After the credit crunch Quantitative Easing or QE bond buying became the go yo policy for central banks. This was because they had cut interest-rates as low as they thought they could. For example in my home country the UK the Bank of England thought that some of the building societies could not cope with an interest-rate below 0.5% so Bank Rate got stuck there. This was what was called the Zero Interest-Rate Policy or ZIRP although as you can see it was not literally 0% at this point.
Bond yields remained much higher so they hit on the idea of buying them to reduce yields and get the economic effect that they had hoped would be achieved by cutting official or short-term interest-rates. That is how the Bank of England ended up with £375 billion on its books. I had my concerns about this and suggested in City-AM in September 2013 that we should begin to reverse course by not replacing bonds that mature. It would be a slow process but there would be a drip-drip reduction and crucially we would be doing so when the economic times were good.
Second Wave and Third
This took various forms as central banks decided they could go below 0% interest-rates with the ECB going to 0.5% and introducing large-scale QE bond buying. This added another facet to the equation because it bought bonds at negative yields so it was guaranteeing a capital loss. Then post Covid it bought a lot more bonds at negative yields or if you prefer record high prices. That was relatively low risk in say Germany but short-term bonds in Italy were driven into negative yields as well. If we take the case of Italy there was a period at the end of 2020 when the five-year yield was negative ( -0.1% or so) which means QE purchases were guaranteeing a loss on expiry which is 2/3 years away. The issue is being rubbed in because as I type this the five-year yield in Italy is over 4%. If you were a bond trader you would get sacked ( probably several times) for such a performance.But as a central bank it just gets swept under the carpet because they can print themselves out of trouble. Although the ECB is a special cse in that with 19 treasuries and rising some may get upset at individual countries getting more than their fair share or capital key. As buying of Italian bonds is still ongoing with other countries bonds sold to finance this ( maturing funds from German or French bonds are put into Italian ones) this could yet lead to trouble in a way that cannot happen elsewhere.
Can the ECB QT?
The forst point here is that the ECB has got ready a new version of QE in case Italy needs more help. Below is President Lagarde at the European Parliament on Monday.
Later in July, we also announced a new monetary policy tool, the Transmission Protection Instrument (TPI), complementing our existing tools. This tool has been designed to counter unwarranted, disorderly market dynamics, with sufficient flexibility to respond to the severity of the risks facing policy transmission.
As to QT? Well that seems to have been deferred to the 12th of never for now.
ECB’s Lagarde: QT To Be Considered Once Rate Normalization Is Complete ( @LiveSquawk)
The US
First we need to note that the US made an effort starting in the summer of 2017 to QT. The Federal Reserve did reduce its balance sheet from US $4.48 trillion to US $3.77 trillion. But the crucial point is not only was QT 1.0 abandoned it was buying more before the covid crisis blew the balance sheet to nearly US $9 trillion. That is a little awkward as whatever excuses you make the reality is that a few years later the reduction period turned into the balance sheet being doubled!
The latest version or QT 2.0 has not done much with the balance sheet dropping by US $160 billion or so and this being intended.
- For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.
- For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.
So US $95 billion a month. It is funny in a way that we have reached the point where 95 billion dollars a month does not seem much! That is of course a relative issue but the absolute one is in play.
The $24tn US Treasury market has been hit with its most severe bout of turbulence since the coronavirus crisis, underscoring how big swings in international bonds and currencies and jitters over US rate rises have spooked investors. ( Financial Times)
There is more detail here.
The 10-year Treasury yield, a key benchmark for global borrowing costs, has surged to nearly 4 per cent from 3.2 per cent at the end of August, leaving it set for the biggest monthly rise since 2003. It is on track for its sharpest ever annual rise. The two-year yield, more sensitive to fluctuations in US monetary policy, has leapt 3.55 percentage points this year, which would also mark a historic increase. ( FT)
My point is that they have torpedoed their own bond market with what have been relatively small actual sales. Even if we factor in planned sales for the rest of this year they are minor compared to the market impact.
