Economy snippets

nickmason

Generali wrote: »

HI nickmason,

I amended my post but you picked up on it prior to that!

Looking at the link, what struck me was the level of GDP/head in England, Scotland and Wales. England and Scotland are broadly smiilar, Wales is a long way behind if you measure by value added.

My recolection/belief is that the NE of England is in a worse position than Wales. These are places that are going to be in a lot of strife if UK Governmetn spending has to fall.

Agreed - the three poor relations, as it were, have for some time been North East, N Ireland, and Wales. Wales has only recently dropped below the NE.

It's a similar debate to international development - these are areas where there has been high gov spending to try and prime local economies. This makes sense - assuming you have some gov spending (and as you've pointed out, hmrc etc is pretty damned complicated) you should put it in areas that are both inexpensive and needy. This will squeeze out some local industry, but also foster other through the influx of money.

The question is whether, when the gov spending tap gets stopped, the priming has had the effect of preparing people for wealth-generating work; and critically whether there will be an economic landscape that allows the development of those new businesses. Otherwise, frankly, it's mines all over again.

HAMISH_MCTAVISH

Mr_Mumble wrote: »

The 7x issuance calc is simples:

£225bn gross issuance of gilts by the DMO this financial year
-£200bn BoE purchase of gilts for QE scheme
is a net £25bn

£175bn of gilts to be issued in FY 2010/11

£175bn/£25bn = 7

There are lies, damn lies, and statistics......

Whilst the above is true, to a point, it doesn't take into account a couple of tiny little details.

The gilts the BoE purchased under QE are not freshly issued, they cannot be under law, as at that point you are simply monetising debt.

The purchase of older gilts by the BoE through QE was designed to remove previously issued gilts held as assets by banks etc from the economy, and replace them with cash that could then be used to lend. The prime issue being that in a liquidity crisis, when banks have no cash but too many assets, buying back the assets solves the liquidity problem.

To make a reasonable case for your premise, which appears to be that the banks simply recirculated all the money back into newer gilts, you would have to prove that the market only purchased an average of 25 billion in freshly issued gilts per year in the year or two before QE.

Can you do so?

Generali

nickmason wrote: »

Agreed - the three poor relations, as it were, have for some time been North East, N Ireland, and Wales. Wales has only recently dropped below the NE.

It's a similar debate to international development - these are areas where there has been high gov spending to try and prime local economies. This makes sense - assuming you have some gov spending (and as you've pointed out, hmrc etc is pretty damned complicated) you should put it in areas that are both inexpensive and needy. This will squeeze out some local industry, but also foster other through the influx of money.

The question is whether, when the gov spending tap gets stopped, the priming has had the effect of preparing people for wealth-generating work; and critically whether there will be an economic landscape that allows the development of those new businesses. Otherwise, frankly, it's mines all over again.

I guess the problem with Government spending in the regions is that to be done well it would have to be done along French lines: get the car company or whatever to build a manufacturing plant in an area with economic problems and then sign a contract for 20,000 cars/year. Perhaps from there you can build up an industry.

The New Labour idea seems to be to build an art gallery in some benighted place and fill it with diversity consultants and educational coordinators. That model just sets up an ongoing commitment to subsidy which never solves the underlying problem - that you have a part of the country that isn't paying its way.

Mr_Mumble

HAMISH_MCTAVISH wrote: »

There are lies, damn lies, and statistics......

Whilst the above is true, to a point, it doesn't take into account a couple of tiny little details.

The gilts the BoE purchased under QE are not freshly issued, they cannot be under law, as at that point you are simply monetising debt.

I don't see the practical difference between the BoE buying up a 10 year gilt that was issued 20 years ago and one issued yesterday. There will be a difference in coupon rates and market price therefore a change in risk profile but this doesn't make a difference to the argument. The DMO is issuing £225bn in bonds this year and the BoE is buying up £200bn so the net amount of gilts in the market has only risen by £25bn. Next year QE is expected to stop and the government are to issue another £175bn in gilts.

The purchase of older gilts by the BoE through QE was designed to remove previously issued gilts held as assets by banks etc from the economy, and replace them with cash that could then be used to lend. The prime issue being that in a liquidity crisis, when banks have no cash but too many assets, buying back the assets solves the liquidity problem.

