Wednesday, June 1, 2011

The Con men feed the Con men :-(

Banks buy bulk of £39.8bn of new gilts

The increase in UK bank purchases of gilts has offset the fall in demand among overseas investors.

Posted by happy mondays @ 07:58 PM (2563 views)
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27 thoughts on “The Con men feed the Con men :-(

  • Ah, so the government bails out the banks, then the banks use the money to buy government bonds.

    Sounds like the beginning of the end to me.

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  • Of course there is no foreign demand. A faltering currency, high inflation and low interest rates are not helping one iota!
    Once the banks stop buying then there will be no choice but to increase interest rates. Then house prices will collapse.

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  • Its straightforward…banks don’t lend to industry (as that might help growth) or people buying houses. Instead the banks hold short term cash. Isn’t this just what Posen wanted 3 months ago, another round of QE ??

    This circular flow of funds isn’t really helping anyone, is it? Sustainable growth is the only thing which will help this country out of the muck, and that isn’t likely to happen at this rate, is it?

    …that said, why would anyone buy our debt when i) the value of what they will get back will vanish due to inflation and ii) there is a real risk that they will not get it back?

    Doh!

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  • general congreve says:

    Snake eating its own tail! Zimbabwe-ahoy-shipmates!

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  • Not much tail left now surely? Although Merv will no doubt extend it with some more funny money…

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  • bellwether says:

    Alan I addressed a long post from you yesterday bearing more of the of rubbish you post at 3. I wasn’t hugely surprised you didn’t respond. Anyway the UK doesn’t need to sell gilts, it could stop auctions tomorrow and it would make no difference. For you to think otherwise is a form of ignorance..

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  • Thankyou Bellwether,
    I will now look back at comments to find out what you wrote. I missed it. Thankyou for referring me back to your posting.

    As for (3) above, I did have a rush of blood to the head when saying “why would anyone buy our debt”. I hope that scenario won’t be fulfilled, otherwise we are all bust. Yes, I understand (6) above. I’ve wildly over exaggerated, whereas you’ve taken my comments literally.

    Now to find your post….

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  • Hi Bellwether,
    My emotional speculation has clearly offended you. I had no intention of upsetting anyone.

    If you re-read your BOLD print, you make emotional comments about me and also speculate about me – I’m not going to pick that apart.

    I hope you have a nice day. Honestly.

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  • stillthinking says:

    I think the snake tail analogy is a good one.

    Your view of this is invariably going to be coloured by whether or not you consider QE to be a liquidity measure or printing money. I think it is printing money personally, and also the UK government does need to -sell- gilts, borrow money, in the normal sense of the word. The UK government purchases real goods and services, when deficit spending, it needs to borrow the value of real goods and services. So the idea that the BoE can fund these needs does not stand. All the BoE can ever do is provide value by diluting existing sterling holding values.

    I don’t think we all agree this point so any discussion on bank gilt holdings is always going to be misaligned. However, I will attempt my view again, don’t worry I don’t need to be asked…

    If John borrows 100 pounds to buy a car from TIm, then Tim has a hundred pounds. This hundred pounds is backed by John’s production. If Tim buys a gilt, then the government has borrowed the real value of John’s production. John produces, the government consumes.

    If on the other hand the BoE buys the gilts through an accounting measure, then there is no production behind this. So QE is printing money. You can argue that if the BoE hold to term, then this printed money is backed by taxation (i.e. real value), but that ignores the fact that all the borrowed money is spent now, but the production backing from tax only comes in over a decade i.e. at the moment we are in now it is printed Zimbabwe style.

    If you accept that, then you can take the opinion that the government is recapitalising the banks with printed money, using the extremely slow expansion of broad money as camouflage for the inflationary consequences. And further, that the next ideal step would be additional BoE “QE” purchasing these gilts at top dollar improving the banks position further.

    If you don’t accept that then I have no idea what you must think, because our banks are busted and they appear to be outbidding foreign solvent purchasers of gilts.

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  • bellwether says:

    Alan you were gracious at 7 and I owe you an apology for the parts of my post of yesterday that were impolite. On this blog I have increasingly found myself casting taking in the role of something akin to a disapointed father. I can’t deny it frustrates me hugely that people who have concerns about this country, about it’s perceived lack of innovation/productivity, can spend great tranches of their days unproductively blogging about how bad it all is.

    I’m not especially patriotic, or even patriotic at all, but I do think if you feel something is wrong you have a duty of sorts to do something about it, rather than abdicating responsibility.

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  • bellwether says:

    “found myself casting myself” line 1 into 2

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  • bellwether says:

    ST, money is and must be printed in advance of production.

    If you were to set up a country tomorrow and were the sovereign issuer of currency, before production could begin you would need to create not just a monetary system but also cash and that cash would be created quite literaly out of thin air.

    Money creation must precede production – this is not a theory but a fact.

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  • Unhappy Chappy says:

    @Bellweather…..I am a luker here on this blog so may I ask what do you propose we need to do to turn around the economy of this country!
    I am employed and have a decent salary but due to divorce and unfortunate events I do not own my home and have very little savings, my salary is being eroded by inflation and I see immorral politicians and bankers making things worse…your advise would be appreciated.

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  • bellwether says:

    So the question becomes is the amount of money created out of thin air (because that is always how its created) beyond the productive capacity of a country as relative to the volume of money created out of thin air by other countries relative to their productive capacity.