The US bond market is in trouble which is why we are seeing statements like this.
Speaking to reporters on Tuesday, Treasury secretary Janet Yellen said the US is “monitoring developments very closely” in the UK ( @colbyLbmith )
Or indeed an official denial.
US TREASURY SECRETARY YELLEN: I DON’T SEE ANY ERRATIC FINANCIAL MARKET CONDITIONS. ( @financialjuice)
So we have both deflection and an official denial. But the heat is on as rumours like this for someone who was a key policy appointment do not just appear.
“White House officials are quietly preparing for the potential departure of US Treasury Secretary Janet Yellen after the midterms, @axios reports, citing unidentified people familiar with the matter.” ( @DiMartinoBooth)
Comment
I have long argued that the central bank plans for what they call “normalisation” which includes QT are ill thought out. Indeed they are turning out to be as stupid as I Iong feared.
The US 10 year rate just crossed above 4 percent. Mortgage rates comfortably exceed 7 percent. We are now in new financial territory. ( @LHSummers)
Their “triumph” of reducing bond yields in the pandemic has been replaced by pumping them up in this inflation crisis. What I could not entirely forsee was that via their policy of denial about inflation followed by panic they would run into the crisis with the speed of Usain Bolt.
Switching to Europe we see that even if you still have some QE you can now be in trouble as the ten-year yield approaches 5% there. As I would suspect the ECB is buying as much as it can via PEPP maturities the underlying situation is worse.
Next up is Japan which has ignored all this but even there the heat is on.From Bloomberg on Monday
The Bank of Japan buys more bonds at its regular operation, as the benchmark yield rises toward the upper end of the central bank’s tolerated trading range.
They in a way are the ultimate can kickers as they plough on.But the heat is being felt in other areas as they add buying Yen to the equities, bonds and commercial property they have already bought.
We’re caught in a trapI can’t walk outBecause I love you too much, babyWhy can’t you seeWhat you’re doing to meWhen you don’t believe a word I say? ( Elvis Presley)
Notayesmanseconomics's Blog 
From your posting this just a few minutes ago the BoE has resumed bond buying. We are now officially in basket case territory, so much so, even the IMF have noticed. I think QT will have to wait.
They were given the choice of raising interest rates, and seeing price discovery … or printing to keep the fantasy going.
No wonder Liz and Kamakasi didn’t wish to consult the civil service prior to the mini budget.
Hi Happening and welcome to my corner of the online world.
bill40,
Yes they resumed bond buying to calm the markets but the markets want more they want an interest rate rise now not in weeks at the begining of November !
The £ is still under pressure and the footsie 100 now under 7,000 (0.4%) and 250 down worse down 314 (1.8%)
I don’t think the bond buying will be enough and Labour are now calling to recall Parliament, the budget down down quicker than the Titanic and people are desserting the stock market others are screaming “what about my mortgage rates” !
You normally get a bounce with a new leader not this time even some of the back benchers must be fretting at events unfolding.
The BOE were probably hoping the markets would calm down but it is far from it and reminscent of the £ falling out of the exchange mechanism and it didn’t work out.
The “masters of the Universe” which the GOV mentioned in the 2008 financial crisis still playing their hands and they have the money to do it. If the money markets say the BOE must act it must act they will force the £ to below parrity if the BOE keep sitting on their hands.
In 2008 after the banks were failing numerous financial analysts were crying out the capitalism has failed !
But no one has taken any notice why?
Well this is just one example the housing market was overheated over 2 years ago now and what does the GOV do in Covid is reduce stamp duty causing a mini rush and the GOV had already been offering incentives one way or another to get first time buyers on the property market.
Instead of building more houses they have allowed the handfful of large builders to make massive profits and billions of that make more money when we have a massive housing shortage.
