The value of money, interest rates, inflation and yields

[GoSeigen]

German industry doesn't like a strong Euro making their products more expensive and so perhaps the ECB is reacting to pressure from Merkel whereas Trump sees such moves as going against his trade policy and undermining US industry.

I get it. Print more euros and make hence em cheaper.

Doesn't work that way. They've been "printing" Euros and Dollars and Yen and Sterling for a decade now with not a sniff of inflation and the currencies have only got more expensive, not cheaper.

As usual, asset prices are not about "supply" and "demand" or buying and selling -- they are about the value that market participants place upon them.



GS

Moderator Message:
Split off from the ECB consider more QE topic. - Chris

[TheMotorcycleBoy]

German industry doesn't like a strong Euro making their products more expensive and so perhaps the ECB is reacting to pressure from Merkel whereas Trump sees such moves as going against his trade policy and undermining US industry.

I get it. Print more euros and make hence em cheaper.

Doesn't work that way. They've been "printing" Euros and Dollars and Yen and Sterling for a decade now with not a sniff of inflation and the currencies have only got more expensive, not cheaper.

As usual, asset prices are not about "supply" and "demand" or buying and selling -- they are about the value that market participants place upon them.



GS

Did you ever read about how the spanish currency devalued after they (the spaniards) found a whole bunch of silver in South America?

https://en.wikipedia.org/wiki/Price_rev ... y_of_money

Didn't the (monetary) value of the coins plummet after finding the metals or something?

[odysseus2000]

German industry doesn't like a strong Euro making their products more expensive and so perhaps the ECB is reacting to pressure from Merkel whereas Trump sees such moves as going against his trade policy and undermining US industry.

I get it. Print more euros and make hence em cheaper.

Doesn't work that way. They've been "printing" Euros and Dollars and Yen and Sterling for a decade now with not a sniff of inflation and the currencies have only got more expensive, not cheaper.

As usual, asset prices are not about "supply" and "demand" or buying and selling -- they are about the value that market participants place upon them.



GS

Most of the currency trading `I have seen has been about short term volatility events, some politician or central banker making a statement and traders going long on what ever currency they think this makes stronger and often simultaneously going short any currency they think this makes weaker. What happens beyond the short term impact they don't care, having trousered any profits and written losses down as an hedge, as they know that there will soon be another volatility event that they can trade. There are other folk who act to hedge currencies for folk who have regular commitments to buy or sell e.g. some commodity or product in some currency who may be accumulating positions in that currency to smooth out exchange rate fluctuations. At one time Russian traders were often cited as being some of the best at all these kinds of currency trades. Now the whole game seems to have become very global with positions trading 24 hours, folk in one time zone near to their day end passing positions to folk in the next time zone at their day beginning and so it goes in cyclical position passing through the global 24 hour day.

Regards,

[TheMotorcycleBoy]

They've been "printing" Euros and Dollars and Yen and Sterling for a decade now with not a sniff of inflation and the currencies have only got more expensive, not cheaper.

Presumably, if like you suggest, the supply of all currencies is rising, and they've "only got more expensive", then we have lost our concept of value, right?

By which yardstick are you measuring worth?

[odysseus2000]

They've been "printing" Euros and Dollars and Yen and Sterling for a decade now with not a sniff of inflation and the currencies have only got more expensive, not cheaper.

Presumably, if like you suggest, the supply of all currencies is rising, and they've "only got more expensive", then we have lost our concept of value, right?

By which yardstick are you measuring worth?

Another way to look at this is to note that world wealth continues to rise. E.g. In the UK the minimum wage slowly goes up so that every unit of labour costs more over time & often with productivity gains can do a little bit more. E.g. The car that did x miles per gallon is replaced by one that does x+delta. Once Reagan left the gold standard there has no longer been any under lying physical entity to measure wealth against. Central banks do what they can to increase growth & they print more money every year. What they try most to prevent is deflation.

Regards,

[GoSeigen]

They've been "printing" Euros and Dollars and Yen and Sterling for a decade now with not a sniff of inflation and the currencies have only got more expensive, not cheaper.

