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VeryMeanReversion

Fiscal Easing

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On R4 this morning, there was an economist talking about tools that the central bank could use to stimulate the economy. This is something I've been expecting but it was the first time I've heard anyone else talk about it.

They were saying that that unlike QE, where the central bank creates debt based money, they could simply do it fiscally and debt-less instead i.e. Just print some of the government expenditure, in a controlled way of course (!). You can just imagine how attractive this would be to the politicians if they could get away with it (using long technical names will help).

The presenter seemed to assume this is "helicopter money" but I don't see it as that. It's not sprayed across the population, just x% of the government budget.

It seems like an obvious next step to me. The ageing and debt-loaded population can't take on any more debt, low interest rates simply become ineffective. A small inflation target (to prevent hoarding of cash) can only be met by printing with debt-free central bank money.

It's not something I'm either for or against but its something to watch out for.

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On R4 this morning, there was an economist talking about tools that the central bank could use to stimulate the economy. This is something I've been expecting but it was the first time I've heard anyone else talk about it.

They were saying that that unlike QE, where the central bank creates debt based money, they could simply do it fiscally and debt-less instead i.e. Just print some of the government expenditure, in a controlled way of course (!). You can just imagine how attractive this would be to the politicians if they could get away with it (using long technical names will help).

The presenter seemed to assume this is "helicopter money" but I don't see it as that. It's not sprayed across the population, just x% of the government budget.

It seems like an obvious next step to me. The ageing and debt-loaded population can't take on any more debt, low interest rates simply become ineffective. A small inflation target (to prevent hoarding of cash) can only be met by printing with debt-free central bank money.

It's not something I'm either for or against but its something to watch out for.

Monetising the fiscal deficit, a recognized economic no-no for many years as it leads to inflation. However, if one thing doesn't work why not do something else which isn't going to work either - at least it's a change!

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I think that I agree with the presenter, surely this IS effectively helicopter money, since government spending is for the benefit of the whole citizenry?

As an aside, is this not very similar to what Corbyn has been proposing (big spending of printed money on infrastructure projects, etc)...

Sounds to me like they know government debt levels are unsustainable and they are looking for ways to get "off the hook" without admitting the whole thing is a charade.

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Monetising the fiscal deficit, a recognized economic no-no for many years as it leads to inflation. However, if one thing doesn't work why not do something else which isn't going to work either - at least it's a change!

The Japanese have been doing it for years and have bankrupted themselves in the process.

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The Japanese have been doing it for years and have bankrupted themselves in the process.

+1,000.

Its being seen as a solution to todays problem without thinking thru what the longterm outcome will be.

CB + economists - idiots.

There's a number of keeping low IRs.

1) The banking/finance sector will contract. We are seeing it now. Banks make their proft on the spread. Low rates = no spread = no profit = no banks. Look at the collapse of the banks share prices.

2) What money you save on your mortgage, you have to more than double in saving for your pension. With low rates no one will be able to retire - they are destroying saving and returns. You cannot have a system where the public sector, on unfunded pensions, gets given huge pensions when the private sector on DV pensions get f-all.

3) The number of banks and financial companies, which are located around the South, in and out of London, are cutting jobs rapidily.

4) If rates are low then the lending multiples need to very low too - banks should not be lending more than 2 times the main salary at the moment. Banks mortgage lending models are fcked!

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There was zero need for Osborne to fiscally tighten with such a large output gap after such a massive financial crisis. Thats the main problem UK has and why it hasnt worked.

Ditto EZ which despite Marios best efforts is still too dominated by fiscal nutters.

So theres lots can be done before you start printing money, but it would likely require a change of government in UK

The basic problem is that governments have been relying on CBs to bail them out rather than reconising that fiscal policy must also play its part and in UK in particular made CBs job far more difficult by actively tightening fiscal policy. Insanity.

Edited by R K

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2) What money you save on your mortgage, you have to more than double in saving for your pension. With low rates no one will be able to retire - they are destroying saving and returns. You cannot have a system where the public sector, on unfunded pensions, gets given huge pensions when the private sector on DV pensions get f-all.

I've noticed this. The capital repayments on my mortgage are <10% of gross salary.

But to get a pension that I can live with, I'm putting away ~37% of gross salary. I'll be lucky to get a 1/3 to a 1/2 of an equivalent defined benefit pension.

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+1,000.

Its being seen as a solution to todays problem without thinking thru what the longterm outcome will be.

CB + economists - idiots.

