How long can/will interest rates stay this low?

Wookster

Rochdale_Pioneers wrote: »

"If there is a lot of lending going on today on Planet Wookster then good for you.

You're not reading what I'm saying.

QE is intended to get the banks lending again. The UK is one of the most heavily indebted countries on earth.

Why are steps being taken to increase this already insanely high level of debt?

Ron2256

Radiantsoul wrote: »

I can't see inflation being a big risk. The government can resell the assets purchased and cancel the money issued to suck the liquidity back out of the system.

I can't see the governement doing that. They will enjoy the ride far too much. Cancel the money means pushing the brake pedal. They have not done it in the last boom and I can't see them doing it in the future.
They will speed up and crash in the next bend.

Generali

Radiantsoul wrote: »

I can't see inflation being a big risk. The government can resell the assets purchased and cancel the money issued to suck the liquidity back out of the system.

The bigger risks are the BoE acquires riskier assets and its credit risk rises increasing the national debt burden.

The BoE may also make a trading loss. But even a 1-5% loss is quite small beer really.

If the banks can't sell these assets why do you think the Bank of England will be able to?

I was working for one of the investment banks when the credit crunch first got going. I used to get a daily email from the structured debt desk (basically because I couldn't work out how to turn it off) which listed unsold inventory. In a matter of weeks it went from a handful of items to a couple of hundred. The stuff they were trying to shift was mortgage backed debt (sub-prime, jumbo loans and Alt-A) and some of the weirder end of the US local Govt and state debt. Basically they couldn't sell it at any price.

Now do you think the market for securitised debt has gotten easier or harder since mid-2007? Would you buy an investment consisting of securitised debt at the sort of prices the Bank of England will be paying for it? I sure as hell wouldn't and nor would any other private investor. Knock 50% off the face value and I might be willing to talk.

Radiantsoul

Generali wrote: »

If the banks can't sell these assets why do you think the Bank of England will be able to?

I was working for one of the investment banks when the credit crunch first got going. I used to get a daily email from the structured debt desk (basically because I couldn't work out how to turn it off) which listed unsold inventory. In a matter of weeks it went from a handful of items to a couple of hundred. The stuff they were trying to shift was mortgage backed debt (sub-prime, jumbo loans and Alt-A) and some of the weirder end of the US local Govt and state debt. Basically they couldn't sell it at any price.

Now do you think the market for securitised debt has gotten easier or harder since mid-2007? Would you buy an investment consisting of securitised debt at the sort of prices the Bank of England will be paying for it? I sure as hell wouldn't and nor would any other private investor. Knock 50% off the face value and I might be willing to talk.

True, but most of the money is going to be spent on gilts where there is still a market. The government is able to sell gilts amount to close to 10% of GDP at the moment with an interest rate of 1%, I assume that in five years time it will be relatively easy to dump them back on the market when borrowing will have tailed off.

I accept there is a much greater risk on the commercial paper element. Even then the government have the option to hold to maturity and then match the repayment with the cancellation of reserve balances.

Generali

Rochdale_Pioneers wrote: »

And once it starts heading p the government simply liquidates the assets bought through QE and the inflationary push from that disappears.

Wrong side of the balance sheet old chap! It's not a case of liquidating the assets the BoE is buying, it's a case of buying back the liability the BoE has in the form of cash.

That can either be done by selling the assets the BoE has bought and then destroying that money or by the Government raising cash in taxes which then aren't spent.

Do you think that the Bank of England is going to get face value for securitised debt?

Generali

Radiantsoul wrote: »

True, but most of the money is going to be spent on gilts where there is still a market. The government is able to sell gilts amount to close to 10% of GDP at the moment with an interest rate of 1%, I assume that in five years time it will be relatively easy to dump them back on the market when borrowing will have tailed off.

The Government has proposed selling Gilts worth (IIRC) £148,000,000,000 this year. Before these sales get going properly, long term Gilt yields are well in excess of 4%.

Clearly (as you suggest) the Gilt market is deep and liquid so selling on paper the BoE has bought should be pretty simple as long as things don't go really badly wrong.

Radiantsoul wrote: »

I accept there is a much greater risk on the commercial paper element. Even then the government have the option to hold to maturity and then match the repayment with the cancellation of reserve balances.

True. That implies a one-off increase in the price level and then an anchor on inflation for many years afterwards as the mortgages are paid down or refinanced. Do you trust future Governments not to spend the cash rather than destroy it? I don't but perhaps I'm too cynical.

bubblesmoney

can someone tell me when in the last century the govt has not run a deficit budget? basically with a deficit budget one is alway spending more than one is earning and financing that with debt. sooner or later the interest servicing will put a spanner in the works.