Presumably, if like you suggest, the supply of all currencies is rising, and they've "only got more expensive", then we have lost our concept of value, right?

By which yardstick are you measuring worth?

Sorry for the hasty post -- written on the way out the door. I think the main thing I'm trying to say is that it is more complicated than "Central Bank prints money, therefore value of money declines." For a start, money is issued not only by central banks but also by commercial banks, and monetary aggregates include both. If the vast majority of issuance is by commercial banks (as it was) then the contribution of the central bank is insignificant. It's always been my contention that the effect of QE (an activity of CBs alone) thus far has been marginal at best. There are other issues to consider too, like the so-called velocity of money, which decreased significantly in some developed economies in the wake of the GFC.

As for measuring worth, I think I was echoing your words -- and also wondered what you meant by it? Of course money by definition has a constant face value. So for me there are two essential measures of the "price" of money: 1. its value against consumer goods, so if inflation is high its value is declining, whereas if inflation is negative its value is rising. 2. Its interest rate, or the yield of near-money substitutes like treasury notes or short-dated gilts. These measures have been at historic lows: negative in absolute terms on occasion (yen/euro) and negative in real-terms for long periods.

If money and near-money rates are close to or below zero, and inflation is low, then to me on a historical view money is highly valued by those who wish to hold it: certainly when comparing to the situation which held before the GFC and QE, where holders required nominal rates of 4-5% to be willing to hold money and near-equivalents. And if you want evidence of the investor psychology of the time, I offer 1. the fact that many investors wanted any asset other than gilts yielding 4-5%: property, shares, MBS, corporate bonds, and often at lower yields than gilts! and 2. the numerous investor posts on the Motley Fool pre 2008/9 asking e.g. how to short gilts (at 5% yields); or predicting imminent soaring inflation; or deriding me for my farm bet on gilts; or expressing the near-universal belief that yields could not fall below their prevailing levels. These beliefs persisted for a remarkably long time -- so long that I think many investors are only now grudgingly accepting the reality that yields have been in a collapsed state for close to a decade and may remain so for a long time. A few crusty old pensioners are still waiting for their predicted inflation or still refuse to accept that gilts were a great asset ten years ago, whilst the comments that prompted me to contribute to this thread I think are a hangover of earlier orthodoxy / denial of recent realities.

The fact is that now, people will hold money and near-money assets at yields close to zero, whereas before they were reluctant even at 4-5% yields. That to me indicates that they are more expensive now than in 2007, in the same way that a 30-year bond yielding 1% now is more expensive than the equivalent yielding 4% in 2007.

Hopefully that clarifies my rather cryptic earlier post.

GS

[tjh290633]

Back in the dark ages we used to buy currency forward, in order to fix the costs that we were going to incur during the course of a contract.

Likewise selling currency forward to fix receipts.

I just wonder how much effect forward trades have on exchange rates.

TJH

[TheMotorcycleBoy]

I think the main thing I'm trying to say is that it is more complicated than "Central Bank prints money, therefore value of money declines." For a start, money is issued not only by central banks but also by commercial banks, and monetary aggregates include both.

Fair enough, I assume that commercial banks can only create money by making loans?

If the vast majority of issuance is by commercial banks (as it was) then the contribution of the central bank is insignificant. It's always been my contention that the effect of QE (an activity of CBs alone) thus far has been marginal at best.

But at the time of the GFC, IIRC the commercials banks ceased to lend. Didn't QE then bolster their liquidity (i.e. it bought their gilts, and inflated the "value" of their remaining gilt stocks) ?. So the commercials banks (due to the money multiplier) then could lend against increased reserve ratios and perhaps that's why their overall impact of money supply is higher than that of the CBs (in isolation).

There are other issues to consider too, like the so-called velocity of money, which decreased significantly in some developed economies in the wake of the GFC.

Presumably one of aims of QE was/is to increase the velocity of money. (In addition to giving banks more liquidity, and hence eagerness to lend to each other and to customers.)

As for measuring worth, I think I was echoing your words -- and also wondered what you meant by it? Of course money by definition has a constant face value.