Buillders were making that much money one of their CEO’s was paid a £75 million bonus then got forced out due to an outcry
https://www.bbc.co.uk/news/business-46122407
This is capitalism for you uncontroled greed ! Did Persimmon decide to build even more affordable houses? No !
No builder makes as much money building low cost houses so although they are supposed to build a percentage of low cost homes they argue planning laws to reduce the amount they are supposed to build.
Unfortunately we have a GOV in power who don’t understand people need operations to get back to work. They don’t understand people need affordable housing. They don’t understand you don’t feel well when cold they don’t understand because they are not in that position.
Liz Truss has no economic acumen imo to remove the cap on bankers bonuses and then reduce the top rate for the rich shows how much she really understands about the real economy and how it affects the average brit.
We are in a crisis at the moment and the GOV dug themselves a big hole.
Hi Peter,
First of all I hope you’re well and things are getting better. As to the current car crash The BoE had to act to prevent pension funds literally going bust as explained here https://bondvigilantes.com/blog/2022/09/collateral-calls/ LDI’s are something Shaun will have to explain as it’s way above my pay grade!
This in in addition to nobbling the tax base, the housing market, bond markets, currency markets and the FTSE. Now if we know all this there is no possible way they didn’t, this isn’t incompetence it’s a coup. Next come the emergency cuts due to the **unforeseen** consequences and they’ll try to present themselves as saviours for doing so, the UK will be unrecognisable, this is a coup.
Again everybody knows that the housing market is broken at the bottom which the private sector will never fix except with ghettoes, it has to be the state. The BoE cannot go bankrupt but the currency can become all but worthless, these maniacs must be stopped.
As for those desperately trying to say this is MMT it is not, it’s disaster capitalism to make Mises wet dream come true. (Apologies if this is a tad political)
Society/people need cheap shelter, fuel and food to survive in a stable fashion.
Whilst we have cheap fuel and food, but the extremes of the unaffordability of shelter that needs fixing, and the reason its unaffordable is down to the govt/civil service.
Until that happens the economy can and will never recover, it’ll be one relapse after another.
I vaguely believe Truss and Kamakasi get that, but i’m 100% certain the civil servants and those at the BoE are wholly against shelter becoming cheap, and will do all they can to keep it unaffordable, as they and their ilk profit from it.
Breaking my sel fimposed ban just to say:
QE re-started then.There’s that dreaded word “temporary” again, I won’t say any more.
KEVIN
The BOE had to intervene if they hadn’t some pension funds would have gone bust as soon as this afternoon. SKY news equated this to the run on Northern Rock
https://news.sky.com/story/bank-of-england-takes-action-to-restore-orderly-market-conditions-after-mini-budget-panic-12706827
I don’t think we will see the back of this some people make massive amounts of money on market volotility.
I remember the Halifax turmoil and the shorters were forcing Halifax share price down and they did so making it impossible for Halifax to raise money what happend is there was a run on the banks.
SKY news also requating this to Black Monday..
This is not a good start to the new Tory Gov.
I don’t expect Parliament recalled and the Chancellor not for turning which reminds me of Margaret Thatcher a “woman not for turning”.
However the poll tax put a end to her erra.
No Peter, they did not have to intervene, it is due to endless government intervention in markets that we are in the mess we are in – they must stop or it will end up in hyperinflation and currency collapse – as I have already predicted and believe will happen.
Yes pensions would have collapsed but by re-starting QE and the other insane polices in the pipeline they are going to guarantee hyperinflation and currency collapse so that if the pensions of those affected do eventually get paid, it will be in worthless money anyway, so why maintain the distortions – just let the markets fail and we will go back to real markets and real economies.
They caused this problem by excesive QE/ZIRP causing gilt prices to artificially soar to unsustainable levels, which pensions have to hold by law, thereby causing their losses when the bond market recently goes into freefall due to the governments insane budget and the Bank of England refusing to raise rates in order to protect the housing bubble – so you want to protect the housing bubble but also want to destroy the currency as well,what about those who haven’t bought a house or want to and can’t afford to?, what about savers who have been robbed of billions of pounds in interest th last 13 years since QE started – that’s all OK then? I suppose you will then tell us we should accept all of the above since people who bought houses will not be able to keep up payments and might lose money or even have them repossessed and the economy will suffer.
