Printing Money

purch

but house prices, stock markets etc have all crashed before eg in the early 90's, and we had none of this kerfuffle

Yes we've had it before, and we will have it again.

Whenever there is an asset bubble that has burst, the Central Banks have had to reflate, which includes the creation (printing) of new money. It is not a new phenonemum and hasn't often led to massive inflation later.

Money is always being created, without it the growth in the Economy would lead to deflation of prices if the money stock remained constant. The trick is to balance it out and control the money stock, which generally happens.

The Hyper-Inflation scare stories assume that they will lose control in a big way, which I for one think is unlikely

Generali

carolt wrote: »

Sorry for being dim - and yes, I do know it's worse this time round - but house prices, stock markets etc have all crashed before eg in the early 90's, and we had none of this kerfuffle, neither massive inflation or deflation that I recall.

Why can't we just let asset prices fall till they hit fair value?

Well frankly that's what I'd do. If the banks are insolvent then let them go bust. The BoE could run a shadow retail banking industry until the free market did its thing and banks were set up again by entrepreneurs.

The main difference between now and in the past is scale. House prices have doubled or more just about everywhere in the world fuelled by cheap and plentiful cash. There is a lot of debt to be repaid and that'll reduce disposable incomes for years to come.

tradetime

carolt wrote: »

Sorry for being dim - and yes, I do know it's worse this time round - but house prices, stock markets etc have all crashed before eg in the early 90's, and we had none of this kerfuffle, neither massive inflation or deflation that I recall.

Why can't we just let asset prices fall till they hit fair value?

I'm not sure whether I am right on this, haven't given it a lot of thought, but I'll throw it out and maybe others can do some of the thinking for me (lazy sod )
Perhaps one word, Leverage, the bets that have been taken in this run up have been so big, that normal unwinding has caused a catastrophic event in credit markets that cannot go un-addressed. Poor old yanks always get the blame, and it has to be acknowledged that we are all as bad as each other, but imho two of the pivotal events that have allowed this crisis, were the rescue in 1998 of the hedge fund LTCM by Alan Greenspan, and then the subsequent maintenance of very low interest rates during the early 2000's.

WTF?_2

tradetime wrote: »

Sorry, I'd have to disagree with the inclusion of banks in that comment, it's almost tantamount to scare mongering as it makes no sense. US bank deposits are guaranteed up to $250,000 by the FDIC which is back stopped by the US Treasury, thus the government guarantees your bank deposit, if the government were to default on savings deposits, their guarantee of treasury's would be meaningless.

I'm talking about institutions and very wealthy players with anything from millions to hundreds of millions. Even a $250k bank guarantee isn't going to go very far in that case.

The reason bonds are so strong is because investors have moved into bonds since there is too much uncertainty in the stock market, particularly the big mutual funds, pension funds, just about any fund whose mandate allows it. They have to have a return or face further redemptions, if one had the infamous crystal ball bonds have been the place to be since late 2007, they are customarily the place for investment money to hide in uncertain times, highly liquid and as good as cash.

This is pretty much what I said - a flight to safety. And safer than a bank. Banks are offering good rates to large depositors right now, certainly a lot better yielding that bonds ... but money in a bank just means a debt owed by the bank which is gone if they go bust. Better to have the debt directly owed by the government. Preferably a big government. When yields went briefly negative, people were paying the US government to borrow their money on the grounds that they were most likely to get it back.

tradetime

!!!!!!? wrote: »

I'm talking about institutions and very wealthy players with anything from millions to hundreds of millions. Even a $250k bank guarantee isn't going to go very far in that case.

This is pretty much what I said - a flight to safety. And safer than a bank. Banks are offering good rates to large depositors right now, certainly a lot better yielding that bonds ... but money in a bank just means a debt owed by the bank which is gone if they go bust. Better to have the debt directly owed by the government. Preferably a big government. When yields went briefly negative, people were paying the US government to borrow their money on the grounds that they were most likely to get it back.

Yeah I understand what you are saying up to the point on banks, and to suggest the action of wealthy people supports this doesn't help. Suggesting there is a general reason to be afraid to keep your money in the bank really isn't what the average people reading these boards needs to see, banks guaranteed by governments are as safe as anywhere for the average savings depositors, and to address the not so average...........

Wealthy people tend not to keep their money in banks, it's really a very inefficient use of it. To wealthy people a bank is just a place to park your day to day operating cash. Funds and institutions would not keep their money in a bank either, not because they "fear" or "mis-trust them", but in many cases their mandate does not allow them to sit in cash, and also for the same reason wealthy people don't do it, it's a very inefficient use of money, banks historically barely beat inflation, for anyone who understands wealth creation a bank is really not far above a hole in the ground as a home for your money.

Banks offering a better return than bonds? If you had put your money in US treasury's back end of '07 up to now, you'd have blown away any bank interest rate you care to mention, fixed or otherwise, and yes people were paying in yield to put their money in bonds because they are riding a bull run in bonds (which is really a bubble) but as long as the bubble keeps inflating it's very lucrative. I don't have the figures to hand, but I think I'm safe in saying the appreciation in US treasury's over the last 12 month's is well into double digits Thus "fear and mistrust" of banks does not come into it.

tradetime

!!!!!!? wrote: »

Banks are offering good rates to large depositors right now, certainly a lot better yielding that bonds ...

