1nvest wrote:In a near zero interest rate world, QE becomes the means to accelerate/slow the economy, replacing prior interest rates being increased/lowered as the means to steer the economy. YCC however raises warning flags. Previously that has been used as a means to deflate debt. A handful of years with interest rates being kept down at relatively low levels whilst inflation rages, and much of debt is eroded by inflation. A form of fundamental default, but where politically no one accepts/claims that such a default occurred.
I get it - I think. If you lend the Government £100 over 10 years, with inflation at say 7%, then the present value of that capital when repaid will be only about £50, hence they have defaulted on half their debt. Whereas the current yield on the gilt being only 0.21% due to the low rate environment the discounted coupons received will fail to come close to compensating.
In the past YCC has cost relatively little. Once the Fed/Central Bank/Treasury announce policies to keep interest rates at x% and will print to buy or sell enough of Treasury bonds (Gilts) to maintain that, then more often the market aligns prices to reflect a x% rate such that the Central Bank doesn't have to actually buy or sell much itself. More usually used during exceptional times such as during/after World Wars. Historically inflation has, coincidentally or otherwise, tended to spike into double digit figures a year or two after the commencement of YCC.
So yes inflation is looming, but a good guide as to when will be when the BoE or US Fed start talking about/implementing yield curve control measures. Thereafter a sequence of four years with interest rates being pegged to say 1%, whilst inflation runs at 12% and a third of debt real values are wiped out (more often to the cost of pension funds/savings).
Can you elaborate on YCC a little please? Do you mean making periodic corrections, such that the curve does not invert, that is, in order that for businesses it is always possible to borrow at lower cost for short periods, than for the medium term?
Finally, and apologies for being in reverse order to your original paragraphs, but why in your cited historical context, has inflation spiked in those times?