I think it's value is abstract. There isn't a single measure, but that's in my naive and financially simplistic view. Everything ultimately depends on people's willingness to exchange either goods or labour of one form for differing forms, again of goods and labour. (1)

So for me there are two essential measures of the "price" of money: 1. its value against consumer goods, so if inflation is high its value is declining, whereas if inflation is negative its value is rising. 2. Its interest rate, or the yield of near-money substitutes like treasury notes or short-dated gilts. These measures have been at historic lows: negative in absolute terms on occasion (yen/euro) and negative in real-terms for long periods.

But aren't those 2 concepts linked it?

If money and near-money rates are close to or below zero, and inflation is low, then to me on a historical view money is highly valued by those who wish to hold it: certainly when comparing to the situation which held before the GFC and QE, where holders required nominal rates of 4-5% to be willing to hold money and near-equivalents. And if you want evidence of the investor psychology of the time, I offer 1. the fact that many investors wanted any asset other than gilts yielding 4-5%: property, shares, MBS, corporate bonds, and often at lower yields than gilts! and 2. the numerous investor posts on the Motley Fool pre 2008/9 asking e.g. how to short gilts (at 5% yields); or predicting imminent soaring inflation; or deriding me for my farm bet on gilts; or expressing the near-universal belief that yields could not fall below their prevailing levels. These beliefs persisted for a remarkably long time -- so long that I think many investors are only now grudgingly accepting the reality that yields have been in a collapsed state for close to a decade and may remain so for a long time. A few crusty old pensioners are still waiting for their predicted inflation or still refuse to accept that gilts were a great asset ten years ago, whilst the comments that prompted me to contribute to this thread I think are a hangover of earlier orthodoxy / denial of recent realities.

The fact is that now, people will hold money and near-money assets at yields close to zero, whereas before they were reluctant even at 4-5% yields. That to me indicates that they are more expensive now than in 2007, in the same way that a 30-year bond yielding 1% now is more expensive than the equivalent yielding 4% in 2007.

Again, at risk of sounding very naive and pompous. But weren't the previously higher rates merely due to less money being available? Hence lenders wanted more return to lend it out? I guess I'm back at your earlier supply and demand argument.....

As for measuring worth, I think I was echoing your words -- and also wondered what you meant by it? Of course money by definition has a constant face value.

Perhaps it's ultimately down to trust. People ceased to trust in the value of Lehman Brothers, or Northern Rock, so they withdrew their loans/capital/savings etc. (2)

Matt

PS A bit like our earlier "flow" debate, we seem to be entering a philosophical domain!

[GoSeigen]

I think the main thing I'm trying to say is that it is more complicated than "Central Bank prints money, therefore value of money declines." For a start, money is issued not only by central banks but also by commercial banks, and monetary aggregates include both.

Fair enough, I assume that commercial banks can only create money by making loans?

I can't say that is the only way, but it is the usual way, yes.

If the vast majority of issuance is by commercial banks (as it was) then the contribution of the central bank is insignificant. It's always been my contention that the effect of QE (an activity of CBs alone) thus far has been marginal at best.

But at the time of the GFC, IIRC the commercials banks ceased to lend. Didn't QE then bolster their liquidity (i.e. it bought their gilts, and inflated the "value" of their remaining gilt stocks) ?. So the commercials banks (due to the money multiplier) then could lend against increased reserve ratios and perhaps that's why their overall impact of money supply is higher than that of the CBs (in isolation).

Now we're getting into the detail. It's not true that the banks ceased to lend. Their lending appetite and activity may have reduced relative to previously. It's even true I think that the amount of outstanding loans fell i.e. new lending volume was lower than loan repayments.

The purpose of QE was not to improve liquidity of the banks. Liquidity was addressed by other BoE (and other CB) programs. The stated goal of QE was to increase the money supply, thereby maintaining a stable level of consumer price inflation (targeting 2%). As I have said many times, the mere act of someone buying an asset (gilts) does NOT inflate its value. Gilt values did in fact rise massively, but I doubt it was much to do with QE.

