Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to servodude,tjh290633,csearle,jfgw,bionichamster, for Donating to support the site

The value of money, interest rates, inflation and yields

The Big Picture Place
scrumpyjack
Lemon Slice
Posts: 628
Joined: November 4th, 2016, 10:15 am
Has thanked: 23 times
Been thanked: 176 times

Re: The value of money, interest rates, inflation and yields

#232125

Postby scrumpyjack » June 26th, 2019, 10:50 am

Of course the value of currency is all about confidence. After all the pound has no inherent value. It is simply a promise to pay one pound. If you compare what £1 would buy in 1900 with what it buys now you will see how staggeringly devalued it has become.

That confidence takes a long time to build up and can be lost very quickly. If a government did start printing money in a big way, so that confidence waned, I'm sure we would rapidly discover that its value can evaporate in the same way as has happened in many countries many times.

TheMotorcycleBoy
Lemon Quarter
Posts: 2382
Joined: March 7th, 2018, 8:14 pm
Has thanked: 1152 times
Been thanked: 172 times

Re: The value of money, interest rates, inflation and yields

#232127

Postby TheMotorcycleBoy » June 26th, 2019, 11:11 am

tjh290633 wrote:
TheMotorcycleBoy wrote:
tjh290633 wrote: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

But they are commodities, so perhaps their values have risen too.

The day-2-day prices of Mars, beer, petrol etc. (IMHO) are only used to inform as to how to construct a consumer price index.

What measure can we use to determine whether the value of money itself (I'm referring to our £) has changed as opposed to the value of any financial asset (e.g. bonds, shares, gilts) before and after the QE launched in the UK between 2007 and 2016? Or do you believe that the value of the £ is essentially abstract in of itself and can only be compared against more tangible yardsticks, as you have done in your last post?

Matt

Howard
Lemon Slice
Posts: 690
Joined: November 4th, 2016, 8:26 pm
Has thanked: 243 times
Been thanked: 342 times

Re: The value of money, interest rates, inflation and yields

#232157

Postby Howard » June 26th, 2019, 1:13 pm

GoSeigen wrote:
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.

GS


I read your posts with interest (no pun intended :D ). Thank you for the analysis. And then today watched an interview with Jenna Barnard, co-fund manager of Henderson Diversified Income Trust - see link below.

I think she is agreeing with your statement which I have highlighted in bold and her comments about the recent Fed actions are interesting. As a "crusty pensioner" it is fascinating to reflect on how world economics (or my understanding of them) have changed. And isn't it interesting as an investor to hear Bond fund managers echoing Terry Smith about the value of doing absolutely nothing!

https://www.janushenderson.com/ukpi/pos ... lent-stuff

regards

Howard

tjh290633
Lemon Quarter
Posts: 3683
Joined: November 4th, 2016, 11:20 am
Has thanked: 248 times
Been thanked: 1245 times

Re: The value of money, interest rates, inflation and yields

#232165

Postby tjh290633 » June 26th, 2019, 2:00 pm

TheMotorcycleBoy wrote:
tjh290633 wrote: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

But they are commodities, so perhaps their values have risen too.

The day-2-day prices of Mars, beer, petrol etc. (IMHO) are only used to inform as to how to construct a consumer price index.

What measure can we use to determine whether the value of money itself (I'm referring to our £) has changed as opposed to the value of any financial asset (e.g. bonds, shares, gilts) before and after the QE launched in the UK between 2007 and 2016? Or do you believe that the value of the £ is essentially abstract in of itself and can only be compared against more tangible yardsticks, as you have done in your last post?

Matt

There was time when we were on the Gold Standard, and a golden sovereign was worth its weight in gold, as was a Krugerrand. Since we decoupled the value of the pound has varied widely, both up and down, in terms of gold. Oil, for example, has varied in price in terms of US$ and also relative to gold. Which of these do you think has an intrinsic value? At one time gold was fixed at US$35 per Troy ounce. Did the dollar or gold have an intrinsic value?

I bought our house in 1978 and the market price today is of the order of 20 times what I paid. The relative prices of petrol and beer are different, but taxes have been raised along the way. Petrol, for example, was 4 shillings a gallon in 1957 and is about 110 shillings (£5.50) today. That is about 27 times over 60 years. Beer in 1957 was about 1 shilling a pint and today can be 80 or 100 shillings, less in Wetherspoons. Hence that range is 60 to 100 times. Wildly different rates of inflation. Arguably the quality of housing, petrol and beer has improved.

Do we take the value of a commodity or a year's work as our yardstick? In 1957 a new graduate in chemistry could get a salary of about £800 per year. Today that might be £24,000 or 30 times higher.

There is no correct answer. Consider the Argentine Peso at times of hyperinflation. Compare with the Deutschmark. Compare the Greek Drachma.

TJH

GoSeigen
Lemon Quarter
Posts: 1677
Joined: November 8th, 2016, 11:14 pm
Has thanked: 384 times
Been thanked: 388 times

Re: The value of money, interest rates, inflation and yields

#232243

Postby GoSeigen » June 26th, 2019, 11:16 pm

TheMotorcycleBoy wrote:Hi GS,

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

GoSeigen wrote: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.