Please tell us how is it Ok to punish one group of people in order to maintain and protect another that have profited from a rotten corrupt system of government and central bank intervention???
£ soaring against dollar, market expects u turn from gov or an emergency BofE increase in rates or co-ordinated central bank intervention?.
No, we on here all know it can’t be one or two so it only leaves 3, DXY looks like topping out so maybe dollars rocket ship is running out of fuel so that may be the reason, euro and other currencies also making big gains against dollar, £ not making gains against other currencies so its dollar weakness, talk about a dead cat bounce – meoooooowwwwwwwwww.
£ up 1.5% against the dollar a temporary boost if you can call it that and it is early days.
Labour calling for a recall to Parliament is what you would expect them to call for but unlikely to happen imo.
Not sure whether the BOE buying bonds will fully restore confidence but maybe shaun will comment on that later on.
Personally I think market turbulence will continue for a while yet.
Do we have here another ERM moment (as described here last week)where the Bank of England defiantly stands up to the markets to defend its ludicrous policies with unlimited buying -gilts this time instead of sterling.
As I said before – they just never learn do they?, to them we never lost the empire or both World Wars and we still rule the waves, the arrogance and stupidity is unfathomable, to prop up the bankrupt pension system they are prepared to print unlimited money to keep gilt yields down but in the process shoot themselves in the foot, I can’t wait to see how this plays out, perhaps they have other central banks commited to helping out as well, but our version of Draghi’s “whatever it takes” moment is upon us, but this time you have a government doing the opposite of what the Bank of England is supposedly trying to achieve and with inflation in the mid teens coming into the winter with an open ended commitmwnt to pay the country’s gas and electricity bill, I would say on balance of probabilities the bond vigilanties should win, the Bank of England have got two chances – slim and none – and slim just left town.
It wasn’t the poll tax which ended Thatcher; it was EU-scepticism.
https://www.bing.com/videos/search?q=geoffrey+howe+speech+against+thatcher&&view=detail&mid=E6D0B671E0A0DE3B3BB0E6D0B671E0A0DE3B3BB0&&FORM=VDRVRV
simple answer to the question in the heading is clearly no.
To understand why, it is worth reminding ourselves how currency (in the form of reserves is created and destroyed). Govt spending creates reserves. Taxation drains reserves. Govt selling bonds drains reserves from the system, replacing them with bonds. Govt (including its central bank) buying back its bonds recreates those reserves, and drains bonds from the system.
When viewing the Treasury, DMO, Royal Mint, NS&I and the central bank as one consolidated entity (let’s call it the ‘public sector’), the process is very simple. When the govt spends it creates reserves, when it taxes it drains reserves, if it runs a deficit (which is normal) it leaves reserves in the system. It can then sell bonds (either from the DMO or NS&I) in exchange for some of those reserves. It can also exchange reserves for notes and coins (issued by the central bank and the Royal Mint) to meet demand. Ultimately, the financial assets (its liabilities) it leaves in circulation by running deficits (the sum of which we call the ‘national debt’) will be a mix of reserves, banknotes, coins, Gilts and NS&I savings.
Now, clearly there is a need for some of the public sector’s liabilities to be in the form of money-liabilities (reserves, notes and coins) and some in the form of bond liabilities (gilts and NS&I savings). How is the mix adjusted? Easy; by exchanging one for the other. It’s that straightforward. We see that as buying and selling of bonds. Selling bonds is a reserve drain, reducing the quantity of reserves in the system and buying bonds is a reserve add.