When you say "due to the money multiplier" what do you mean by this? I am not aware of any mechanism called the money multiplier. Similarly I don't know what you are referring to by "reserve ratios". I fear if we continue with these terms we will be talking at cross purposes.

I believe the limited effect of the CB's on money supply is quite simple to explain: The overwhelming majority of issued monetary aggregates pre-QE were on commercial bank balance sheets, not the Central Banks. Therefore whatever increase to money supply the CB's provided was from a very small base and insignificant compared to the commercial banks' supply; perhaps it merely matched the decrease in commercial bank stocks of money.

I don't even think banks were the sellers of bonds to the CBs: they hardly held any bonds, that was the problem! To see who was holding gilts before QE take a look at the data on the DMO website.

There are other issues to consider too, like the so-called velocity of money, which decreased significantly in some developed economies in the wake of the GFC.

Presumably one of aims of QE was/is to increase the velocity of money. (In addition to giving banks more liquidity, and hence eagerness to lend to each other and to customers.)

You may be right but I never saw it mentioned by CBs unless "economic activity" is a euphemism for velocity. Velocity is a notional value calculated from other real-world quantities. I don't think any CB looks at it directly, though it describes neatly what was happening to money, and where Friedman moneterism went awry (Friedman IIRC assumed velocity would remain constant).

As for measuring worth, I think I was echoing your words -- and also wondered what you meant by it? Of course money by definition has a constant face value.

I think it's value is abstract. There isn't a single measure, but that's in my naive and financially simplistic view. Everything ultimately depends on people's willingness to exchange either goods or labour of one form for differing forms, again of goods and labour. (1)

So for me there are two essential measures of the "price" of money: 1. its value against consumer goods, so if inflation is high its value is declining, whereas if inflation is negative its value is rising. 2. Its interest rate, or the yield of near-money substitutes like treasury notes or short-dated gilts. These measures have been at historic lows: negative in absolute terms on occasion (yen/euro) and negative in real-terms for long periods.

But aren't those 2 concepts linked it?

No doubt. The first focuses on money in its use for transacting: buying articles and services which are consumed and therefore need to be continually produced. The second focuses on money as a store of value, where it is compared to other stores of value e.g. bonds and other assets.

If money and near-money rates are close to or below zero, and inflation is low, then to me on a historical view money is highly valued by those who wish to hold it: certainly when comparing to the situation which held before the GFC and QE, where holders required nominal rates of 4-5% to be willing to hold money and near-equivalents. And if you want evidence of the investor psychology of the time, I offer 1. the fact that many investors wanted any asset other than gilts yielding 4-5%: property, shares, MBS, corporate bonds, and often at lower yields than gilts! and 2. the numerous investor posts on the Motley Fool pre 2008/9 asking e.g. how to short gilts (at 5% yields); or predicting imminent soaring inflation; or deriding me for my farm bet on gilts; or expressing the near-universal belief that yields could not fall below their prevailing levels. These beliefs persisted for a remarkably long time -- so long that I think many investors are only now grudgingly accepting the reality that yields have been in a collapsed state for close to a decade and may remain so for a long time. A few crusty old pensioners are still waiting for their predicted inflation or still refuse to accept that gilts were a great asset ten years ago, whilst the comments that prompted me to contribute to this thread I think are a hangover of earlier orthodoxy / denial of recent realities.

The fact is that now, people will hold money and near-money assets at yields close to zero, whereas before they were reluctant even at 4-5% yields. That to me indicates that they are more expensive now than in 2007, in the same way that a 30-year bond yielding 1% now is more expensive than the equivalent yielding 4% in 2007.

Again, at risk of sounding very naive and pompous. But weren't the previously higher rates merely due to less money being available? Hence lenders wanted more return to lend it out? I guess I'm back at your earlier supply and demand argument.....

I don't think the money supply changed much but you're welcome to produce figures which show otherwise. I believe lower rates came from an investor realisation that future real and nominal economic growth would be far lower than previously assumed (perhaps with overshoot from excessive pessimism). Money and short-dated securities became attractive relative to riskier assets.

