Sunday, November 8, 2009

Boiling the frog

A glimpse at the scary world post-Quantitative Easing

Debt Management Office at a Treasury Select Committee transcript. The DMO is at pains to show that they will do anything to maintain a stable and gradually adjusting increase in yields. Presumably because any panic or even a sniff of it will take the form of an "ipso facto permanent" jump in yields i.e. yields jump unnecessarily from panic, government position looks real shaky due to higher servicing costs, shaky governments have to up yields on debt and so forth. A collapse in confidence.

Posted by stillthinking @ 08:17 PM (2010 views)
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16 thoughts on “Boiling the frog

  • What goes up….

    One way to avoid all hell letting loose is a slow leak of these kinds of articles releasing minutes. But whatever they do, there is a serious tightrope of sterlign crisis or gilt sale failure. Who wants to buy UK government stock if the sterling value is perceived to fall in the future? I can see UK debt being sold in Euros…. an irony if ever there was.

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  • “Post-Quantitative Easing”

    Does anyone really believe QE will stop?

    Poor misguided fools.

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  • devo,

    I half-agree…. but surely the gilt markets and/or forex markets will force an end to it eventually?

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  • “the gilt markets and/or forex markets will force an end to it eventually?”

    Only if it is in their long-term interests.

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  • This analogy from Zero Hedge, though used in a different context, applies here I think…

    “their ticket is stamped and thus non refundable, they’re on the plane at 35,000 feet, it’s two thirds of the way to their destination and they’re committed regardless of how they feel about the situation.”

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  • “Only if it is in their long-term interests.”

    If the BoE keeps printing money, then it will be in the long-term interests of investors to stop buying gilts (or to demand much higher interest rates). Even ordinary savers will think about moving their money to bank accounts in Australia (where the base rate is 3.5%) in order to get a higher interest rate. It’ll be like Japan’s carry trade all over again.

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  • Gold is $1105 this morning. This is not just a result of QE but the way the West has been “creative” with money. Have a look at the gold graphs since we started all of the “bail-outs, QE etc”. Make your own mind up – I’m not a lecturer or a VI.

    http://www.kitco.com/charts/livegold.html

    OOooops, its now $1106.

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  • mountain goat says:

    Alan @7 – I think short term valuations of assets, including currencies and gold is 90% about perception and 10% about fundamentals. People buy an asset if they think it will go up in price.

    I think you will find that the Euro or GBP vs USD look like your gold chart for 2009. The price of Euro, gold and GBP are up today as the USD is down. BoE just committed to more QE last week, and the Euro zone masters are being just as “creative”.

    QE or dollar carry trade?

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  • fallingbuzzard says:

    I am sure that QE will stop in Feb. The uncertainty is whats going to plug the gap and it can only be one thing, foreign buy in, through one of two routes, higher interest rates and yields or a forced lending package organised by the IMF. Lets see if Gordon makes an impromptu visit to the US.

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  • Why is the government printing money in the first place? is this because nobody will buy the UK’s debt at the current interest rate, if this is the case I assume this is to keep interest rates low in the run up to the general election. Once the election is over interest rates can be raised to attract buyers of UK debt. This will obviously destroy the housing market but it will keep the country solvent without raging inflation.

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  • fallingbuzzard says:

    Exactly, you could get loads of cash into the country just by raising interest rates to the right level. It certainly doesn’t need to be printed.

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  • @MG,
    I respect your view.

    I’m not trying to force/bend anyone’s opinion. However, the “perception” seems to be leading the gold price upwards.

    Gold now hitting new highs $1110 +. I’m not a chart expert but all the gold graphs seems to be going up. I stopped buying a while back.

    Anyone think gold is a bubble, about to crash?

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  • @ fallingbuzzard,

    Raising interest rates would threaten the “spring bounce” in property and destroy NuLabour’s illusion of prosperity ahead of an election.

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  • Drewster, I completely agree with you about getting out of pounds, but have no idea what are the avenues to go about this (being a complete novice in this area). The forex seems a bit scarely to a complete beginner & had a look at some fixed term account but not sure about them….. Has anyone moved out of the pound and tapped into the Australian higher interest rate? How did you do it?

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  • mountain goat says:

    @Alan – Thanks. Hope you don’t mind me putting my views on your question of possible gold crash, this is not an attempt to give advice in any way. I confess to being a gold bug but got nervous when I saw it rising in value on days that the stock market and more risky currencies were rising. I own gold as most people own cash in the bank, i.e. as a safe form of savings. So it made me nervous to see it rallying when confidence in a recovery was high (I am not convinced there will be a recovery to the way things were 2 years ago. If I was I would buy a house). Gold seems to me to be the last thing to rise in value since March. First we had banks, then risky stocks and commodities, then other stocks, now gold as these other risky assets are starting to decline. Personally I expect prices back at $700 fairly soon, lower still if gold spikes to say $2000 in the coming weeks. At $700 I will be interested in buying gold again because the dollar will go into decline some day. But how can it go into decline now when it is still being used to fuel all sorts of asset bubbles? Today the dollar is still money of last resort, despite all its flaws and abuse by the US authorities. I think that gold will have it’s day, but only when the whole concept of fiat money gets challenged by the markets, because governments can’t be trusted like gold to protect peoples wealth.

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  • fallingbuzzard says:

    @alan,

    An increase in interest rates around March or even April would not threaten anything, it would be pitched as a proof of recovery. What better proof of recovery? But by mid May, Spring would be over.

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