Tuesday, February 24, 2009

BoE can’t be telling the whole truth about the gilt buyback

How to fight deflation in a liquidity trap: Committing to being irresponsible

This pdf explores the various ways that the government can avoid deflation. There were some posts about the BoE going on a buyback of gilts which is still suggested in the media. But this article suggest that "open market operations in -any asset other- than bonds eliminates deflation..". Anyway there a number of interesting points in this, perhaps one that isn't so obviously stated is that government debt won't be reducing in the future, and gilts are going to come down in price and up in yield. Further, the intervention would ideally be against assets or foreign exchange. Foreign exchange (as deliberate devaluation) is out, which leaves assets. So asset holders (banks) could be looking at an unfair transfer of wealth away from the general population (-over- and above default covering).

Posted by stillthinking @ 04:16 PM (1065 views)
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10 thoughts on “BoE can’t be telling the whole truth about the gilt buyback

  • stillthinking says:

    Let me put that another way. The banks assets are either foreclosed and taken into ownership, or debt. If the government uses bank debt as vehicle for qe then they will be printing money and giving the cash to the banks.

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  • stillthinking – do you think the central banks of the U.S., U.K and Europe will heed the advice and start to purchase real assets… oh hang on…

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  • stillthinking says:

    Actually, no I don’t. If they are going to buy “real” assets that wouldn’t be so bad. I think they are going to buy up debt obligations which will default. Which will leave the government with nothing. The main asset of the UK has been housing stock, the amount they would have to buy to restore housing inflation must be too great. There were 45,000/month in 2007, thats for new purchases not remortgaging, so that would be 100 billion a year roughly for new lending. The government seems more than capable of exceeding this level of borrowing. Unfortunately exchanging bonds for cash isn’t inflationary, printing is of course.
    It is a bit of a gamble, I think, because they are attempting to a fairly major forceful adjustment of prices. If it works, then the flood of money will enable repayments of their worthless bonds, if not. Then nothing will happen, we still get deflation and taxpayer debt at admittedly a low rate of interest.
    Thats why they are in such a panic. Because the liquidity trap, interest rates at 0% in a deflationary environment means that irrespective of how much money is printed there is no individual advantage to begin the spending. You didn’t ask me this but I am going on anyway, the weird thing about Japan is that if -everybody- is a large saver, then obviously that money can’t ever be spent without an inflationary crisis. Too stupid for everybody to be a millionaire. But, in the trap, real wealth rises precisely because nobody spends money and so the whole society gets sucked in.
    What is worse, if you can’t kick off inflation with your first few attempts then you have so much money locked up in accounts that suddenly, to trigger inflation would be a disaster. The BoJ wants to start inflation but they really risk danger, they already flooded the system with money.
    It is kind of unrealised inflation due to savings which is the problem. Really there is a substantial underlying inflationary threat, just that everybody is locked into real gains by saving not spending. Its that idea of an emergent behaviour arising totally at odds with the actual situation.
    My main whinge is that it is unfair to artificially force asset prices up, as within UK society, your average pauper doesn’t have any. Also, I don’t think it works anyway, because artificially buying up debt doesn’t stop real gains in a zero interest environment. The way out is somehow to force savers to spend. As it always has been, and they still don’t know how to do it.

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  • Didn’t Hitler plan on imposing QE on us by distributing forged money? His economists thought it was a great way of ruining us.

    One of the the prescriptions described in this paper relies on a central banks’ ability to manipulate inflation expectations and consequently reduce real interest rates. The BOE could not achieve this because it is every bit as goal independent as the BOJ and does not have the clout or voice to alter inflation expectation to any precisely desired level. The BOE does not operate in a static world and would be hindered in this goal by political interference and journalistic opinion.

    Another problem is that the open market operations that are one of the main tenants of this paper would present an opportunity for opportunistic arbitrage. This real world intrusion is half heartedly dismissed but it nevertheless presents a real threat to any desired outcome. Arbitrage activity can not be negated so easily because it happens at the lighting speeds facilitated by computer scanning. There is also no certainty that bonds will go down and yields rise. Politics and diplomatic lobbying of the Chinese government (for example) could prevent this outcome as could old fashioned market perversity. I would also have been more convinced if the author was not so uncertain about what caused the Japanese deflation to persist.

    I am vehemently against QE but I hope that if they are going to do it, they won’t try to be too clever.

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  • bob1, the bank of england financed hitler up to and during the 2nd ww

    check out Montague Norman the boss at the time

    also check out Hansard parliament records for the time, it’s no secret.

    he also created the background which gave rise to the Jarrow march by wrecking British shipyards

    The history books are full of lies and deception we are ‘Orwellian’ now.

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  • Another perfect example of what is wrong with modern economics. Complete mathematical w*** that is either obfuscating the trivial or has no bearing on reality.

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  • voiceofreason says:

    [1] So, inflation means spend it quick before it loses its value.
    [2] Deflation means don’t spend it cos its increasing in value.

    Both are positive feedback loops.
    Looks like we are either in [1] or [2] at any one time. 1995 -> 2007 was a massive period of [1] where RPI was manipulated by not including house price inflation properly.

    [1] to [2] transition is caused by excessive debt that can no longer be serviced.
    [2] to [1] transition is caused by lower debts allowing borrowing to start again.

    Looks like we have a lot of paying back time before we transition again.

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  • troy: I once read that Bush’s grandfather helped fund him as well. I wonder if he really had one ball?

    d’oh: I have to agree with you.

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  • bob1 not just prescott

    I’d love to agree with d’oh also but I haven’t got an efin clue what he’s going on about.

    Our posts were parallel so I assume he was referring to something earlier I assume your post @ Tuesday, February 24, 2009 08:10PM

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  • stillthinking – I was referring to the acquisition of banks themselves in this country, and totally agree with the analysis in the paper – and your points about saving and the potential of velocity problem.

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