Just to cover what I said above, it's not always about yield. I don't trade bonds so I am not subscribed to a feed, but these are etf's that track them, I think you'll find the performance is the same.

WTF?_2

tradetime wrote: »

Just to cover what I said above, it's not always about yield. I don't trade bonds so I am not subscribed to a feed, but these are etf's that track them, I think you'll find the performance is the same.

Thanks for the info but are you saying that for a sterling investor that buying US treasuries from the US govt would have returned better yield than buying dollars and putting them with a US bank or just better than putting your pounds in a UK bank? Obviously a sterling investor would have done well from US bonds as the dollar appreciated against sterling but that's coming from dollar appreciation/sterling depreciation.

AFAIK you can make good money on bonds when existing holders are selling them off at a discount giving you a better yield (assuming the bond holder pays out) but if you buy the bond from the government and rely on the coupon you'll not get as good a rate of return as loaning that currency to a corporation or often just letting the bank handle it. Governments use their status as reliable borrowers to obtain a lower rate of interest repayments for the money they borrow. Of course if lots of people are buying bonds on the open market from people dumping them then the govt has to raise the coupon on their new offerings as they are seen as a higher risk - or have I got that wrong?

At the moment though, doesn't look like a lot of people are selling off their bonds hence low or even zero yield. I'm guessing that it's the fear factor that is making people unwilling to invest it anywhere but instead they want a very safe haven. Hence no need to pay a high coupon especially as deflation is widely predicted now.

tradetime

!!!!!!? wrote: »

Thanks for the info but are you saying that for a sterling investor that buying US treasuries from the US govt would have returned better yield than buying dollars and putting them with a US bank or just better than putting your pounds in a UK bank? Obviously a sterling investor would have done well from US bonds as the dollar appreciated against sterling but that's coming from dollar appreciation/sterling depreciation.

With regards to US bonds for a UK investor, yes there would be a currency risk, the charts posted just reflect the bonds' performance (actually a fund invested in the bonds) no currency adjustment is applied. As it happens the currency would have worked for you, and you would have done even better than those charts suggest, back in '07 you would have been buying $1.90-$2.00 for your pound, and if you were getting nervous about bubbles around now you might be selling and getting your pounds back for $1.50 ish, but that currency benefit would be on top of any appreciation in the price of the bond

!!!!!!? wrote: »

AFAIK you can make good money on bonds when existing holders are selling them off at a discount giving you a better yield (assuming the bond holder pays out) but if you buy the bond from the government and rely on the coupon you'll not get as good a rate of return as loaning that currency to a corporation or often just letting the bank handle it. Governments use their status as reliable borrowers to obtain a lower rate of interest repayments for the money they borrow. Of course if lots of people are buying bonds on the open market from people dumping them then the govt has to raise the coupon on their new offerings as they are seen as a higher risk - or have I got that wrong?

Don't know mate tbh Purch or Generali would do a better job of answering most of those questions, as I said I don't trade bonds, hence the posting of ETF charts rather than the bonds themselves, so my understanding of bonds leaves much to be desired The yield I believe is a function of the perceived risk coupled with demand for the bond, thus government bonds in a stable country will yield lower than corporate bonds, as there is more risk of a company defaulting than a government.

!!!!!!? wrote: »

At the moment though, doesn't look like a lot of people are selling off their bonds hence low or even zero yield. I'm guessing that it's the fear factor that is making people unwilling to invest it anywhere but instead they want a very safe haven. Hence no need to pay a high coupon especially as deflation is widely predicted now.

For those who have to be in markets the bond market is the only "safe" market at the moment, stocks have been trashed, and likely have further to fall, commodities have faired even worse, until there is a market to lure money out of bonds, (or something about bonds spooks investors) then there shouldn't be much selling I'd imagine. Bonds always bored me up until recently.

setmefree2

!!!!!!? wrote: »

You just know that when politicians and the compliant media are strongly pushing the 'deflation' line onto the public, that what is really going to happen down the road is inflation. There is no way they'll ramp the interest rates up and turn off the printing presses once we see a 'recovery' start.

I don't think anyone is pushing the 'deflation' line. It is a fact, the annual rate of inflation in the US in November was just 1.1%. Not hard to see why they are worried about deflation. Of course 'down the road ' inflation is possible but right now deflation is a real threat, not some figment of the Americans imagination.

WTF?_2

setmefree2 wrote: »

I don't think anyone is pushing the 'deflation' line. It is a fact, the annual rate of inflation in the US in November was just 1.1%. Not hard to see why they are worried about deflation. Of course 'down the road ' inflation is possible but right now deflation is a real threat, not some figment of the Americans imagination.

The threat is that the US can't keep securing credit to live beyond its means. Printing more money won't help with that but they clearly hope it might kickstart economic activity to the point where the US looks a good credit risk again.