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bankstersparadise

Zirp Vs. Qe - Which One Ends First?

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All the central banks that have employed Quantitative Easing (QE) since the financial crises have done so AFTER dropping central bank reference rates to zero, or near zero. However, the common wisdom is that central banks could look to raise interest rates before starting to reduce QE.

Why is it that way round?

What would be the implications of the BofE not deciding to re-invest the 6.bn redemption in December and so reducing the stock of bonds in their asset purchase facility from 375bn to c. 369bn?

Would this tightening be less tough than a 25 bps increase in the base rate?

Why would the playbook not be to let the asset purchase facility mature and wind down some way before seriously thinking of a rate hike?

I don't really have a strong view either way but I am a massive dove, so I don't believe we will get any reasonable monetary tightening without being forced to by the market. The old chestnut of our 5% budget deficit and 6% current account deficit leading to some sort of sterling crises.

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Why would the playbook not be to let the asset purchase facility mature and wind down some way before seriously thinking of a rate hike?

Spot on. Until they start selling their treasuries and what not to withdraw cash from the market it's all busy-bodying. Make pretend, smoke and mirrors, for BBC and so on to enjoy all those press conferences, Q&A.... the dry residual of which is pretty much a fat zero?

Edit: indeed, they will move on the market telling them in no uncertain terms. Until then they will pretend they are the pace setters

Edited by Meerkat

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I think far more of our money will be base money by the time this has all finished.

After the war it was a much higher proportion (half?) before steadily falling to about 3% before the crisis and 97% interest bearing credit money.

I think we'll end up managing this by raising rates whilst still printing new money. That way we can bring the debt load down.

It is the ONLY way that rates can be 'normalised' and we bring back capitalism.

So let me see if I've got what you are saying.

Higher interest rates discourage private sector credit creation and encourage private sector saving so we get a de-leveraging in the private sector. This is the mechanism for reducing the debt load?

But at the same time Geroge O will be running a zero budget deficit in 5 years ;-) (of course he will right?).

So the numerator, debt might not shrink as fast as the denominator, GDP. So maybe there is no de-leveraging?

Or maybe, George O is still running a 5% deficit in 4 years time and in which case the private sector is de-leveraging but the public sector is still gearing up and this debt is monetised via QE still?

Also how would this bring back capitalism? And why would TPTB want to bring back capitalism?

Edited by bankstersparadise

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+1. Also I like your signature :D Understanding that private banks create 97% of the money supply as debt is hugely important.

But you need demand for loans and if you raise interest rates which cause the front end of the tield curve to move up then deamnd for credit will fall. So increasing base money in this envorinment is kind of a waste of time as banks won't need fresh reserves because they won't be growing their loan books? Edited by bankstersparadise

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