Firstly, the Bank of England could be told to stop its quantitative tightening programme, which is deliberately designed to fuel this crisis.
Secondly, the government could declare what it already says exists, and call the current economic situation a cost-of-living crisis, and so intervene in Bank of England policy, ordering it to cut rather than increase interest rates at this point in time.
Thirdly, the government could, if it wished, reduce the number of bonds it sells into financial markets when it appears they do not want to buy them. It could do this by cancelling current bond auctions and funding itself through the Bank of England instead. Rationing the supply of new bonds would immediately affect their price and send shockwaves through the market.
You just wait and see what gilts rates rise to if you go for full on monetisation of the deficit, Matey. For a major determinant of the price/yield on gilts is expectations of future inflation……
He’s only come up with three unworkable or insane options? He’s not really trying today.
a cost-of-living crisis
There’s always a cost of living crisis. For some sectors of society it’s permanent because their output, if they produce any, is insufficient to trade for the stuff they need. For the rest of us the only time there is not a cost-of-living crisis is when productivity and growth (here or abroad: thanks, China) combine to make the cost of living decline relative to incomes. Green degrowth policies directly create cost-of-living crisies.
Moreover, when I see tattooed landwhales wearing heavy metal merch scoffing junk while cruising around on mobility scooters I wonder whether there really are any poor people left in this country. All of that stuff is the result of discretionary expenditure.
I’ve just seen what is probably a decent prediction of one of the economic policies of
St Andy of t’North.
https://europeanconservative.com/articles/news/brussels-eyes-private-savings-as-public-money-runs-out/
Is it, though? That might be the total amount shown on people’s bank statements, but how much is actually in cash in the banks?
The European Banking Authority says it’s only €3 trillion:
https://www.eba.europa.eu/publications-and-media/publications/asset-side-1
So despite what Murphy and von der Leyen claim, 70% of those bank deposits are already ‘being used’, lent out to someone, so they can’t be grabbed by the government without taking it from some other use.
A chunk of that remaining €3 trillion is probably what they need for day-to-day liquidity. All of it, if they’re doing proper Treasury management.
(plus I should think some of the difference is lent to governments, so they’ve already got it, at least in cashflow terms)
This!
“70% of households savings are bank deposists, wailey wailey!”
When my Mum moved into a care home and sold her house, 100% of her savings were bank deposits. That’s just how human life goes. Basicly what Urslua Von To Ten is complaining about is people making provision for their own old age.
It’s very Spud-u-Like isn’t it. Ursula can see the Euro-car-crash in the distance and is valiantly trying to steal money to stave it off. But you can only do that once. When the EU fails and crashes as national governments take their own protective measures, then things will get a bit tasty.
That’s the main reason I voted Brexit – try to keep us out of the worst aspects of that crash. Sadly we have had our own crap governments shitting all over us since Brexit so there’s that to deal with instead ☹️
I posted this on one of yesterday’s threads, but unapologetically repeat ut it now
“The 10-year US Treasury yield rose to 4.8%”, inflation there is 3.4, so real yield being asked for is 1.4.
In the UK 10-year is up to 5.3, inflation is 2.9, so real yield being asked for is 2.4.
France 10-year yield is up to 4.3, inflation is 2.4 so real yield is 1.9.
I think the fucked yield should be based on the real yield, but yes, UK more fucked than any others. I’m scared by the use of the word ‘global’, ‘global bond yields are up’, ‘global energy prices up’, ‘global trade headwinds’, ‘global migration patterns’ ‘global food shortages’ etc.
When politicians start saying it’s caused by global stuff then we know they fucked up the local stuff. Gordon Broon’s glottal globals of 2007 spring to mind
Yes but…
The thing that people and businesses notice is the money in the bank.
The effective yield may be Return – Inflation, but a borrower still has to pay the rate as stated on the bond, which is cold hard cash.
Once it gets to 7ish % the only way is up for interest payments, it becomes a vicious cycle, unless someone bails out or restructures the loans.
The UK becomes a bad risk and the rates go up and the govt panics and prints money and causes inflation…
“You just wait and see what gilts rates rise to if you go for full on monetisation of the deficit, “
Also that sucking sound as the pound circles the drain…….and the howling gale of money leaving the country.
Jim, you might do less badly out of it than most; once the pound goes down the plughole, we won’t be buying much food from abroad any more.