Now, prior to the GFC the split was heavily weighted towards bonds. Why? Who knows! Historical reasons, perhaps. But there was this view that if the split was weighted more towards reserves, then unspecified ‘bad things’ would happen. I’m not sure what those ‘bad things’ were meant to be, but there we were. Typically the system would run with about £50bn of notes and coins and £20bn to £25bn in reserves, the most liquid asset that banks can hold and used to settle payments, gross and in real time between themselves.
Woefully, woefully inadequate
There’s no way we will be going back to the banking system relying on £20bn to £25bn of reserves to meet banks’ liquidity needs. The number is going to be in the several hundred billion £.
So, even if the central bank felt the need to swing the balance back more to bonds and fewer reserves (and I’m not sure why they think this is necessary – those unspecified ‘bad things’ didn’t happen), there is no chance they can reverse all the actions taken to recreate reserves during the various rounds of QE. It’s not going to happen. Is this an issue? Absolutely not!. Surely we want our banks to have immediate access to liquidity. That’s a ‘good thing’, not a ‘bad thing’.
Only in a closed system.
We do not live in a closed system.
See Sri Lanka.
the Sterling monetary system IS a closed system. Every £ payment made is a £ payment received. Every £ owed by someone is a £ owed to someone.
Every £ of currency that has been issued by the UK govt and hasn’t (yet) been taxed back will be held by someone. It can only be held in the form of reserves, banknotes, coins, Gilts or NS&I savings. That is a closed system. If you add up the total of those 5 things, the answer will be exactly how many £ the govt has spent into existence and hasn’t taxed away out of existence. That is what we call the ‘national debt’
Although Sterling is a minor reserve currency, it is a reserve currency, therefore it cannot be a closed system.
the UK economy is not a closed system, but the Sterling monetary system is. As is the USD monetary system etc etc.
It makes no difference whether a person wishing to hold Sterling, whether in the form of govt issued money or govt issued bonds, is physically located the near or far side of a random line on the map. If it is a liability of the UK public sector, it is a financial asset of somebody somewhere.
It doesn’t matter who holds the financial asset, but if it is a liability of the UK govt, it can only be a money-liability or a bond-liability….and it doesn’t really matter which it is.
The govt cannot tax out of existence currency held by foreign governments as reserves. Yet that foreign govt. can spend those reserves, here or elsewhere, as it chooses.
Thus, it is not a closed system.
By the way Robert Pearson, it is not I who has marked you down.
I don’t hide behind downticks: I make my argument & if I’m proven wrong I learn.
Is it not the case, Shaun, that at one of the biggest motivations for QE was to free banks from the need to find their liquidity from savers, so that it became easier to lower interest rates, & to encourage savers to spend their savings in further ill-thought-out economic policy?
Would it not be better for everyone but government if that liquidity provided by QE was vastly reduced, & banks were once again forced to seek deposits from savers for liquidity.
central bank reserves, which is the most liquid asset banks can hold and what they use to settle payments between themselves, can only come from the central bank/government. Reserves cannot come from savers. If one bank attracts a deposit from a customer who banks at another bank, the first bank’s reserve account gets credited and the second bank’s reserve account gets debited. No new reserves are created! (Because…..it’s a closed system). If the overall demand for reserves increases (and it might increase due to the regulatory authorities telling banks they have to hold more reserves), then only the central bank can supply those reserves.
See Sri Lanka, it ran out of foreign reserves buying commodities.
Sorry to go off-topic, but both Nord Stream pipelines have been sabotaged. Properly sabotaged, as in Germany is USC.
I think that when markets digest what is in store for Germany this winter ( and by default the EU ) the Euro will come under real pressure. Sterlings problems might be small fry by comparison.
We had an email from our energy provider recently asking us, did we know that our energy consumption had increased by over 25% in a short period (something like 3 or 4 days). I had turned up the thermostat on the boiler by 2c, to get it up to speed for the winter after it being set to 18C over the summer months; just happened to coincide with the coldest weekend since summer ended (overnight went to +4C).
Nonetheless, look out. The energy police are about.
buz, do you think Putin has ordered the sabotage ?