Okay now I'm convinced were talking past each other. The topic of the old thread was QE, a monetary operation. I was writing specifically about money in its narrow technical sense (M0, M4 etc). Other transactions are irrelevant to what I was writing; in particular, any lending transaction with bank as lender was irrelevant to the conversation as far as I am concerned. Similarly, if savers are thought of as "borrowing" money we again are on different wavelengths.

Money, whether cash, reserves or deposits, is a claim on the banking system, a promise by the banks to honour its value. I really don't know how to think of it in any other way.



GS

GoSeigen
Lemon Quarter
Posts: 1677
Joined: November 8th, 2016, 11:14 pm
Has thanked: 384 times
Been thanked: 388 times

Re: The value of money, interest rates, inflation and yields

#232246

Postby GoSeigen » June 26th, 2019, 11:30 pm

Howard wrote:
I read your posts with interest (no pun intended :D ). Thank you for the analysis. And then today watched an interview with Jenna Barnard, co-fund manager of Henderson Diversified Income Trust - see link below.

I think she is agreeing with your statement which I have highlighted in bold and her comments about the recent Fed actions are interesting. As a "crusty pensioner" it is fascinating to reflect on how world economics (or my understanding of them) have changed. And isn't it interesting as an investor to hear Bond fund managers echoing Terry Smith about the value of doing absolutely nothing!

https://www.janushenderson.com/ukpi/pos ... lent-stuff

regards

Howard


Howard, thank you, and yes I identify very closely with what I understand the author to be saying. I think bond investors find this easier to agree with, and it probably makes no sense at all to equity investors. Certainly true of a equity-specialist friend of mine who runs a very large fund -- he has never understood the idea that inflation might not come roaring back.

To me the recent fashion for CVAs and other "forced income cuts" as I might characterise them are a predictable symptom of the inflation terror of the past decade -- where the moneyed classes and most governments have opted for inflation-fighting over growth-promotion (except Obama). The need to cut income will be a long drag on the economy IMO.


GS

JamesMuenchen
Lemon Slice
Posts: 442
Joined: November 4th, 2016, 9:05 pm
Has thanked: 56 times
Been thanked: 49 times

Re: The value of money, interest rates, inflation and yields

#232269

Postby JamesMuenchen » June 27th, 2019, 8:19 am

Howard wrote:I read your posts with interest (no pun intended :D ). Thank you for the analysis. And then today watched an interview with Jenna Barnard, co-fund manager of Henderson Diversified Income Trust - see link below.

I think she is agreeing with your statement which I have highlighted in bold and her comments about the recent Fed actions are interesting. As a "crusty pensioner" it is fascinating to reflect on how world economics (or my understanding of them) have changed. And isn't it interesting as an investor to hear Bond fund managers echoing Terry Smith about the value of doing absolutely nothing!

https://www.janushenderson.com/ukpi/pos ... lent-stuff

regards

Howard



She says:
As a bond investor we’re thinking how low do interest rates go in the next downturn and not only that but once they get to the zero bound or in some cases negative interest rates, what else do they do. Do they do quantitative easing? Do they use fiscal policy? Does monetary and fiscal policy start working together? There's going to be a whole new regime and I think that's where the mentality of bond investors is increasingly focused.

German 10yr bunds are negative and you would now need 23 million Euros to make an annual pension income of 60,000 Euros with 30 yr bunds.
Not sure what kind of new regime would fix this.

GoSeigen
Lemon Quarter
Posts: 1677
Joined: November 8th, 2016, 11:14 pm
Has thanked: 384 times
Been thanked: 388 times

Re: The value of money, interest rates, inflation and yields

#232287

Postby GoSeigen » June 27th, 2019, 9:42 am

JamesMuenchen wrote:
She says:
As a bond investor we’re thinking how low do interest rates go in the next downturn and not only that but once they get to the zero bound or in some cases negative interest rates, what else do they do. Do they do quantitative easing? Do they use fiscal policy? Does monetary and fiscal policy start working together? There's going to be a whole new regime and I think that's where the mentality of bond investors is increasingly focused.

German 10yr bunds are negative and you would now need 23 million Euros to make an annual pension income of 60,000 Euros with 30 yr bunds.
Not sure what kind of new regime would fix this.



Yeah, if you're planning to be retired for 383 years...

GS

GoSeigen
Lemon Quarter
Posts: 1677
Joined: November 8th, 2016, 11:14 pm
Has thanked: 384 times
Been thanked: 388 times

Re: The value of money, interest rates, inflation and yields

#232292

Postby GoSeigen » June 27th, 2019, 10:06 am

MCB,

In the sense that I am talking about money, organisations cannot "take money", they cannot "lend money", they cannot "put money into shares". It might sound pedantic but honestly we you and I are talking about different things. The above phrases are colloquial, and the word money in those phrases does not mean M0 or M4 money, it means "funds" or "capital" or some other vague thing.