Pity about your fuel and fertiliser costs though; you’ll have to go back to ploughing by horse.
And shitting all over the fields.
Or use sewage sludge like one of the local farmers around here does. Stinks to high heaven. You’d risk being the victim of a freak sludge drowning ‘accident’, ofc.
In the East Riding, are you? Was there last week. Could hardly breathe.
Perish the thought!
Once imported fertiliser costs shoot through the roof, they’ll unmothball the potash mine down the road from me. It’s been on standby as native potash is more expensive than imported, and they lose money if they operate it.
Its not potash we need the most, its nitrogen based fertilisers. And to make them you need natural gas, and lots of it….
Its often been said that Labour governments are good for farmers, because they usually f*ck the economy up and lower the pound, which means dearer imported food and higher prices for UK produced food. But that was in the day when we actually made the fertiliser, fuel, machinery and chemicals here, now they are all made abroad too, which our host constantly tells us makes us richer……
BOE rates are about 4%. About 4% is *NORMAL*.
True, but 4% being “normal” as a Bank Rate misses the problem.
Governments are like someone who took out a massive mortgage at 1-2%: they’re not just borrowing new money at 4-5%, they’re having to refinance the enormous pile of old debt as it matures at those rates as well.
It’s not just Britain, the same problem is hitting heavily indebted governments across the world simultaneously.
This is dangerous batshit bonkers bollocks from the man who definitely appears to have discovered macroeconomics by staring at a gilt auction and licking a window. I’m certain of it.
There’s 3 ideas here and all three demonstrate a catastrophic misunderstanding bond markets.
1. Stop QT.
QT can put some upward pressure on yields but claiming it is “deliberately designed to fuel the crisis” is nonsense. QE suppressed yields; QT is the process of unwinding it.
This isn’t just a UK supply problem. Bond yields are rising across the US, Japan, Europe and the UK because investors are repricing inflation, deficits, duration and sovereign risk. Spud has seemingly looked at a global bond sell-off and concluded: “Blimey, cancel the DMO auctions.”
2. Tell the BoE to cut rates.
This is where the wheels really come flying off, go bouncing down the track and smash some poor bugger in the head.
Bank Rate is not the 10-year gilt yield. You can slash short-term rates and still watch long-term yields rise if investors think inflation, deficits and future borrowing are getting worse.
The government doesn’t get to order the people lending it £billions for 10, 20 or 30 years to accept whatever interest rate it fancies and they have demonstrated for years now that the don’t want long dated gilts (ooh, I wonder why???).
3. Cancel gilt auctions and have the Bank of England fund the government.
And now the gone totally teapot bit:
“If investors won’t lend to us cheaply enough, get the central bank to create the money instead.”
Classic Spud monetary financing.
Fewer new gilts could temporarily push existing gilt prices up. But if investors conclude the government is deliberately bypassing the bond market and monetising its deficits, they can demand an even bigger risk premium. So sterling and inflation expectations take the hit.
So the proposed solution to a global repricing of sovereign debt is apparently:
Issue fewer bonds – print more money- hope the bond market doesn’t notice.
What could possibly go wrong?
Spud thinks the bond market is a vending machine: insert fewer gilts, receive lower yields.
Slight problem is the people putting the money in the machine get to decide what they’re prepared to charge. Oops!
So, as I see it, Spud’s solution is turn a bond market problem into a currency, inflation and sovereign-confidence problem which he’ll then say the solution for is moar tax and confiscate everything. He’s like a bloody broken record.
Oh, Murphy will have a plan for forcing them to do so. Your pension fund, bank deposits, ISAs, will all be ‘borrowed’ by the government at 1%.
“Spud’s solution is turn a bond market problem into a currency, inflation and sovereign-confidence problem which he’ll then say the solution for is moar tax and confiscate everything. “
Its almost as if the last bit is the actual goal…….
He has a cunning plan.
I’ll believe there’s a cost of living crisis when the government starts acting like there’s one and starts issuing North Sea drilling licences like they’re going out of fashion, for starters. The fact that they’ve dithered over the two that are ready to go shows there is no urgency and therefore no crisis.
It’s sort of explicable for Labour. If they let people drill then their idiot voters will flock back to the Greens. Why the Tories didn’t just let it rip I have no idea.