GS

[GoSeigen]

But at the time of the GFC, IIRC the commercials banks ceased to lend. Didn't QE then bolster their liquidity (i.e. it bought their gilts, and inflated the "value" of their remaining gilt stocks) ?. So the commercials banks (due to the money multiplier) then could lend against increased reserve ratios and perhaps that's why their overall impact of money supply is higher than that of the CBs (in isolation).

Here's what the BoE said about the money multiplier (what I understand it to be) in 2005:

https://www.bankofengland.co.uk/-/media ... utumn-2005
In fact, the multiplier linking the broad money stock (M4) to M0 has proved to be anything but stable. [...] M4 has tended to rise at a much faster rate than M0, especially in the1980s.

which means anyone who discusses money assuming the money multiplier to be some sort of constant has a bit of explaining to do.


GS

[TheMotorcycleBoy]

Hi GS,

Sorry I'm in a bit of a rush. I'll read your posts better tomorrow morning. But briefly:

But at the time of the GFC, IIRC the commercials banks ceased to lend. Didn't QE then bolster their liquidity (i.e. it bought their gilts, and inflated the "value" of their remaining gilt stocks) ?. So the commercials banks (due to the money multiplier) then could lend against increased reserve ratios and perhaps that's why their overall impact of money supply is higher than that of the CBs (in isolation).

Here's what the BoE said about the money multiplier (what I understand it to be) in 2005:

https://www.bankofengland.co.uk/-/media ... utumn-2005
In fact, the multiplier linking the broad money stock (M4) to M0 has proved to be anything but stable. [...] M4 has tended to rise at a much faster rate than M0, especially in the1980s.

By money multiplier, I may well have the wrong terminology here, apologies. I meant the loan-to-deposit ratio!

https://www.forbes.com/sites/greatspecu ... 3cf4246f03

In other I thought that if QE prints some more money, and inject capital into Commercial Banks then that bank can lend out more i.e. due to, and hence increase the supply further. Hmm... perhaps I'm wrong...

I do need to read more on M0...M4 money etc.

You may be right but I never saw it mentioned by CBs unless "economic activity" is a euphemism for velocity. Velocity is a notional value calculated from other real-world quantities. I don't think any CB looks at it directly, though it describes neatly what was happening to money, and where Friedman moneterism went awry (Friedman IIRC assumed velocity would remain constant).

I thought that "economic activity" was a euphemism for velocity!

Matt

[TheMotorcycleBoy]

Hmm...

If money and near-money rates are close to or below zero, and inflation is low, then to me on a historical view money is highly valued by those who wish to hold it:

Had a rethink this morning. I disagree. If rates are low, it must imply less value. The lender is struggling to lend it, it is less demanded, so people assign less importance to it's possession, i.e. they "value" it less. Hence the interest rate the lender applies is less.

For instance. Say a friend wants to borrow my motor for a day. Assume the face value of the car is £1000. If I couldn't care too much about it I'd let him use it for, say, £20 (2% of face value). However, if I attach a great deal of sentiment to the possession, I'd want £50 (5%) per day (and probably a £500 deposit).

certainly when comparing to the situation which held before the GFC and QE, where holders required nominal rates of 4-5% to be willing to hold money and near-equivalents.

Uh huh. Cos there was less of it.

The car analogy probably works here too. If I only had one car I'd rent it out for more, than if I had ten of them....

Matt

[GoSeigen]

Hmm...

If money and near-money rates are close to or below zero, and inflation is low, then to me on a historical view money is highly valued by those who wish to hold it:

Had a rethink this morning. I disagree. If rates are low, it must imply less value. The lender is struggling to lend it, it is less demanded, so people assign less importance to it's possession, i.e. they "value" it less. Hence the interest rate the lender applies is less.

For instance. Say a friend wants to borrow my motor for a day. Assume the face value of the car is £1000. If I couldn't care too much about it I'd let him use it for, say, £20 (2% of face value). However, if I attach a great deal of sentiment to the possession, I'd want £50 (5%) per day (and probably a £500 deposit).