Also in response to your question yesterday about gas, you are correct the end of the war won’t sort out the energy crisis but it will ease things.
Re: Sabotage .. Cui Bono? Certainly not Germany. Russia neutral – loses all negotiation leverage and could achieve a similar outcome by just turning off the taps (as they have done in the past) instead of permanent damage. Poland – after opening of the Norwegian – Denmark – Poland Pipeline this week most definitely stands to gain. USA … has made thinly veiled threats on NS2 in the past and would also stand to benefit with increased LNG sales to EU
Hi Able Crane and welcome to my corner of the online world.
Cui Bono?
buz SKY news intimating Russia sabotaged Nord pipeline, no one else would want to do that.
No. It is definitely not Putin.
Putin has had the lines filled with gas at operating pressure, so that he can fulfil his promise of turning on the taps as soon as sanctions are dropped.
This sabotage prevents him from doing so.
Putin controls the taps at both ends; give me a logical reason for blowing up the pipes.
There are three countries in particular who don’t want Germany to fold & deal with Russia:
Truss has stated that she won’t be held to ransom by Russia. Has the capability, but the strength of motive?
Zelensky has repeatedly put pressure on EU to refrain from buying Russian energy. Probably not capability.
USA: Recent documents (claimed to be fake) show US hoping for a weaker Germany, & there’s this:
So what do you think?
I think that the culprit will be in the brown sticky if caught, especially if they’ve done enough damage to kill off a few hundred thousand Germans.
Don’t see how you can say its definitely not Putin. In the poker game of war, it could be a semi bluff re-raise.
There are only negatives for Putin from this sabotage, as he already had complete control over the pipelines; false flag ops don’t usually do this level of harm to the perpetrator.
It is as important for him to be able to turn the gas on, as it is to be able to turn it off.
“Damaged beyond repair…” I’ve read, so not the same motivation to drop sanctions.
The leaked Rand Corporation Doc they said was fake?
https://redpill78.substack.com/p/newly-leaked-report-from-rand-corporation
My suspicion is that the NordStream pipes were taken out by US underwater drones, as US helicopters reconnoitred the pipes only a few days ago, on exercise.
https://www.republicworld.com/world-news/us-news/us-helicopters-fly-above-sites-of-nord-stream-blasts-leak-as-europe-suspects-sabotage-articleshow.html
Hi therrawbuzzin
When I saw it on social media this had me thinking of how you would measure Nord Stream 2 in GDP terms. It goes as follows.
Income.Okay as people have been paid and interest settled etc
Expenditure: Money has been spent so also okay
Output: Well not much and now nothing at all. Er this is a lot more difficult.
NS2 has never sent any gas to Germany nor has NS1 since beginning of Sept so doesn’t change current supply situation so why has gas gone up so much?
USA kills thousands of Germans?
Hi therrawbuzzin
It is an awkward one to say the least.I guess the only country we think we can be sure about is Germany.At least I think so although with their energy track record?
Probably not this though.
nickvii
on September 27, 2022 at 6:21 pm said:
I must be older than you Peter, as I do not think of IR of 4 – 5 % as “sky high”.
nick,
Yes I remember in the early 80s mortgage rates going towards 20%
But the difference then was not every household member had a car, mobile phones hadn’t taken off and neither had computer technology all which is draining family income today as 2 car familles is the norm.
But also back then the lenders had mortgage affordability tests something like 3 trimes the main income now people can be paying multiples of 10 times income and one reason for that is base rate has been at 0.5% for a decade before interest rises kicked in early this year.
We now have a situaton where the average morgage interest rates have been circa 2-3% and those rates are now doubling.
This has come as a big shock to the present generation, maybe yesterdays post by myself was a little dramatic on “sky high rates” but to some people that is what is may look like and mean some people struggle to remortgage.
All this has come out of the blue go back 12 months and people were talking of negative rates and living their lives accordingly not really overworied about their mortgages now the scene has changed.