There's a number of keeping low IRs.

1) The banking/finance sector will contract. We are seeing it now. Banks make their proft on the spread. Low rates = no spread = no profit = no banks. Look at the collapse of the banks share prices.

2) What money you save on your mortgage, you have to more than double in saving for your pension. With low rates no one will be able to retire - they are destroying saving and returns. You cannot have a system where the public sector, on unfunded pensions, gets given huge pensions when the private sector on DV pensions get f-all.

3) The number of banks and financial companies, which are located around the South, in and out of London, are cutting jobs rapidily.

4) If rates are low then the lending multiples need to very low too - banks should not be lending more than 2 times the main salary at the moment. Banks mortgage lending models are fcked!

1. good. It was too big. Thats what a deleveraging financial sector means.

2. Public sector "unfunded" pensions are funded from tax revenues. This idea they need to be "capitalised" is risible nonsense

3. good. Bank, insurance sectors are bloated and being attacked by disruptors.

4. Doesnt make sense. If rates are low, proportion of repayment of capital to interest rises.

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Monetising the fiscal deficit, a recognized economic no-no for many years as it leads to inflation. However, if one thing doesn't work why not do something else which isn't going to work either - at least it's a change!

When I was a kid "inflation" was always on TV. I had no idea what it was but from the way they talked it was obviously a very bad thing which needed to be stamped out. (I also thought Vietnam and Northern Ireland were the same thing since the news was always about how many people being killed.)

Now though inflation is desirable and we haven't got enough, we can't reach the 2% target.

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1. good. It was too big. Thats what a deleveraging financial sector means.

2. Public sector "unfunded" pensions are funded from tax revenues. This idea they need to be "capitalised" is risible nonsense

3. good. Bank, insurance sectors are bloated and being attacked by disruptors.

4. Doesnt make sense. If rates are low, proportion of repayment of capital to interest rises.

2. Disagree. You need some means to cap the payout to allow for longer lifetimes.

If the pub,ic sector is to continue with PAYG then the pension being paid out need to be reduced or they need to be drawn at a much later date - say 75.

4. Yes but .... IO mortgages, which ought to be banned.

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I've been thinking. Productivity growth over the long run is only about 1% annually. per capita, thats all that makes us richer, really. Meawhile, we're spending nearly that much on foreign 'aid' annually. I reckon we've had zero growth foisted on us on the sly. Any growth is shipped off to wherever.

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2. Disagree. You need some means to cap the payout to allow for longer lifetimes.

If the pub,ic sector is to continue with PAYG then the pension being paid out need to be reduced or they need to be drawn at a much later date - say 75.

4. Yes but .... IO mortgages, which ought to be banned.

Retirement dates are rising.

Free marketeers seem to be most keen on banning stuff. Weird. But in any event clearly when rates fall IO mortgages benefit disproportionately so your argument is false.

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Monetising the fiscal deficit, a recognized economic no-no for many years as it leads to inflation. However, if one thing doesn't work why not do something else which isn't going to work either - at least it's a change!

QE is monetising the deficit - just doing it via a middleman rather than having the BoE directly 'buying' the bonds from the treasury.

It will never be unwound either - the fact that any coupon is remunerated to the Treasury shows that. Expect an eventual writeoff of the approx £375 billion (or whatever it eventually gets extended to) of govt. debt held by the BoE or else dump it into 100 year Gilts and forget about it for all intents and purposes.

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QE is monetising the deficit - just doing it via a middleman rather than having the BoE directly 'buying' the bonds from the treasury.

It will never be unwound either - the fact that any coupon is remunerated to the Treasury shows that. Expect an eventual writeoff of the approx £375 billion (or whatever it eventually gets extended to) of govt. debt held by the BoE or else dump it into 100 year Gilts and forget about it for all intents and purposes.

But doesn't that cause a gross mispricing of Gilts and cause yields to rise?

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Retirement dates are rising.

Free marketeers seem to be most keen on banning stuff. Weird. But in any event clearly when rates fall IO mortgages benefit disproportionately so your argument is false.

Not fast enough.

OK, rather than banning IO how about correctly priced? At the moment they are way too low considering the risk the bank is taking on.

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Not fast enough.

OK, rather than banning IO how about correctly priced? At the moment they are way too low considering the risk the bank is taking on.

Well now youre just asserting stuff with no substance.

Pension liabilities as % of output are falling.

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Well now youre just asserting stuff with no substance.