So in essence you propose that your adversary has misunderstood his subject completely in its most basic fundamentals!




Money is not lent by a bank and thus owed to it. It is issued by the bank and represents its liability: it is what the bank owes to its depositors.

The bold quoted section above is flawed, because the people who possess the money (as their asset) ARE THEMSELVES the lenders; it is the bank which is "borrowing".


Maybe a little study of some bank financial statements is in order?


GS

[TheMotorcycleBoy]

Hmm...

If money and near-money rates are close to or below zero, and inflation is low, then to me on a historical view money is highly valued by those who wish to hold it:

Had a rethink this morning. I disagree. If rates are low, it must imply less value. The lender is struggling to lend it, it is less demanded, so people assign less importance to it's possession, i.e. they "value" it less. Hence the interest rate the lender applies is less.

For instance. Say a friend wants to borrow my motor for a day. Assume the face value of the car is £1000. If I couldn't care too much about it I'd let him use it for, say, £20 (2% of face value). However, if I attach a great deal of sentiment to the possession, I'd want £50 (5%) per day (and probably a £500 deposit).

So in essence you propose that your adversary has misunderstood his subject completely in its most basic fundamentals!




Money is not lent by a bank and thus owed to it. It is issued by the bank and represents its liability: it is what the bank owes to its depositors.

The bold quoted section above is flawed, because the people who possess the money (as their asset) ARE THEMSELVES the lenders; it is the bank which is "borrowing".


Maybe a little study of some bank financial statements is in order?


GS

I understand the stuff about a bank's deposits being it's liabilities*.

But if we cast aside the bank as a middleman, why else do "entities" require less compensation (i.e. interest) now when they lend? Presumably they regard the thing they are lending with less sentiment than they had when they required a higher level of compensation.

* Even Niall mentions that

[GoSeigen]

Hmm...


Had a rethink this morning. I disagree. If rates are low, it must imply less value. The lender is struggling to lend it, it is less demanded, so people assign less importance to it's possession, i.e. they "value" it less. Hence the interest rate the lender applies is less.

For instance. Say a friend wants to borrow my motor for a day. Assume the face value of the car is £1000. If I couldn't care too much about it I'd let him use it for, say, £20 (2% of face value). However, if I attach a great deal of sentiment to the possession, I'd want £50 (5%) per day (and probably a £500 deposit).

So in essence you propose that your adversary has misunderstood his subject completely in its most basic fundamentals!




Money is not lent by a bank and thus owed to it. It is issued by the bank and represents its liability: it is what the bank owes to its depositors.

The bold quoted section above is flawed, because the people who possess the money (as their asset) ARE THEMSELVES the lenders; it is the bank which is "borrowing".


Maybe a little study of some bank financial statements is in order?


GS

I understand the stuff about a bank's deposits being it's liabilities*.

But if we cast aside the bank as a middleman, why else do "entities" require less compensation (i.e. interest) now when they lend? Presumably they regard the thing they are lending with less sentiment than they had when they required a higher level of compensation.

* Even Niall mentions that

The "entities" as you call them are you and I. Why do you hold money? Why do I hold money? Because we value it for its particular properties and uses. e.g. 1. no-one has a claim on you when you hold money 2. money is instantly exchangeable for goods, services or other assets 3. its value is defended by the central bank which has shown an extraordinary determination to prevent inflation 4. it is resistant to the zero bound (can be kept under the mattress), etc.

So how much do we value this money? Would we like to have 5% interest? Sure, but no bank is offering that now. The best we can get is maybe 1%. Yet we still are satisfied to hold money balances (or cash) though we receive practically no income from it. The reason is that the other benefits from holding the money are so great that we don't require an income. Thus the bold quote above about sentiment is exactly backwards. Before, we would hold money balances if we were offered 5%. Now we will hold those balances even receiving no interest. When the central banks said "we are dropping our interest rates" some pensioner savers grumbled a bit but there was no real dissent at all. Then the central banks said "Hey we'll issue a load more of this stuff and swap it for the government bonds you hold" and they had no shortage of buyers, even though they offered practically no interest.

