Friday, December 28, 2012

Money Printing For Beginners

Money Printing For Beginners

This came through from Paul Tustain. He is very sober in his analysis. Stick with it - it's tricky at first - through to the end. It's worth it. It begins with this disturbing stat : For every one of all 25 million working people in Britain the government is printing £16 of brand new money – every day. Via the public sector the government is showering the economy with this new cash and shunting the resulting debt into the sovereign bond market, where somehow these highly questionable assets still find buyers. How come the bond market has not yet got indigestion? That is a complicated question, and one which this Christmas I have sought to address in my annual seasonal review.

Posted by frizzers @ 10:39 AM (3004 views)
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12 thoughts on “Money Printing For Beginners

  • Have you changed your name, General?

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  • Not a bad article until about page 16 where it starts foaming at the mouth, on government bonds:
    “These types of bonds are now at record high prices, and record low yields, yet have a history of hard and soft defaults which takes in virtually every major financial crisis there has ever been.”
    Well the history part of that is plain wrong. Everything I have read about government bonds explains that they are regarded as solid because the sovereign can never be in a position in which it has to default. If sovereign, it can, by definition, issue enough of the currency to cover any debt denominated in it. “Sovereign defaults” are on debts denominated in *other* currencies. It also says that governments don’t have any collateral backing up their debts. That’s also demonstrably untrue. Governments have the power to make their citizens pay taxes, and therefore to make their citizens work (to earn money to pay said taxes) and to make the currency valuable (if it can be used to pay taxes there will be general demand for it).

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  • Why give air-time to this gold-bug, who thinks money originated with barter!!!

    You should read David Graeber ‘Debt: The First 5,000 Years’ before spouting this tripe again (but I know you won’t)

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  • Interesting article. No real answer to what is the tipping point in central bank balance sheet expansion and currency confidence. There must be an upper limit to how many gilts the BOE can hold before confidence is destroyed in sterling and UK gov.

    Does confidence matter while the BOE is intervening in the market and buying up so many Gilts? It seems to me that whilst BOE is buying true price discovery will not occur. It can continue to expand its balance sheet, monetize the deficit and dictate bond yields and values (300 year low rates) – until it stops buying.

    Surely what it does to its expanding balance sheet (gilts) and when it decides to sell is now not that important. The bank is in a difficult position. How can it stop intervening and expanding its balance sheet without the market demanding interest rate payments more in line with the risk of holding a uk bond. That rate must be surely far higher than the crushingly low yields currently paid. Each year the BOE monetises the deficit, the national debt balloons and our fiscal position gradually deteriorates. It seems logical that over time this will lead to widening reality gap between actual gilt prices and yields and truly what the market will pay and expect as yield in return.

    Where is the point of no return in this situation? When will the BOE stop? At some stage in the distant future if the BOE attempts to reduce its purchases then downward pressure on bond prices would presumably lead to foreign selling and a bond panic if things have gone too far. If it stopped now it would presumably lead to increased interest rates. What level of interest rate rises can UK gov, mortgage holders and the banks bear? Anyone in possession of numbers to help?


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  • is that frizzers of ‘debt bomb’ fame. if so explains the article on gold. interesting read but flawed, imho

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  • Actually history tells the exact opposite The following soverign countries have gone through hyper-inflation which has resulted in the imparement or default of their bonds. Their ability to print money didn’t help them. Soverign countries can and do default on their obligations.

    bonds are the biggest bubble atm, from US to EU and UK. when they pop, all hell will break loose.

    Bosnia and Herzegovina
    Hungary, 1923–24
    Hungary, 1945–46
    North Korea
    Poland, 1923–1924
    Poland, 1989–1990
    Republika Srpska
    Soviet Union / Russian Federation
    Zaire (now the Democratic Republic of the Congo)

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  • nickb – “the sovereign can never be in a position in which it has to default. If sovereign, it can, by definition, issue enough of the currency to cover any debt denominated in it. ”

    If I expect “money” and receive “toilet paper” because a government has printed too much, then I think one can say the government defaulted.

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  • Nod,
    This list is like a Gish Gallop! nothing more than a long list of countries. Which specific incidents are you referring to? If e.g. by Argentina you mean the Argentine default in the 2000s then it was dollar denominated debts that it could not pay, not debts denominated in its own currency. Ditto Russia’s default under Yeltsin – suspending convertibility of the Rouble. Why not take just one historical episode, the one you think most clearly illustrates a sovereign default in its own currency debts, and discuss that? It would be useful for clarity.
    D’oH – that’s right. But 1) inflation is not a default in nominal terms, so the level of risk is still lower than with other assets where 0 nominal return is a possibility. And 2) usually the hyperinflation is the result of real economic problems that preceded money printing. E.g. Weimar republic Germany, this occurred after foreign asset seizures when the republic was defaulting on war reparations denominated in foreign currency, not DM.

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  • stillthinking says:

    Frizzers, this is a superb post. I thought SDRs were just a proposal, I didn’t even realise that they already existed…

    Extremely interesting.

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  • nick.

    lets take argentina as an example. They borrowed from the IMF in dollars, and they defaulted on these bonds. The peso then from 2000-2002, lost over 80% of it’s value. Any peso denominated bonds would have therefore undergone a soft default of over 80%. That is not risk free. it’s very risky. Nominal value is not important, only the real inflation adjusted value is important.

    Note, a bonds yield will only offer some protection against high devaulation of the currency if the rate of devaulation is constant.

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  • Note, a bonds yield will only offer some protection against high devaulation of the currency if the rate of devaulation is constant

    ………& if the inflation measure used to calculate the ‘real’ gain or loss is reliable….which, of course, it won’t be. Therefore, there is no solid ground upon which fair value, or risk, can be calculated with these (or any other) assets. It is all an illussion.

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  • Nod
    “soft default” – by this definition any country that experiences high inflation is defaulting on bond issues. This is surely too strong a definition. Should we then say the same of company bonds? ie that companies that pay out on their bonds in periods of high inflation are soft defaulting?
    The reason why this matters is that there is a difference, often denied for ideological reasons, between states that are monetarily sovereign, such as the UK, USA and Japan, and those that are not, such as the Eurozone countries. The former can always meet their contractual obligations on bond payments, the latter cannot.

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