let say for example i have a 100,000£ worth of assets with no mortgage. now i take another 100,000£ worth of equity release by putting a charge on the assets. in that situation do i have a 100,000 property on my books and 100,000 cash plus 100,000 of debt. Am i any richer just because i have more cash plus property sloshing around on my books? No i am actually poorer than someone having just 100,000 property without any debts. what i have in that situation is NOT (100,000 house+ 100,000cash got on loan) - 100,000loan amount when returned= 100,000 assets. that just happens in a debtors dreams. what actually happens is (100,000 house+ 100,000 cash got on loan) - (100,000loan amount that needs to be returned) - (loan interest on the 100,000 borrowed lets say 5000) = 95,000. so i will actually be poorer and have net assets of 95,000. of course you will say now that we might have earnt more money by investing that money and be in profit. but that happens in fools paradise. because the govt is buying 'assets' (if you can called the toxic crap no one wants to buy as assets) for book value or near value or insuring the same while the banks take a hit for 2-5% of the crap assets while the govt take the crap for the rest of the so called assets if they sell for a loss. the FSA chief is on record in the last treasury select committee hearing that mostly there wont be a market for such securities anymore and that many of these might never be sold how ever long these are kept in hibernation. so based on the FSA statement to the select committtee quite a lot of these toxic assets will never be sold or will be sold for a massive loss. now since the govt insures these assets 95% of the 700£billion of insured asset which trun into a loss will fall on the govts books. thats 635£billion losses if they are not able to sell these things. these things will be the worst of the 'assets' of the banks so most likely they will be the most difficult to sell.

with the govt track record of always being in deficit plus with all these extra expenses of 'stimulus' plus the foreseen losses on these toxic assets does anyone realistically think that the govt will ever be able to burn the newly created money, or delete the electronically created money.

i dont see the difference in printed money and electronically created money. IT is money after all. is there any difference in printed money and electronically created money. i dont think so. it is in the system thats all that matters. i hardly ever use cash for purchases and always use debit or credit cards as much as possible. just because i pay electronically doesnt make my money any less or any more relavant. do any of the international money transactions actually involve physical money. NO, so electronically created money or printed money has the same effect as long as it enters the system.

now if the govt is creating extra money without extra assets that worsens the value of the existing money stock, just like rights issues of shares. probably even worse. lets get to our coca cola (coke) example. i have a bottle of coke to sell, suddenly i need more money, so i get the brilliant idea to dilute half the bottle with water and sell two diluted bottles for the same money. the first muppet will buy it unknowingly but soon people catch on as to what the true value is. no the value wont be 50p it will be worse than that. the value gets worse than half. now diluting with water becomes pretty obvious to the buyer so instead the seller decides to pee in the bottle to dilute it so that the colour change is not that obvious (govt buying toxic assets for book value or insuring it for book value) similar to printing more paper money with no extra assets to back it. sooner or later the people wont have the same value for the newly sold coke or printed money.

can any person keep spending more money than they earn throughout a century. i am sure all of you will say no. then why do you think that the same stupid idea of deficit spending till eternity funded by more and more debt is a sensible idea?

what does any sensible person advice to people facing bankruptcy or IVA on the other forums on this website. anyone will say cut down expenses, tighten the belt, save more money and pay off the debts. no one in their right minds will say borrow more money to pay off the debts or to make ends meet. the same logic applies to nations as well. there is no such thing as a free lunch for people or nations. the longer you fool yourslef the harder the fall will be.

as an analogy for deflation. let me say you are driving on a motorway with over-inflated tyres (so that you go faster and get more milage and have less friction) and hit a pothole and the tyre starts deflating. the only possible safe method is to repair / replace the tyre and correctly inflate the tyre. just inflating the tyre more and more thinking you can use tha same tyre for longer while expecting to go faster with less friction is only asking for disaster. doing so will just be risking a tyre burst instead of a safer slow deflation to what the tyre can bear. same applies to financial system where they are trying to inflate lending to 2007 levels.

when one is constipated(like credit system is now), one needs to see what caused the problem (excessive debt and leverage and poor savings) and then treat the problem by having a proper diet (save more) and water intake (stop taking needless loans and excessive spending). the treatment is not trying to make the person eat more and more of the same crap (excessive loans) they were eating which got them in the problem in the first place.

Generali

bubblesmoney wrote: »

can someone tell me when in the last century the govt has not run a deficit budget?...

I assume you mean the UK Government. The Tories have run occasional, short lived surpluses. I'm not aware of any financial year when any Labour Government has run a cash surplus.

A good question for Question Time on the TV or Any Questions on the radio would be, "How do you propose to pay for pension liabilities and also pay down UK Government debt?"

Wookster

Generali wrote: »

A good question for Question Time on the TV or Any Questions on the radio would be, "How do you propose to pay for pension liabilities and also pay down UK Government debt?"

The answer to that would be "I'm a socialist. Someone else pays."

bubblesmoney

Wookster wrote: »

The answer to that would be "I'm a socialist. Someone else pays."

probably the actual answer will be, we have got nukes, we wont let others have nukes and guess what - we wont be paying my debtors who dont have nukes and anyone having any assets worth controlling we will invade on any pretext and instal a puppet govt all in the name of democracy and war on terror, whilst supporting dictators who are more pliant.

ever wonder why NPT was signed.
1. to avoid nukes proliferating
2. to destroy the nukes already present

ever wonder why countries having nukes always enforce point (1) and never follow point (2). maybe the reason is if you have a bigger stick and others dont have one then you can get away with what ever you want to do. no wonder that many countries caught on to the game and some never signed the NPT and developed their own nukes like India and others signed the NPT and got the nukes anyway. the only ones who got screwed were the ones who didnt develop the nukes and can get bullied or coerced into doing what the people with the bigger sticks want.

same reason why many countries have caught on to the world bank and IMF policies paying lip service to development but in actual terms being just another tool for globalisation when it works for some countries but not the other way around. same reason why the DOHA round of WTO talks failed because not many nations want to bend over like before and say thanks for getting screw*d.