Boris. His wife. Pussy. His dick in her pocket. Also, Tory donors and landowners making shitloads from green subsidies. That’s why I can’t trust Kemi.
Quantitative easing goes straight into the financial markets and the property markets. It does not touch sides on its way there and not a single shovel is bought. Its long-term effect on private citizens is obviously that housing prices shoot up, in line with the value of retirement savings invested in the housing and financial markets. QE is good news for those who decided either to sit tight or to increase their investment when QE was announced. QE is not good news for those who came to the market late and have to pay higher prices for housing and retirement assets.
Quantitative tightening works exactly the same way. Money moves out of the two asset classes, financial markets and property markets. Not a single shovel is sold and the effect on cost of living is slightly more affordable housing. The supermarket price of a 10kg pocket of potatoes will remain exactly the same as it would have been.
This isn’t true Michael – bizarrely spud pbuh got this right back in the day – quantitative easing goes to the government first, not the financial markets. Government gets first dibs on how they spend the money that has been effectively printed, not the financial or property markets.
The government created £ to buy government bonds, that’s how QE worked, they couldn’t do anything else with the money. The previous owners of those bonds got the cash to spend as they saw fit which led to them moving out the risk curve and hence asset appreciation.
Yes. Those bonds were on the market to sell at that time, they hadn’t been sold at the pre QE market price but then they got bought by the BoE at slightly higher and then they moved onto the central bank balance sheet.
The government carried on spending like a drunken sailor by issuing new bonds, which were likely bought by people who had the cash to buy them in many cases (fungibility and all that) from selling their previous ones to the BoE.
This is what I keep banging on about. QE allows the government to spend money it either couldn’t have borrowed at all (because the markets would have baulked at lending them any more) or might have been able to borrow but only at ludicrously high rates of interest. So in effect the government is spending printed money. Yes the gilts go into the private sector briefly, but only as a conduit. The process goes: Private Sector buys a Gilt from the Government for cash, BoE then almost immediately buys said gilt on the open market for printed cash. The end state is the Government has cash to spend it didn’t have before, the BoE has printed some and now holds a gilt, and the Private Sector cash balance is unchanged on the deal (maybe ever so slightly up, because I’m sure the Banks engineered it so that they made a profit). How anyone can say this money ‘doesn’t reach the real economy’ I don’t know. WTF did the government pay everyone to stay at home during covid with, Monopoly money?
Jim,
I saw a short narrative on this no more than a few days ago – saved it specifically for this (future) discussion – and have already managed to lose it… It was the difference between the two QE events.
I’ll do my best, although I’m nothing like as articulate (and my memory is useless anyway).
Both after the GFC and through Covid, we had QE. The underlying gist of the article was: who specifically/additionally benefited from the QE process. Ordinary “day-to-day” government spending levels not materially changing through either period.
After the GFC, the benefit of substantially increased “created money” went mostly to people who held assets. Property, shares etc (Tim’s pushing the yield out, etc). We had material asset inflation through subsequent years as a consequence. Anyone who owned assets was better off – they were the beneficiaries. The money itself did not materially (or immediately) circulate through to those who would otherwise spend it on consumer goods or essentials – at least in no immediate short to medium term timescales – it was reflected in (for example) increased savings, investments or other assets purchased.
Through Covid, it was different, wrt the beneficiaries. The excess money (created) ended up being pretty much helicoptered directly to those who were likely to spend it more immediately on consumer goods and essentials. Hence, we had the anticipated RPI inflationary effect within a relatively short timescale subsequently.
The article explained it better than I can, there was more to it that I’ve already forgotten. And others here might simply tell me that I’ve misunderstood it in any case..
“Ordinary “day-to-day” government spending levels not materially changing through either period.”
Well thats the point. When the GFC hit in the absence of QE the UK government would have faced trying to raise lots of new debt (to fund its massive deficit, as spending was rising rapidly and tax revenue falling) at a time the markets were not exactly functioning very well. The UK government could easily have faced a bond buyers strike, or a rapid rise in bond yields, a la Liz Truss. But they didn’t because the BoE hoovered up all the bonds they could issue. No funding crisis at all, and interest rates driven through the floor. And all that money got spent into the real economy. It paid for pensions, and welfare payments, and to bail out broke banks, and the salaries of State employees, and medicines for the NHS and everything else the State spends its money on, some of which would have to have been cut if they couldn’t have borrowed as much as they did.
