Re: Is rising inflation looming?
Posted: April 5th, 2020, 9:46 am
Thanks for your post, 1nvest,
Interesting stuff. I'm guessing this is what dealtn was referring to in viewtopic.php?p=297820#p297820 re. the long end gilt distortion. Presumably pension funds need to do this in order to feed the hunger for annuities.
Sure. I guess a more blatant default was in 1967, when Callaghan lowered the exchange rate from $2.80 to $2.40 per £1. Then effectively to a foreign owner of UK debt they experienced, what to them equated to a 14.3% nominal default.
Yes the BoE link and the FT link (clear your ft.com cookies and google for "avert a eurozone crisis ft", if you aint a subscriber) that colin just posted, this, i.e. QE is now being publicly stated.
To be honest, this is the new normal is it not? In other words it's https://en.wikipedia.org/wiki/Modern_Monetary_Theory
It is important to note that the central bank buys bonds by simply creating money — it is not financed in any way.
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press
That is: this is the only mechanism which maintains the economy of humanity as it is. We can moan about it as much as we like. But we are (all) currently stuck with it.
Actually due to the money-multiplier, that £10,000 actually breeds see https://www.intelligenteconomist.com/money-multiplier/. I believe this is why the Govt. tasks itself with "monitoring the growth of the money supply".
Hmm.. Very interesting. I must admit I do tend go quiet when folk proclaim "that's ok this one's blah-blah-blah hedged". Aint no such thing as a free lunch.
So back to my OP. The occurance of rising inflation is partially linked to however many plates Rishi Sunak can keep spinning at once. I'm glad he's a clever chap.
Matt
1nvest wrote:Pension funds have to buy gilts. As demand outpaces supply so prices rise/yields decline - so pension funds have to buy more, pushing prices even higher. For instance to liability match £1 to be paid in 20 years time when yields are -2% requires £1.50 to be invested now. So as its been a feeding on gilts frenzy, high demand for too few gilts, if rates rise even moderately, so pension funds will be required to hold fewer, so they would sell - which lowers the price, increases yields ... so they sell more ...etc. That could all unwind by changes in pension rules, or rising inflation/yields due to lack of faith/trust in the Pound relative to others ... and once that ball was rolling quite large moves could occur over a relatively short period of time (days/week/months).
Interesting stuff. I'm guessing this is what dealtn was referring to in viewtopic.php?p=297820#p297820 re. the long end gilt distortion. Presumably pension funds need to do this in order to feed the hunger for annuities.
All currencies have to periodically default. Some totally do so, others do so through more opaque partial means. The UK for instance likes to proclaim that it has 'never defaulted' on its debts - other that is than mixing copper into silver legal tender coins, or seeing inflation of double digits whilst T-Bill yield remained at low/near zero levels................Lenders to the state received back half or less of what they lent to the UK Treasury.
Sure. I guess a more blatant default was in 1967, when Callaghan lowered the exchange rate from $2.80 to $2.40 per £1. Then effectively to a foreign owner of UK debt they experienced, what to them equated to a 14.3% nominal default.
The recent paying of 80% of salaried staff wages is just another form of QE. The issues of the 2008 financial crisis have not been resolved. No bankers served time in prison, regulations have under banking pressure been watered down (more so by the EU where bank stress tests are a joke). If the Pound (Dollar) did not decline as 2 trillion Euros were created to bail out Germany (German bad debts post 2009 were transferred over to the ECB i.e. the risk/liability transferred over to the rest of the Eurozone)......................Treasury sell new gilts, BoE prints money and buys the older gilts, and returns all of the interest back to the treasury. Clearly not the independent body it strives to portray, same as for others. Ideally they're not supposed to buy Corporate debt, let alone stocks, yet the ECB has transitioned from first buying up Treasury debts, then corporate debts and now are even printing to buy up stocks. Pushed to the extreme and there's apparently nothing stopping them buying up all stocks and then houses - a grand nationalisation. All fiat currencies sooner or later fail. Under a gold standard there were finite limits (money was backed by physical gold of which there are finite limits), under fiat there are no limits other than how far it can be pushed before a tipping point is reached and a massive/rapid sell off occurs. For whomever loses confidence first will see the high levels of inflation, perhaps even hyperinflation.
Yes the BoE link and the FT link (clear your ft.com cookies and google for "avert a eurozone crisis ft", if you aint a subscriber) that colin just posted, this, i.e. QE is now being publicly stated.
To be honest, this is the new normal is it not? In other words it's https://en.wikipedia.org/wiki/Modern_Monetary_Theory
It is important to note that the central bank buys bonds by simply creating money — it is not financed in any way.
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press
That is: this is the only mechanism which maintains the economy of humanity as it is. We can moan about it as much as we like. But we are (all) currently stuck with it.
Custodial banks no longer exist in the UK, where you could deposit your money/assets into their safe for safe keeping and for return whenever you asked. Nowadays any deposit you make is a transfer of that money from you onto the banks books, it becomes their money, to do with what they like within regulation limits. You deposit £10,000 and they lend it to Bob to buy a car and the car dealer deposits the £10,000 back into the bank - and they then lend to Carol ...etc. Or they might take the £10,000 and speculate with it wherever.
Actually due to the money-multiplier, that £10,000 actually breeds see https://www.intelligenteconomist.com/money-multiplier/. I believe this is why the Govt. tasks itself with "monitoring the growth of the money supply".
And no, the FT100 with its proclaimed 70% of earnings via foreign isn't diversified, as around half of firms hedge their foreign currency exposure in order to better stabilise their earnings in the currency they report, so its more like just 35% foreign. 70/30 FT100 and US S&P500 for instance has around 33% Pound, 30% US$ and the rest in a mixed bag of currencies - better than being excessively exposed to whichever currency might bang.
Hmm.. Very interesting. I must admit I do tend go quiet when folk proclaim "that's ok this one's blah-blah-blah hedged". Aint no such thing as a free lunch.
So back to my OP. The occurance of rising inflation is partially linked to however many plates Rishi Sunak can keep spinning at once. I'm glad he's a clever chap.
Matt