    If we produce too much we are punished via the ERM (although in fairness benfited too via the advanatages of cheaper labour). Produce too little and our currency gets very expensive.

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  • stillthinking says:

    Currency systems spontaneously emerge to facilitate barter, swapping. They are not needed at all unless you want to swap goods and services. Historically, we all produced before currency was introduced. It’s just a step.

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  • ST I’m not sure of the point at 14. It is a matter of fact that money is created out of thin air and in advance of production. This is not just a creature of QE (even assuming QE is the creation of money) it is how the whole system operates. It becomes zimbawe, as you put it, when money creation grossly outstrips relative future capacity. The government always creates and spends in order that the private sector can produce and save.

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  • stillthinking says:

    Hopefully without blowsing out of the argument, I can delay attendance at work no longer…

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  • No worries. Just add one thing – I believe the literal translation of “fiat” is “let it be done” – which pretty much says it all.

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  • mark wadsworth says:

    Stillthinking 9: “… the government is recapitalising the banks with printed money, using the extremely slow expansion of broad money as camouflage for the inflationary consequences. And further, that the next ideal step would be additional BoE “QE” purchasing these gilts at top dollar improving the banks position further.”

    I’ve not looked into the actual facts and figures yet, but that would appear to be the most likely reason for all this. The £39.8 bn is in itself not a transfer of value (it’s the government spending that’s a trasnfer of value from taxpayer to lucky recipient; and the money printing is a dilution in the value of savings which indirectly helps banks) but the banks can make a nice little profit (even if it’s only 1%) on the way in and on the way out, and are probably earning a small interest margin on what they get on gilts minus what they pay on the soft loans FROM the government, so that £39.8 billion on top of the nearly £200 billion cash which the banks already have deposited with the BoE (the fall out of the last QE shenanigans) is a nice stready annual drip drip which is maybe wopth £5 billion a year to the banks.

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  • Not a big surprise as they need more gilts to meet the Basel 3 requirements.

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  • hpw @1 said ‘Ah, so the government bails out the banks, then the banks use the money to buy government bonds’ The question is what are the prices (interest rates/yields) of (a) money from the government to the banks and (b) money from the banks to the government?

    In the US, for example, Sen Bernie Sanders asked for research on just this question and the results came out in April. The difference in many cases was 2.5 to 3.5 percentage points. In favour of…..(answers on a postcard).

    http://www.commondreams.org/headline/2011/04/26-4

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  • In the US, for example, Sen Bernie Sanders asked for research on just this question and the results came out in April. The difference in many cases was 2.5 to 3.5 percentage points. In favour of…..(answers on a postcard).

    The banks get bailed out for practically nothing. They then loan the money back to the government at probably about 3% interest. Nice.

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  • mark wadsworth says:

    Ic, fantastic find, ta. No doubt it’s not much different in the UK.

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  • @Bellwether
    You didn’t bite when I asked you about MMT yesterday so I’ll post the question here. I think what you are saying about money creation is probably correct (though there can be barter etc., without money, it wouldn’t be much of an economy). We need money before we have a market economy of any scale. However, how this relates to the government issuing bonds to finance its spending is another matter. If the bonds are bought with money that would otherwise be invested, or which would provide the basis for fractional reserve lending, there is crowding out. It’s only if the bonds are bought with newly created credit that the deficit spending would be monetised on a net basis. This is exemplified by Richard Werner’s critique of Japan’s ineffective attempts at expansionary fiscal policy – all it was doing was crowding out other spending. Printing bonds and selling them is quite different from printing money and helicopter dropping it.
    Nick

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  • bellwether says:

    Nick what you say sounds right to me.

    Another point. because the issuance of bonds obviously isn’t needed to fund spending in Japan/ UK/US, and because the value of currencies are adjusted via a floating exchange system – a control on printing too much. I wonder what purpose the the bond market serves? Any thoughts on that?

    Perhaps it’s a bit like the debt ceiling in the US, while the belief that a country operates as a household – ie needs to borrow and can go bust, is fallacious, it is a fallacy that encourages some level of prudence.

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  • nickb and bellwether – a few thoughts on gilts –
    Sometimes government spending crowds out private spending and sometimes it doesn’t. The Tories under Thatcher had a point in those inflationary years when they talked of putting brakes on overheating, controlling public expenditure, paying down the debt and ensuring there was less such crowding out.. In today’s deflationary environment there is little crowding out, so arguments that government should retrench and pay down its debts have less validity.
    The other historical dimension you need to inject into the discussion of goverment bonds is legacy costs – if there was high inflation and therefore high yields on gilts 15 years ago that would be a huge burden on the current government because in the relatively low inflation environment we have now we’d be paying a high real rate of interest on the debt issued then (this was the case in parts of the ’80s and ’90s because of the inflation and high yields of the ’70s and ’80s).
    A third point – some commentators (and bond markets) seem to think that a distinction should be made between governments with bonds held largely by foreigners and those with bonds held largely by their own citizens, since the latter can tax those citizens if they need to.

    As per my reference @19 one function of government bonds is to continue the bank bailouts.

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  • Hi Icarus,
    I suspect two issues are being conflated. The first is whether issuing and selling bonds effects a net addition to the money supply when the revenue from the bond sales is spent. The answer could be ‘no’ whether or not we are at full employment, depending on whether the bonds are purchased with existing money or not. The second is whether an increase in the money supply generates real activity – this depends crucially on whether there is excess capacity.
    @bellweather
    It keeps the banking system sweet and flush with interest on the gilts?
    Nick

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