3-month Libor at record lows

sabretoothtigger

Sounds extreme but looks normal unlike the fed chart where it doubles and the line is vertical





What M number would equate to our monetary base

purch

What M number would equate to our monetary base

M4 is the broadest money supply number.

M3 is errrrr

M2 is M1 plus time Deposits.

M1 is M0, plus Deposits available on demand.

M0 is Currency in circulation plus Bank Reserves

Degenerate

Generali wrote: »

At some point, if QE continues, presumably those big rises in M0 will start to flatten out (as banks stop adding cash to their reserves) and big rises in M4 will occur instead. I dread to think what would happen to inflation if M4 rose by 200% in 4 months!

I don't forsee the sudden avalanche of lending that would be required to create a sudden rapid expansion in the credit money component, but if such a scenario were to occur, it could be quickly reigned in. If banks want to lend then QE has worked. If they want to lend too much, we've over-done it, but that's ok, the excess lending can be to the Government as the BOE unwinds QE by selling the gilts back to the banks. If this were to take too long, a compulsory increase in capital reserve ratios would have an immediate constraining effect. I think it's far more likely to happen gradually though.

Generali

purch wrote: »

M4 is the broadest money supply number.

M3 is errrrr

M2 is M1 plus time Deposits.

M1 is M0, plus Deposits available on demand.

M0 is Currency in circulation plus Bank Reserves

M3 isn't measured in the UK any more I think. IIRC it's M2 plus all other deposits from the non-bank sector (including repo agreements usually)

Degenerate wrote: »

I don't forsee the sudden avalanche of lending that would be required to create a sudden rapid expansion in the credit money component, but if such a scenario were to occur, it could be quickly reigned in. If banks want to lend then QE has worked. If they want to lend too much, we've over-done it, but that's ok, the excess lending can be to the Government as the BOE unwinds QE by selling the gilts back to the banks. If this were to take too long, a compulsory increase in capital reserve ratios would have an immediate constraining effect. I think it's far more likely to happen gradually though.

One of the problems I have with QE (and have always had) is how to 'finesse' it in this way.

I don't really see what would stop such an 'avalanche' of funds into the debt markets. HSBC seem in pretty good shape. Who's to say that they don't decide to gradually gather together a war chest using the generous support and then storm into the market offering decent mortgage offers (perhaps at 95% LTV), secured car loans (secured on the car) and so on? Given the opacity of bank balance sheets it would be pretty easy to do I would think.

Degenerate

Generali wrote: »

I don't really see what would stop such an 'avalanche' of funds into the debt markets. HSBC seem in pretty good shape. Who's to say that they don't decide to gradually gather together a war chest using the generous support and then storm into the market offering decent mortgage offers (perhaps at 95% LTV), secured car loans (secured on the car) and so on? Given the opacity of bank balance sheets it would be pretty easy to do I would think.

I think you're taking the "war chest" analogy too far. It may serve it's purpose in some cases (eg takeover bids) but in the lending market there is no advantage to it. The reason lending has been sluggish is that the banks are repairing their balance sheets. Beyond that, why would they waste time gathering war chests, when they could be releasing those funds straight away to build market share? It simply wouldn't make sense, while you were hoarding your stash off the back of QE, some of your competitors would surely be going the other way and stealing a march on you.

The BOE may doing a large amount of QE, but it's being spread out in measured doses over many months, so I think it it unlikely we will overshoot by some huge margin. Even in the unlikely event of a large jump in M4, although it would be difficult to dispose of a large amount of gilts in a short period of time, an increase in reserve requirements could be announced overnight, and would have an immediate effect of restraining the banks.

michaels

Time to dig out the economics text books and see what behaviour makes sense in an oligopoly - HSBC with its financial strength can get funds more cheaply and in effect has a competitive advantage in the current market but profit maximising strategy is not to try and drive out the competitors (there would obviously be long run regulatory issues if it pursued this strategy) so instead it can set its 'prices' at the level that gives it the best return - pushing down rates to boost market share would probably be less profitable.

Thrugelmir

Generali wrote: »

I don't really see what would stop such an 'avalanche' of funds into the debt markets. HSBC seem in pretty good shape. Who's to say that they don't decide to gradually gather together a war chest using the generous support and then storm into the market offering decent mortgage offers (perhaps at 95% LTV), secured car loans (secured on the car) and so on? Given the opacity of bank balance sheets it would be pretty easy to do I would think.

Lending needs to be made to enterprises that will create jobs and real wealth.

An avalanche of funds into the mortgage market. Will merely cause assets prices to bubble again. Something the BOE is trying to avoid. Though the recent rise in stock markets suggest otherwise.

The BOE is balancing on a knife edge the need to keep the economy going, with the fact that debt levels have to be reduced, and that banks will need to increase capital reserves. Which in itself means a contraction in overall lending.

The BOE is trying to let the air of the balloon very slowly. Creating a stagnant enviroment, where inflation is slowly eroding away the excesses of the past.

There are no quick fixes. The banks are still in intensive care.

Generali

Thrugelmir wrote: »

Lending needs to be made to enterprises that will create jobs and real wealth.

An avalanche of funds into the mortgage market. Will merely cause assets prices to bubble again. Something the BOE is trying to avoid. Though the recent rise in stock markets suggest otherwise.

The BOE is balancing on a knife edge the need to keep the economy going, with the fact that debt levels have to be reduced, and that banks will need to increase capital reserves. Which in itself means a contraction in overall lending.

The BOE is trying to let the air of the balloon very slowly. Creating a stagnant enviroment, where inflation is slowly eroding away the excesses of the past.

There are no quick fixes. The banks are still in intensive care.

If debt levels are being reduced M4 will fall and deflation will result. You can't have debt levels falling and inflation rising in a modern economy unless you literally print pound notes and hand them out in the street.

You're right to say there are no quick fixes. There are unintended consequences however, one of which is that while most banks are fkd, not all banks are fckd so the working banks can throw an almighty spanner into the monetary works.

inspector_monkfish

3mth & 6mth down another basis point to 0.595 & 0.79

Thrugelmir

Generali wrote: »

There are unintended consequences however, one of which is that while most banks are fkd, not all banks are fckd so the working banks can throw an almighty spanner into the monetary works.

Retail banks are heavily inter dependendant in the modern financial world.

QE pumping in £175 billion is small change. When Lloyds and RBS have a combined wholesale funding requirement of around £400 billion alone to maintain their assets.

HSBC and Standard Chartered will use their capital bases to pick off RBS's and other banks Asian assets. The centre of the financial world will soon be in the East.