This is not rocket science, though a bit confusing to get one's head around. Every asset whose yield falls experiences a price rise. (Remember, yields move opposite to prices?) Money's actual price can't rise because it is fixed, but you can think of the price as notionally rising if its future cashflows (therefore yield) fall. There are other ways to understand its value rising, but I won't extend the post.


GS
P.S. If you wish to discuss about entities lending, as above, could I invite you to define who is lending, and to whom, and what the nature of that lending agreement is? I don't think we've agreed yet what it means.

Here's my definitions: Either, 1. in my earlier post I identified the bank as borrower, the deposit holder as lender and the nature of lending being a money balance, i.e. usually a variable interest demand deposit account or a (short) term deposit account. Alternatively, 2. if talking about Base Money, then the CB is the borrower, the reserve account holder (usually a financial corporation) is the lender and the lending agreement is a reserves account, again with a variable rate of interest or perhaps no interest. If you mean some lending other than these then as I say you need to define it.

[GoSeigen]

Money's actual price can't rise because it is fixed, but you can think of the price as notionally rising if its future cashflows (therefore yield) fall.

This part of the previous post is a bit garbled and nonsense as written. Please disregard. Note to self: preview more carefully before clicking Submit!

GS

[TheMotorcycleBoy]

Hi GS,

Apologies for my tardiness. Day job gets in the way.

P.S. If you wish to discuss about entities lending, as above, could I invite you to define who is lending, and to whom, and what the nature of that lending agreement is? I don't think we've agreed yet what it means.

In modern days, i.e. with commercial banks, the bank is the lender and the borrower, and customers (you and I) are savers and borrowers. In the olden days without banks presumably people were broadly speaking either lender/savers or borrowers.

The "entities" as you call them are you and I.

Agree.

Why do you hold money? Why do I hold money? Because we value it for its particular properties and uses. e.g. 1. no-one has a claim on you when you hold money 2. money is instantly exchangeable for goods, services or other assets 3. its value is defended by the central bank which has shown an extraordinary determination to prevent inflation 4. it is resistant to the zero bound (can be kept under the mattress), etc.

The way you argue it here it would appear to have some value. I agree with all this.

So how much do we value this money? Would we like to have 5% interest? Sure, but no bank is offering that now. The best we can get is maybe 1%. Yet we still are satisfied to hold money balances (or cash) though we receive practically no income from it. The reason is that the other benefits from holding the money are so great that we don't require an income. Thus the bold quote above about sentiment is exactly backwards. Before, we would hold money balances if we were offered 5%. Now we will hold those balances even receiving no interest.

To be completely honest with you, GS, you would've never have made Mel and I's acquaintance had it not been for the drastic decline in interest rates post the GFC. Seriously! I'm not just saying this to try to win a point. From 2000-2007 we would either i) put spare money in "best saving account" we could find or ii) pay off the mortgage. From 2010-2013 our money was tighter (2 house moves and my broken arm incident, and brief redundancy being main causes). From 2013 we bought our current house and I spent a few years putting £££ into repairs. From 2015 we started looking again for how to save our money. With despair! Around about 2016-2018, my Dad (who's owned HYP type shares since at least the 90s) taught us about the "Stocks and Shares ISA". And in Mar 2018 me and Mel bought our first shares. Motivated by 0 to very low savers rates.

When the central banks said "we are dropping our interest rates" some pensioner savers grumbled a bit but there was no real dissent at all.

No real dissent - correct. But one would need to survey some serious statistics to see whether (various ages of) people have moved from keeping any spare money in a saver account (bank or buildsoc.) into stocks, shares and "funds"[*].

Then the central banks said "Hey we'll issue a load more of this stuff and swap it for the government bonds you hold" and they had no shortage of buyers, even though they offered practically no interest.

But the organisations who "took the money" presumably made a large capital gain from the gilt sales and were suddenly liquid again. And indeed had more liquidity to i) buy more financial market instruments and ii) to lend this money at higher rates, e.g. (see http://www.keystonemortgages.co.uk/interestrates.php for mortgage vs base rates).