All the stuff about stock prices and asset inflation are second order effects. Thats what happened once the money got out into the real economy. There was a deep recession, and in recessions people save, not spend. They were looking for yield for their savings (as interest rates were artificially depressed by all the QE) so naturally they looked to buy houses to rent out, and stocks that offered a better return than gilts, thus driving the prices of those up.
Whereas in covid after the government spent all its printed money, this time you had the trifecta of massive pent up demand (everyone had built up savings during lockdown but were not able to spend them), reduced supply, as factories etc had not been able to operate properly during covid, and labour shortages as loads of foreigners had buggered off when the lockdowns started. So inflation took off like a rocket this time as people weren’t looking to invest their savings they were looking to spend them on goods and services. If we accept our hosts version of why QE causes inflation sometimes but not others, we could say the Velocity of Money rose rapidly after Covid, whereas it fell during the GFC.
The issue with QE is not that the Covid version was done differently to the GFC version, its that it was done exactly the same but in totally different economic and social environments. The UK immediately after the GFC was not the same place as the day lockdowns ended. So doing exactly the same thing twice was never going to have the same impact.
Jim,
You make perfectly good points. Apologies, this has moved on now, but been tied up. I would add just one thing.
Again, it’s wrt who benefits. Let’s take two extreme examples, these aren’t real, simply to illustrate.
Gov’t is issuing / rolling over bonds each month at £100. No new money (ignore their small monthly deficits relative to the total balances for a second). Investors simply roll over / re-invest the £100 exactly the same.
1) This month, the BoE steps in with created money and buys half the issue. Ie, investors fail to roll over £50 of their £100. That £50 is now in the hands of investors who are looking to put that money to productive use elsewhere. Ie, into others assets, not trainers.
2) This time, the Gov’t issues £150 of bonds, not £100, and the BoE take up the extra £50. Investors, no change, £100 rolled over. Gov’t has an extra £50, helicopters it to the yoof, new trainers.
Two different immediate beneficiaries and different outcomes / processes from the same underlying QE process (ie, that of the BoE creating £50 of new money). 1st order effect of 1) might lean towards asset inflation, 1st order effect of 2) might lean towards RPI inflation.
These are extreme examples, although my superficial glance at the Gov’t spend data *might* suggest that Covid was slightly more like 2) above than 1). There seemed to be a bigger / more sudden change in 2020 wrt increased Gov’t spend (Covid grants and all that?), and intuitively it seems to me that the differentials are the important thing here? Don’t take that as gospel, it would need a good data pendant to extract the right info.
This doesn’t take away one jot from your perfectly sound points above. Again, apols, tied up, maybe next time, when it’s not already disappeared from view.
In both your cases, (1) and (2) an extra £50 of printed money has hit ‘the real economy’, ie actual people owning a bit more cash. Either an investor who used to have a gilt now has cash, or someone the State has splurged cash on now has it.
So the question is not ‘does QE hit the real economy’, because we know the answer is always Yes. The question is who gets it, and what do they do with it? And as ever the answer to that is ‘It depends’. In your first scenario yes, its probably likely that people who had money invested in gilts but now have the cash will look to save it elsewhere, so other assets will get the benefit. And yes if the State just helicopters money to people like in covid its more likely they will spend it rather than save it. But neither is 100% certain. The investor with the proceeds from his gilt sale might decide to build an extension on his house, or go on a round the world cruise. And the person who built up savings in covid might decide to invest them instead of spend them.
I return to my point – there is no difference in what the government and BoE did in 2009 and what they did in 2020-2022. The difference is in who ended up with that printed money, what they did with it, and larger macro-economic situation they had around them. Thats why you get different outcomes.
That’s not even wrong. Chart the release of QE alongside stock exchange indices and housing. Lockstep. The natural home of money is the markets.
This little gem dropped from 2012 in a search for something else…..
Absolutely hilarious, since The Murph considers his #Opinion Absolute Truth once he failed his spell checker…
I go online for entertainment. Tim is often entertaining. He’s very good at sarky take-downs of nonsense opinions. He’s not very good at forming opinions of his own that are not nonsense, and once offered he never retracts them. We have two Icons of Absolute Truth in a head-to-head here.
Ever spiraling the plug hole…
Theoretically, you need higher prices to incentivise production. But since profits would then be taxed away, why would anyone bother?