often assume that the collapse of the western Roman Empire was a catastrophe for everyone involved.

Tainter points out that it can be seen as a very rational preference of ordinary individuals at the time, [non property owners] many of whom were actually better off.

Average individuals may have benefited because they no longer had to invest in the burdensome complexity of empire.

In Tainter's view, while invasions, crop failures, disease or environmental degradation may be the apparent causes of societal collapse, the ultimate cause is an economic one, inherent in the structure of society rather than in external shocks which may batter them:

Finally, Tainter musters modern statistics to show that marginal returns on investments in energy, education and technological innovation are diminishing today.

The globalised modern world is subject to many of the same stresses that brought older societies to ruin.

UK wont Go Mad Max in the event of a Black Swan.

Those with nothing to lose have nothing to fear.

Edited May 3, 2011 by Dan1

[winkie]

a long maturity only removes the risk of default. it makes no difference to the structural problem that the debt itself poses.

....maybe they hope that inflationary growth will erode the majority of it by the time it needs to be re-structured.

[sharper]

Firstly, inflation isn't raging.

Secondly, the bond vigilantes are a myth. When QE started in the US, US yields rose. Then when it stopped, yields fell again, even though none of the QE money had been removed from the economy. If the bond vigilantes exist, what have they been doing while interest rates have trended down for 30 years? Or perhaps it was the bond vigs driving the yields down?

Thirdly, if you remove a whole bunch of long bonds by monetizing them, that means supply of bonds has declined, so unless demand declines by even more, yields would fall wouldn't they?

Firstly - it depends how you define inflation - if you define it as anything that is not going up in price then it is not raging (assuming such things exist) - otherwise it is high by any other measure - the highly suspect official figure is double target

Second - they likely do exist - just difficult to work out how material they are relative to the vastly more significant pension funds and insurance companies that are just matching liabilities.

Thirdly - agreed - the UK has the longest average duration of bonds of any country in the world. Largely again due to the demand from insurers and pension funds. How do you match pension payments for someone currently age 20 but expecting to live well into their 80s?

Fourthly, the UK banks increased capital requirements will likely end up in gilts.

Fifthly - the pound has fallen enormously from the glory days of 2.1 dollars and 1.6+ euros

[mfp123]

....maybe they hope that inflationary growth will erode the majority of it by the time it needs to be re-structured.

that could well be the case. but they must also realise if they create inflation to erode the debt, this also damages the economy massively, so it will come back to bite us somewhere else.

in essence we cannot cheat our way out of the problem. every action has a reaction.

if prinitng money to pay for stuff was a workable system, zimbabwe would be the wealthiest country in the world.

Edited May 3, 2011 by mfp123

[winkie]

that could well be the case. but they must also realise if they create inflation to erode the debt, this also damages the economy massively, so it will come back to bite us somewhere else.

in essence we cannot cheat our way out of the problem. every action has a reaction.

if prinitng money to pay for stuff was a workable system, zimbabwe would be the wealthiest country in the world.

...so does ' we are all in this together ' really mean we are all printing together?

[clockslinger]

I dont know. I must say a 10% GDP deficit, awful though it is, is far below what it was last time i looked (14% or so)

AFAIK most UK debt is long term and fixed rate, i guess that gives us some leeway. Who knows, maybe Osbourne will put it off - I doubt it, but you never know.

Japan looks a train wreck, Germany has its own vast pension problems, Obama and the congress seem even worse than liebour when it comes to 'deficit denying', and rising oil typically hurts the US economy far more than europe.

I'm not sure how realistic it is to compare Japanese and UK borrowing v GDP. Sure government borrowing in Japan is someting like 200% of GDP. OTOH what is the extent of private borrowing in Japan? What is the extent of corporate borrowing in Japan? Add it up to get total indebtedness then compare as % of GDP and I think you'll find the UK looks bad compared to Japan. So, the question remains quite relevant to my mind. I guess a sniff of a downgrading from the banksters little helpers at Moodys ought to do it once it becomes clear that Gideons ideological public spending balm is in fact making things worse.

[SNACR]

that could well be the case. but they must also realise if they create inflation to erode the debt, this also damages the economy massively, so it will come back to bite us somewhere else.

in essence we cannot cheat our way out of the problem. every action has a reaction.

if prinitng money to pay for stuff was a workable system, zimbabwe would be the wealthiest country in the world.

Before the crisis the BBC showed a documentary about how a Nazi plan to destroy the British economy by flooding it with printed money was thwarted - bet they won't be repeating it any time soon.

Either the Nazis or Mervyn King and the BOE are idiots - I suspect the latter.

[SNACR]

I'm not sure how realistic it is to compare Japanese and UK borrowing v GDP. Sure government borrowing in Japan is someting like 200% of GDP. OTOH what is the extent of private borrowing in Japan? What is the extent of corporate borrowing in Japan? Add it up to get total indebtedness then compare as % of GDP and I think you'll find the UK looks bad compared to Japan. So, the question remains quite relevant to my mind. I guess a sniff of a downgrading from the banksters little helpers at Moodys ought to do it once it becomes clear that Gideons ideological public spending balm is in fact making things worse.

Yep, let's spunk more money, we don't have, on 5-a-day advisers.

They can save us from the bond vigilantes by reorganising their diets so they're so rich in vitamin C and fibre that they'll be on the loo all day and have no time left to be trading bonds.

Edited May 3, 2011 by Soon Not a Chain Retailer

[R K]

China can't (for obvious reasons)

BoE won't (for obvious reasons)

'Ere long we'll be fighting the next downwave in any event