This is not a good situation as buz has posted a number of times and the housing market could well take a big hit.
Rates may ease back in 18 months time but I wouldn’t bet on it.
It’s all right keep running the printing presses but at some stage the ink runs out.
It just goes to show what a mess the BOE is in halting bond buying and then selling and back again buying bomds to calm markets.
This doesn’t look like you have a GOV or BOE got a proper take on things.
£ has eased back following the BOE announcements but still weak against the $ and a long way to go back to the averages a couple of months ago. Some analysts will still be forecasting parrity out there.
Dont know how that happened but typed in a wrong username should have been Peter Pan LOL
Hi Peter
One of my memories from my early days working in the bond market was asking Legal & General why they had bought a UK Gilt yielding 15%! It was in a panic like this and L&G were right if you were able to hold a position. The danger at the moment is not absolute numbers even though the 5% we reached is a bigger deal than in the past due to the factors we have discussed over the years.
The issue at the moment is all the swinging around in currency and bond markets which will have caught people out and may lead to yet more problems. It is far from just us as this tweet from a former US bond trader shows.
He is right…
BBC
Posted at 17:4917:49
BREAKING
Government departments to be asked to find ‘spending efficiencies’
Helen Catt
Political correspondent
The Chief Secretary to the Treasury, Chris Philp, will write to government departments in the coming days about and identifying spending efficiencies and living within the spending review, a Whitehall source has confirmed.
17:07
Chancellor could make a bad thing worse – Varoufakis
Greek economist Yanis Varoufakis pictured in 2019
Getty ImagesCopyright: Getty Images
Economist and former Greek Finance Minister Yanis Varoufakis says he fears UK Chancellor Kwasi Kwarteng “is going to make a bad thing worse” and cut public spending rather than reverse tax cuts.
Speaking to the BBC earlier, Varoufakis said the International Monetary Fund and America’s central bank were worried the UK “may trigger a financial crisis” by doing to America and other wealthy nations what “Greece did to the Eurozone”.
Greece was severely affected by the 2008 financial crisis, and received huge bailouts in order to tackle its debt crisis.
Varoufakis, a former member of the left-wing Syriza party, resigned in July 2015 after six months as finance minister over the eventual bailout conditions.
“The particular focus of the concern… is the impact that the destabilisation of the markets in Britain will have on the US treasuries, in other words on the public debt of the United States,” he said. “Because that kind of domino effect would have quite severe repercussions for the whole world.”
He told BBC Radio 4’s World at One programme that the Bank of England knew it needed to push interest rates up to stabilise the market, but that this could break the housing market “like a toy”.
So the BOE are in a cleft stick with regards to interest rates they know they should be going up but reluctant to push them up where needed for fear of breaking the housing market.
Little wonder they put them up 0.5% when the market was looking for at least 0.75%.
No sign of Truss and her side kick
Hi Peter
I did not know that places still consulted Varoufakis. After what he did to Greece more fool them.
As to Danny he is a bit of a curate’s egg.
I know you follow our exchanges on twitter and we agreed about recession dangers.
But he has also posted a load of nonsense about inflation in the last year.
He also would have voted for an interest-rate cut last Thursday and if that has happened then this week’s excitement would be a tea party compared to reality then.
Blanchflower is a nation wrecking moron with a big mouth.
He is one of the people at the BoE who initially opted for ZIRP, to save the world, when all it done was kick the can down the road.
And now we’ve reached that can.
He truly is a repulsive individual who fails to see the vast inequality he created with this policy, being that he is one of the worthless parasites who has made an absolute fortune from it, no doubt enough to help generations of his family.
Time the middle class parasites started losing and our economy has millions of them, its time the productive worker is rewarded to the level he/she should be for their endeavour.
Shaun, was it not Tsipras who did the harm to Greece at the time?
My memory is that he cut the rug from underneath Varoufakis in negotiations with the troika, forcing Varoufakis’s resignation.
