Fiscal Easing

[Assume The Opposite]

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.

It appears that Osbourne is focused on public debt (much like the ECB) while ignoring the growth in private debt which caused the financial crisis in 2008 and the great depression.

My signature has quotes from Osbourne's budgets which seem to contradict himself over time.

[Sour Mash]

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

QE creates a guaranteed buyer of Gilts on the secondary market (the BoE) hence increasing the demand for Gilts on the primary market, exerting downward pressure on yields.

So as well as essentially monetising the government's debt, it handily helps interest rate repression as rising yields on '100% safe' sovereign debt would imply even greater rates for private debt which is considerably less secure.

If they want to drive interest rates strongly negative, they'll have to extend QE by quite a bit. Fearful though people are about preserving their wealth, there is a limit as to how much they will be willing to lose by lending their money to the government. At some point they'll probably manage to destroy credibility in the currency itself and then hello currency collapse and likely hyperinflation.

[spyguy]

QE creates a guaranteed buyer of Gilts on the secondary market (the BoE) hence increasing the demand for Gilts on the primary market, exerting downward pressure on yields.

So as well as essentially monetising the government's debt, it handily helps interest rate repression as rising yields on '100% safe' sovereign debt would imply even greater rates for private debt which is considerably less secure.

If they want to drive interest rates strongly negative, they'll have to extend QE by quite a bit. Fearful though people are about preserving their wealth, there is a limit as to how much they will be willing to lose by lending their money to the government. At some point they'll probably manage to destroy credibility in the currency itself and then hello currency collapse and likely hyperinflation.

Just a more complex version of clipping gold coins.

[R K]

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 .

Banks need a +ve yield curve to make money. i.e. they borrow cheap short duration funds and lend longer duration funds with a +ve spread. So, a low policy rate helps them fund their business cheaply whilst still maintaining a profitable spread on their longer term lending on mortgages, biz loans etc.

As the yield curve flattens (which currently is happening from the long end, with the short end more or less zero, or negative in EZ) they find it more difficult to make money not least because they still carry the same fixed costs in assets, people, technology etc.

So ideally they want a nice +ve yield curve from say 2 years out to 10 years which enables them to lock in a profit on their lending. The current yield curve is just about at the "sweet spot" in terms of late phase economic expansions.

[pmf170170]

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 - there is a fair spread between many mortgages and base rate. As a percentage markup on cost of finance it's huge compared to historic margins. With credit card debt it's a preposterous mark up.

2 - agreed but the lack of inflation does offset some of the damage. If inflation does kick in due to monetising the debt, defined benefit pensions could quickly become the poor relation as in Weimar Germany. Those on fixed incomes (or the public sector) were the worst affected by hyperinflation.

4 - I couldn't agree more. The MMR has clearly made it more difficult to borrow but I suspect that when interest rates return to something resembling normality (perhaps I should say if rather than when) there will be a lot of people in financial difficulty; especially the young suckered into the inflated market with HTB.

[VeryMeanReversion]

The bit that concerns me most with negative interest rates is when people directly see the effect on their current/savings account. That may be the time that more people start to ask "what is money", a very dangerous question.

If the powers that be can get the same effect with more obfuscation, the game can carry on.