Ritchie still doesn’t understand QE

Let’s be clear what this means: one implication is that the savings glut of big business is being invested at negative interest rates. The managers of these companies are so bereft of ideas they will pay governments to take cash off their hands. If that isn’t a definition of management failure I am not sure what is.

But what I also hear is that the demand for high quality collateral in some sectors is now so high because of Basel (in particular) that the price of government bonds does not matter: what is important is that there be enough of them.

In other words, people want more debt than governments are willing to supply. Which is quite astonishing, because the question that is then begged is why when this is the case and when people so obviously need the services that government can deliver that sufficient debt cannot be created by government running deficits?

We’d need to see proof that it is in fact corporate purchases which is driving the two year bond rate into negative territory. No idea myself but I’d rather not take Ritchie’s assumption that it is. From what I understand, little as I admit that is, government bonds are held by banks, central banks and pension and insurance funds. The corporate qua corporate holdings are negligible.

However, he’s still missing the entire point of QE. Which is to drive down the yields on safe debt so as to move people out along the risk curve. We are deliberately lowering those yields. Thus they are not a sign that we should be issuing more such debt: because that would just raise the yields again undoing the very thing we’re trying to achieve with QE.

13 thoughts on “Ritchie still doesn’t understand QE”

  1. In other words, people want more debt than governments are willing to supply. Which is quite astonishing, because the question that is then begged…

    The question is being begged all right, but not in the (incorrect) manner in which Ritchie uses the term.

  2. While I agree with most of your conclusion I’m slightly concerned that I’m sure, in a previous lesson to Richie on QE, you claimed the Banks are not a significant holder of Gov bonds.

    Business hold cash like assets for a wide number of reasons, making a finacial return is not really one of them, so it’s not an automatic criticism of management.

  3. Oh, where to start:

    1) There are no gilts yielding negative rates. The worst yield on the current curve is 0.50% for 1 year notes. So management aren’t investing their cash at negative rates

    2) If management aren’t investing their cash, it’s because they don’t think that valuations on potential purchases justify the purchase. I would trust the specialists in each company to have a slightly better idea of what value exists in their industry than the WGCE. So overpaying for an investment that will lose money is better management than keeping a sum in cash waiting for better prices in the future ?

    3) BASEL 3 has no impact upon the legislation of capital levels for non-financial corporates.

    4) A simple search of the DMO website will tell you that non Financial private corporates hold around £ 2 Billion of gilts. Or around 0.12% of total issuance, whilst Public corporations hold £ 466 Million, or around 0.03% of total issuance.

    So if I have this right, he appears to want corporates to ‘mismanage’ (his words) their businesses by buying low yielding gilts (which they pretty much don’t buy), in order to meet regulatory capital levels, which they don’t have to meet, in order to invest in stuff that government should provide, that corporates don’t think are worth investing in, because at the moment, errr, they’re not investing in ?

    I fear for the 0.2 professors students.

  4. “I fear for the 0.2 professors students.”

    Do we know if he’s actually done any teaching yet? And if so if there’s any feed back?

  5. > Do we know if he’s actually done any teaching yet? And if so if there’s any feed back?

    Firstly, academics tend to take student feedback, especially about content, with a pinch of salt. It’s a constant discussion point among us as to what feedback is valid. Any complaints will probably be ascribed (arguably, rightly) to a political motivation.

    Secondly, they’re undergraduates. They’re going to lap up rabble-rousing nonsense provided it sounds sufficiently left-wing and is all about sticking it to hated corporations and the Tories. He’ll probably be a hit with the students, who will be hoodwinked right up to the point where they enter the real world and discover quite how much it lacks congruence with Prof. Murphy’s impassioned lectures.

  6. Philip, I presume that university exams are still independently moderated? Any student who produces Murph-tripe is in for a shock.

  7. I wonder if the fat fvck will exercise the same type of comments policy for students who express views non-aligned with his own as he does for his blog? I imagine an increasingly aggressive series of comments on essays prepared by a student who is an independent thinker:

    You display an ignorance of the issues.
    You need to live in the real world.
    I have run actual businesses and am a serial entrepreneur, you have not and are not.
    You are treading on very thin ice with conclusions like that.
    This course is not a forum for neo-liberals, you are in danger of being barred.
    Do not turn up on my course again.

  8. Bloke in North Dorset

    @Philip Walker,

    Maybe that will be the case for a while, but just wait until he commits his first micro-aggression, and I bet it doesn’t take long, and he has to apologise.

  9. Bloke in North Dorset

    “Ritchie still doesn’t understand QE”

    I wonder how many times you’ve used that title, it must be getting in to double figures. Perhaps you should change it to “Ritchie still doesn’t want to understand QE” or “Is Ritchie capable of understanding QE”?

    Perhaps some of your wittier commenters could think of something better?

  10. “Perhaps some of your wittier commenters could think of something better?”

    Not claiming to be witty, but I think all articles on Murphy could be headed up as below, and be perfectly informative, with no need for anything specific to be mentioned:

    “Richard Murphy is a cvnt”

  11. It is quite amazing that Murph learns that companies are piling up cash and reaches the conclusion that there are not enough gilts in issue.

  12. diogenes

    Probably not. There is a strain of fairly stupid Marxist “political economy” idiots out there – Yanis the idiot who bungled Grexit is a traveller in that caravan. Their internals and externals will probably be drawn from this very shallow intellectual puddle.

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