This is not rocket science, though a bit confusing to get one's head around. Every asset whose yield falls experiences a price rise. (Remember, yields move opposite to prices?) Money's actual price can't rise because it is fixed, but you can think of the price as notionally rising if its future cashflows (therefore yield) fall. There are other ways to understand its value rising, but I won't extend the post.

I do understand this bit - i.e. yields vs prices. But I struggle to square the circle as to why post 2007 the bank won't give me anything interest for me to lend them money for them to re lend that money to borrowers. In my brain I keep coming back to them, somehow having more money supplied so private savers' money (i.e. mine) is less valuable to them.

Another interesting comparison to make, is (I struggled to find good data in a hurry, day job, etc), is to compare the value of our currency (which had QE) against another (which presumably did not) e.g. the chinese currency.

This shows a small green graph which confusing has "monthly change" written above it. If you click the green graph you'll see the chinese curr VS £ from 1995-2016. There is a huge drop in £ relative value between 2007 and 2008.

Here's my definitions: Either, 1. in my earlier post I identified the bank as borrower, the deposit holder as lender and the nature of lending being a money balance, i.e. usually a variable interest demand deposit account or a (short) term deposit account. Alternatively, 2. if talking about Base Money, then the CB is the borrower, the reserve account holder (usually a financial corporation) is the lender and the lending agreement is a reserves account, again with a variable rate of interest or perhaps no interest. If you mean some lending other than these then as I say you need to define it.

When you say CB is that the central bank or commercial bank?

Personally I don't identify the (commercial, e.g. Lloyds) banks as a borrower (or lender) as such but rather as a profit making organisation, making it's business to trade in money in both directions, i.e. lending and borrowing.

Gotta to go, hope it makes sense
Matt

[*] I have several mates either shy of direct shares, or had fingers burnt by dot com, who now don't save in savers accounts, but buy funds.

[tjh290633]

We have this strange situation where banks are unwilling to pay much in the way of interest on savings accounts, yet are prepared to pay interest and offer benefits on modest amounts in a current account, up to £5,000 in my case, and to waive all charges if a minimum balance is maintained.

I can recall when a minimum balance of £100 was required to avoid bank charges, which in the 1980s was better than having interest on that £100 in a savings account.

So here we have the customer lending the bank a small sum, which in turn allows the bank to lend a multiple of that amount to borrowers. In return the bank pays interest to the customer considerably above commercial rates.

But I digress.

TJH

[TheMotorcycleBoy]

We have this strange situation where banks are unwilling to pay much in the way of interest on savings accounts, yet are prepared to pay interest and offer benefits on modest amounts in a current account, up to £5,000 in my case, and to waive all charges if a minimum balance is maintained.

I can recall when a minimum balance of £100 was required to avoid bank charges, which in the 1980s was better than having interest on that £100 in a savings account.

So here we have the customer lending the bank a small sum, which in turn allows the bank to lend a multiple of that amount to borrowers. In return the bank pays interest to the customer considerably above commercial rates.

But I digress.

TJH

I know this question is slightly abstract, but do you think a £ is worth more or less now, post GFC after the waves of QE which were implemented? That's what I'm puzzling over.

Matt

[tjh290633]

We have this strange situation where banks are unwilling to pay much in the way of interest on savings accounts, yet are prepared to pay interest and offer benefits on modest amounts in a current account, up to £5,000 in my case, and to waive all charges if a minimum balance is maintained.

I can recall when a minimum balance of £100 was required to avoid bank charges, which in the 1980s was better than having interest on that £100 in a savings account.

So here we have the customer lending the bank a small sum, which in turn allows the bank to lend a multiple of that amount to borrowers. In return the bank pays interest to the customer considerably above commercial rates.

But I digress.

TJH

I know this question is slightly abstract, but do you think a £ is worth more or less now, post GFC after the waves of QE which were implemented? That's what I'm puzzling over.

Matt

Look at purchasing power then and now. Use Mars bars, the price of beer, cost of a litre if petrol or house prices.

A mix of those will tell you

TJH