Pension liabilities as % of output are falling.

Could that be explained by the move from DB to DC in the private sector?

The company is no longer shouldering liabilites?

And are public sector pension liabilities kept out?

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QE is monetising the deficit - just doing it via a middleman rather than having the BoE directly 'buying' the bonds from the treasury.

It will never be unwound either - the fact that any coupon is remunerated to the Treasury shows that. Expect an eventual writeoff of the approx £375 billion (or whatever it eventually gets extended to) of govt. debt held by the BoE or else dump it into 100 year Gilts and forget about it for all intents and purposes.

Exactly.

Adair Turner has been banging this particualr drum for some time. Probably still harbours a desire to follow Carney at BoE.

Fact is Osborne cant cancel up to £375bn in QE because at a stroke it removes his false "must cut government spending" premise. The only time I could see him doing it is if its clear Tories are about to lose the election as a final coup de grace.

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Well now youre just asserting stuff with no substance.

Pension liabilities as % of output are falling.

http://www.ons.gov.uk/ons/rel/lifetables/national-life-tables/2012-2014/stb-life-tables-2012-2014.html

  • A newborn baby boy could expect to live 79.1 years and a newborn baby girl 82.8 years if mortality rates remain the same as they were in the United Kingdom in 2012–2014 throughout their lives.
  • In 2012–2014, a man in the UK aged 65 had an average further 18.4 years of life remaining and a woman had an average further 20.9 years of life remaining.
  • The most common age at death for men was 86 and for women was 89.
  • Life expectancy at birth in the UK has increased since 1980–1982 by 13.5 weeks per year on average for men and 9.8 weeks per year on average for women

Start at 1980, 26 years ago.

Average life expectancy has increased by just over 9 years.

The UK retirement age has only just started to be bumped up.

Thats a lot.

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+1,000.

Its being seen as a solution to todays problem without thinking thru what the longterm outcome will be.

CB + economists - idiots.

There's a number of keeping low IRs.

1) The banking/finance sector will contract. We are seeing it now. Banks make their proft on the spread. Low rates = no spread = no profit = no banks. Look at the collapse of the banks share prices.

2) What money you save on your mortgage, you have to more than double in saving for your pension. With low rates no one will be able to retire - they are destroying saving and returns. You cannot have a system where the public sector, on unfunded pensions, gets given huge pensions when the private sector on DV pensions get f-all.

3) The number of banks and financial companies, which are located around the South, in and out of London, are cutting jobs rapidily.

4) If rates are low then the lending multiples need to very low too - banks should not be lending more than 2 times the main salary at the moment. Banks mortgage lending models are fcked!

Something I don't understand, maybe you can explain it to a layperson such as myself? On the one hand, I have read numerous times that low rates are needed to help the banks recapitalise after 2008 and get their balances into a healthy place. On the other hand, I read (via Martin Armstrong for example) that low rates are killing banks such as Deutsche Bank who need higher interest rates to survive (along with the pension and insurance industries). So if low interest rates are not for the banks, pension industry or insurance industry, who are they actually helping? I always assumed that most monetary policy was to help the banks especially with Carney being ex-GS. It's quite confusing :P.

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Something I don't understand, maybe you can explain it to a layperson such as myself? On the one hand, I have read numerous times that low rates are needed to help the banks recapitalise after 2008 and get their balances into a healthy place. On the other hand, I read (via Martin Armstrong for example) that low rates are killing banks such as Deutsche Bank who need higher interest rates to survive (along with the pension and insurance industries). So if low interest rates are not for the banks, pension industry or insurance industry, who are they actually helping? I always assumed that most monetary policy was to help the banks especially with Carney being ex-GS. It's quite confusing :P.

They need low rates to stop their loans from 2000-2007 from defaulting, destroying their capital.

But they also need higher rates for new business i,e, interest rate spread.

Thats the deadlock when you get when you do not let banks fail.

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Could that be explained by the move from DB to DC in the private sector?

The company is no longer shouldering liabilites?

And are public sector pension liabilities kept out?

There have been major changes to public sector pensions since 2010

e.g. Civil Service (my wife's a member)

Gone from non contributy, to +8%

RPI Indexing replaced by CPI

Pension age gone from 60 to 65

Final salary replaced by career Average

Overall these changes have reduced the value of the a CS Pension by over 35%. Holding down CS pay since 2010, and out to 2020 will probably knock another 10% off the cost of servicing CS pensions.

Edited by Confusion of VIs

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