The money I am talking about (because the topic was QE, a monetary operation) is a specific entry on a commercial or central bank balance sheet. It is issued, enters the balance sheet and remains there until retired. As I have said several times it is an asset for the depositor and liability of the bank. The bank cannot lend it out. It stays on the balance sheet until the bank has repaid it. That's my understanding of money and in my understanding M0 aggregates all those balance sheet entries on the BoE's balance sheet while M4 aggregates those of the wider financial system.


Always happy to be corrected, but please let's talk about the same thing -- which is not the amorphous everyday concept of "money".


GS
P.S. This concept of "money" was not picked up by accident, incidentally to what I do e.g. by reading newspapers or these forums. I specifically set out to study the topic, read the BoE's annual reports, and material on their and the Federal Reserve web pages. I fully accept it is a subject not everyone is familiar with, but if genuinely interested in QE and interest rate policy, one might at least be familiar with what Central Banks themselves view as the money that they are managing.
P.P.S. Also I'm not averse to discussing bank lending, but let's be careful to use precise language and separate it properly from the concept of money.

TheMotorcycleBoy
Lemon Quarter
Posts: 2382
Joined: March 7th, 2018, 8:14 pm
Has thanked: 1152 times
Been thanked: 172 times

Re: The value of money, interest rates, inflation and yields

#232296

Postby TheMotorcycleBoy » June 27th, 2019, 10:20 am

GoSeigen wrote:MCB,

In the sense that I am talking about money, organisations cannot "take money", they cannot "lend money", they cannot "put money into shares". It might sound pedantic but honestly we you and I are talking about different things. The above phrases are colloquial, and the word money in those phrases does not mean M0 or M4 money, it means "funds" or "capital" or some other vague thing.

The money I am talking about (because the topic was QE, a monetary operation) is a specific entry on a commercial or central bank balance sheet. It is issued, enters the balance sheet and remains there until retired. As I have said several times it is an asset for the depositor and liability of the bank. The bank cannot lend it out. It stays on the balance sheet until the bank has repaid it. That's my understanding of money, and in my understanding M0 aggregates all those balance sheet entries on the BoE's balance sheet while M4 aggregates those of the wider financial system.


Always happy to be corrected, but please let's talk about the same thing -- which is not the amorphous everyday concept of "money".


GS


Hi GS,

I was one of your earlier remarks that I ultimately queried:

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.


which stemmed from one of my responses to one of Odys

I got the impression that you were suggesting those currencies rose in value (presumably against currencies whose governing countries didn't do QE) in the time from the advert of GFC-inspired QE tranche to the last (i.e. 2009 - 2016).

I claim that my spending power fell, which is probably related to the amorphous everyday concept of money.

Matt

PS I happy to keep chatting too. But pretty busy at present. Mel is working now, and my eldest is needing a lot of University consultancy work from Dad!

TheMotorcycleBoy
Lemon Quarter
Posts: 2382
Joined: March 7th, 2018, 8:14 pm
Has thanked: 1152 times
Been thanked: 172 times

Re: The value of money, interest rates, inflation and yields

#232297

Postby TheMotorcycleBoy » June 27th, 2019, 10:21 am


Alaric
Lemon Quarter
Posts: 3554
Joined: November 5th, 2016, 9:05 am
Has thanked: 13 times
Been thanked: 705 times

Re: The value of money, interest rates, inflation and yields

#232302

Postby Alaric » June 27th, 2019, 10:37 am

TheMotorcycleBoy wrote:
I claim that my spending power fell, which is probably related to the amorphous everyday concept of money.


Everyday prices rose, so if your income didn't increase, you were less well off. That also applied to savers who held government bonds, cash and deposits, as the interest paid to them fell to derisory levels. The winners were investors in property and shares whose capital values and dividends grew strongly.

GoSeigen
Lemon Quarter
Posts: 1677
Joined: November 8th, 2016, 11:14 pm
Has thanked: 384 times
Been thanked: 388 times

Re: The value of money, interest rates, inflation and yields

#232306

Postby GoSeigen » June 27th, 2019, 11:02 am

TheMotorcycleBoy wrote:
GS




I was one of your earlier remarks that I ultimately queried:

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.


which stemmed from one of my responses to one of Odys

I got the impression that you were suggesting those currencies rose in value (presumably against currencies whose governing countries didn't do QE) in the time from the advert of GFC-inspired QE tranche to the last (i.e. 2009 - 2016).



No, that was not remotely what I was saying. What gave you that idea?

What you had said which I quoted and responded to is: "I get it. Print more euros and make hence em cheaper." This was a reference to QE in a thread about QE. So I addressed the idea that printing more Euros might make them cheaper and said it is not so simple. I don't think I ever mentioned exchange rates and they were not the topic.


GS
Last edited by tjh290633 on June 27th, 2019, 8:25 pm, edited 1 time in total.
Reason: Tags corrected - TJH


Return to “Macro and Global Topics”

Who is online

Users browsing this forum: No registered users and 4 guests