Many thanks for writing this down for me, I've spent sometime reading the links and thinking some more.
I can see that the Govt have raised about £5.8B in the past couple of days and the market wanted 1.6% from the 8yr one, and 1.0% for the 21yr one.
I can now see that Rishi might be able to raise the promised £330B
if he can find buyers for the gilts either at home or abroad. In a sane world this *has* to come from private finance since aren't basically all CBs (central banks) in debt?
As a very slight aside I'm intrigued as to the exact relationships between 1) the Govt 2) the DMO 3) the Treasury and 4) BoE. My opinion is that really they are all just branches of the State, (public sector) and so all doing the peoples bidding. The DMO manages (i.e. arranges sales+meetings) for gilts sales/purchase, the Treasury decides how to allocate the countries money and how to raise/save/spend money (debt and tax and spending) and the BoE is a nationalised Bank that notionally has the countries "balance sheet".
So if what I've just stated above (i.e. the BoE owns/manages the countries assets and liabilities) is true, then at anytime the BoE will have accounts due to our Commercial Banks, some cash assets, and loads of claims in the form of Gilt issues which I know will expand, but presumably from time to time it have to repay to the private sector.
Now, look at Figure 6 in this chartbook, noting the BoJ's balance sheet as a proportion of Japan nominal GDP:https://www.yardeni.com/pub/peacockfedecbassets.pdf
Japan 2019 nominal GDP was ~550 trillion Yen. BoJ balance sheet is now nearly 600 trillion yen (~107% of nominal GDP).
The UK isn't on that chart, but the BoE's balance sheet, at ~£580 bn is around 26% of UK nominal GDP. If its balance sheet expanded to a similar proportion of GDP, it'd amount to an increase of ~£1.77 trillion and total size of £2.35 trillion.
Yes this pdf was quite interesting. But what I find, well confusing, is when people mention a central banks balance sheet and then a figure. What is meant by the figure, is it their Assets, their Liabilities or their Net Assets (i.e. TA-TL)?
If the private sector doesn't wish to buy the gilts being issued by the DMO, the BoE can buy them instead and expand its balance sheet, handing the coupons it receives back to the Treasury. Result! The Govt could reduce taxes, expand spending and have the entire shortfall financed by the DMO issuing gilts and the BoE buying them.
A ha! But this "the BoE can buy them instead and expand its balance sheet" is where philosophically speaking we get into trouble. You see, several hundred years ago, if I wanted a new horse, and the seller wanted 5 gold coins for the horse which I didn't have, I needed to find a lender of the coins that actually possessed
the coins. We could not "expand" them into existence. So in order to buy it's own debt, BoE must credit it's assets from thin air and swap printed/electronically generated money for the gilts. They could probably just cut out the middleman (the gilts) and just credit their account!
At some point markets (currency) would take fright, but not so much if "everyone else" was doing similar things.
Which is *exactly* the point I made earlier which GS took exception to:
TheMotorcycleBoy wrote:Anyway. This is still vaguely relevant: my assumption is re. covid-19 and the monetary response adopted, is that presumably *all economies globally* will just end up, all effectively printing money (QE), so collectively things will even out between us all. That is, we all devalue, at hopefully similar rates - make sense?
tikunetih wrote:You can see from that chartbook Fig 6. that there is, in theory, enormous potential scope for central banks to expand balance sheets without them losing the confidence of markets. The CBs may not just buy their own Govt's debt, they may buy private sector risk assets (corporate bonds, REITs, equities) as well in order to drive up their price and drive down yields
Yes yes, of course. But without a real buyer (see my above 5 gold coin historical analogy) the Govts/CBs/whatever *must* print money, surely? Indeed don't they actually have to do this. In other words, in our current stricken times they absolutely must drive down yields...else real interest rates on markets would rise and that would put gazillions of over leveraged firms out of business. Because they (private business) are currently making less profit, due to cv-19, so raised overheads would probably kill them right now. Which would increase the burden on the welfare state etc. etc.
The issue-gilts-buy-back-gilts charade, seems exactly that - I think you agree, just money printing in disguise.
As an investor, keeping a weather-eye on CBs and noting the direction in which they wish to move things is probably a good idea long term. Hence, "Don't Fight the Fed" as a core tenet.
Hmm. Out of interest how exactly does that apply to you and I as investors right now?
And finally! Can you go back to this link https://www.yardeni.com/pub/peacockfedecbassets.pdf
my friend, and take another look at Page 9 please? This page is titled "US Treasuries & Agencies Held by Central Banks". Can you see the redline toward the right of the plot? Check the section equating to now. It seems unreal. The gradient is stupendous - noticeably steeper than around 2009 and 2010 (must be "easing" regimes!). I can only imagine that the gradient of approximately 89 degrees is equivalent to the recent $2.2Trillion stimulus just signed. Correct?