I guess Yanis and Robert have different definitions of a “bad thing”.
My definition of a bad thing is my Pension Fund going bust.
Shaun,
Cannot think which financial news network I was watching but they said the BOE would use their reserves to buy GOV bonds and we would all have to pay for this in the end, So how ?
Next question is how much does the BOE have in reserves ? I think I heard the buying of bonds would cost tens of billions of pounds.
Still no sign of Liz Truss today she has gone into hiding hoping the markets calm down. KPMG said on one of the news chanells that today’s intervention would only be temporary however.
The Guardian is saying we could see a 10% fall in house prices next year wqhich isn’t major but no one really knows. What is shockimng is mortgage holdes in London paying 50% of their take home pay on loans,
What was also quoted today was someone on a 200k morgage at 2% will not have to pay an extra £6,000 a year on a new morgage of over 4% but could have been slightly higer.
Whichever way you look at the UK economy at the moment the prospects don’t look particularly well as interest rates are going to rise and many people will see a rise imnediately and then more will follow next year and the year after after fixed deals end. Of course we don’t know what will happen in 12 months time there are too many variables which can alter things at the touch of a button like the BOE intervention today to protect the pension funds.
the central bank neither has nor doesn’t have reserves. Reserves are a liability of the central bank, created whenever the central bank (or the Treasury) buys anything, spends or makes any sort of transfer to the private sector. Reserves are deposits held by commercial banks at the central bank. They are created in the same way as deposits at commercial banks are created – by data entry, just inputting a number into a balance sheet.
When the central bank purchases one public sector liability (a Gilt) by creating another public sector liability (reserves) there is no cost. It’s just an exchange of one IOU for another. There is a potential cost, in that Gilts pay interest to private sector holders and reserves pay interest to the banks that hold them. If the interest rate paid on reserves averages out higher than the interest rate paid on the Gilt, it means over the time horizon of the Gilt, the public sector would have paid more interest. Conversely, if the rate paid on reserves averages out lower than the interest rate on the Gilt, the public sector would have paid less interest. Fortunately, the rate paid on reserves is a policy rate, completely under the control of the central bank. If the aim was to ‘save money’, the BofE could repurchase every Gilt by creating reserves and set the rate paid on reserves (which is Bank Rate) to zero.
But the govt pays interest on its liabilities for policy reasons. It believes there are good policy reasons to pay money to those that hold the money that it has issued. it’s no different to any other govt spending – it’s done to achieve policy objectives. Spending on health? The aim is to have a healthier population. Spending on education? The aim is to have a better educate population. Spending on interest on the public debt? Well. I’m sure they have their reasons for paying money to people with money because they have money, I’m not sure what those reasons are, but it is a policy choice to do so.
Pingback: Can the central banks ever reverse all the QE bond buying? – Investment Watch - DZTECHNO
Here: https://mcusercontent.com/78302034f23041fbbcab0ac6d/files/a70db885-a37e-734e-20fa-f7e6ffa4139b/2022_The_Critic_October_Gas_prices_inflation.pdf
is ‘another one’?
“The effects of soaring gas prices on inflation are likely to be transitory”?
So the Bank of England really doesn’t understand its core responsibility re financial stability. Just so they know, it is about building a robust system that can stand up to what price moves throw at it. It is not about reaching for the levers of the printing press to bail out overleveraged risky financial institutions.
There was Bank regulation in the wake of the 2008 crisis, there has to be regulation of the pension companies coming out of this crisis too. They should not be betting leveraged. And the only reason they feel the need to push the envelope is because the Central Bank has despressed yields so much.
Stop printing. And more regulation of large financial institutions is required. No one would come and bail me out if I got a margin call for a trade that went wrong as I hadn’t protected myself in all circumstances.
I am absolutely disgusted by the Bank of England. They’ve left us here in an extremely precarious situation where if we do anything at all, a crisis raises its ugly head. Bring back capitalism.