The liquidity crisis was solved by the BoE issuing repos to the likes of HBOS/Lloyds and RBS. I agree that the BoE buying up so many gilts does give financial institutions more nominal cash which is intended to get them lending again but this is a bi-product (along with increased asset prices, reducing the cost of borrowing and making people feel wealthier) of the ultimate aim of QE: to boost money supply so the BoE could meet its 2% inflation target over the medium term. High street banks own a small proportion of gilts anyhow.

To make a reasonable case for your premise, which appears to be that the banks simply recirculated all the money back into newer gilts

I'm an awful communicator! I'm not saying commercial banks recirculated the money, I and Monument Securities (who you should really be having this argument with!) are saying that the Debt Management Office and the Bank of England are circulating the money between them.

HAMISH_MCTAVISH

Mr_Mumble wrote: »

I don't see the practical difference between the BoE buying up a 10 year gilt that was issued 20 years ago and one issued yesterday. .

The difference is that one is fresh government debt, the other is an externally held revenue generating asset that has already been paid for.

Either the BoE are increasing liquidity by purchasing back assets, or they are monetising debt by allowing money to recirculate. If it's the latter, then it's right to worry about a 7 fold increase. If it's the former, then the entire premise of a 7 fold increase is false to begin with.

kabayiri

Might I add an uneducated comment to all this ?

From what I read here, we have some regions which have limited ability to value add to the economy, and high exposure to across the board uniform cuts to public expenditure.

If I were the government of the day, I would have 2 options to tackle this, partly already mentioned :-

a) create new revenue generators in areas like NE. (Not easily done has Gen points out)

b) redistribute yet more public sector work from places like London out to these regions.

I wonder how likely b) is? There is already a region in Manchester near Piccadilly station being primed as a new 5,000 occupant home for civil service staff. Do we think more of this will happen?

vivatifosi

Interesting points kabayiri.

If anyone is interested, the GVA stats per region can be seen here (apologies if link already posted, having problem with laptop and can't see all posts:
http://www.statistics.gov.uk/pdfdir/gva1209.pdf

Addressing structural inequality in regions is difficult. The government has, in the past, sought inward investors to help out. A foreign company that I used to work for was offered quite good incentives to open a plant in an area of deprivation. We also used to benefit from more funding from the ERDF, but the regions got realigned when Eastern Europe entered the EU and Cornwall, which was our worse area iirc when the regions were re-based suddenly seemed quite wealthy compared with new entrant regions. If you want to see where the poor regions are and where the money is being spent, see:

http://ec.europa.eu/regional_policy/atlas2007/fiche/nsrf.pdf (warning, big PDF)

Finally, the civil service relocation started with the Lyons review and should be completed by 2010, but won't afaik have achieved its objectives by then.

Mr_Mumble

HAMISH_MCTAVISH wrote: »

The difference is that one is fresh government debt, the other is an externally held revenue generating asset that has already been paid for.

Huh, . You're going to have to tell me who the gilt is a revenue generating asset for, I presume the BoE? The BoE has just increased its balance sheet to pay for the gilts and promises to shrink its balance sheet in the future by selling back the gilts into the open market to wind down QE.

I still have no idea why you think new fresh government debt is any different to old government debt, the DMO pays coupons every six months and has to pay back the principal on maturity on both. For the government gilts are a debt not an asset.

Either the BoE are increasing liquidity by purchasing back assets or they are monetising debt by allowing money to recirculate.

The BoE are increasing liquidity by purchasing gilts but they are not purchasing back those assets, they're paying for them by simply increasing the BoE's balance sheet. Technically this isn't monetising debt or printing money.

If it's the latter, then it's right to worry about a 7 fold increase. If it's the former, then the entire premise of a 7 fold increase is false to begin with.

The seven-fold increase is for the amount of gilts that will have to be bought by someone other than the Bank of England next year.

The DMO are issuing £225.1bn of Gilts this year
&
the BoE have bought £186bn worth of Gilts as of last week

Ergo net-new issuance this year is roughly £25bn (assuming BoE continue to purchase gilts to near the £200bn limit). Which leads us back to the original point made in the Guardian article:

Stephen Lewis, chief economist at Monument Securities, notes: "Unless the Bank of England continues its gilt purchases on a massive scale, net private-sector purchases of gilts could have to rise roughly sevenfold compared with this year. It beggars belief that this change in conditions would not have an adverse effect on gilt prices. If we add to this the market's suspicion that Mr Darling has a strong political motive for resisting fiscal retrenchment, gilts seem set to underperform other government bonds in the months ahead.

HAMISH_MCTAVISH

Mr_Mumble wrote: »

Huh, . You're going to have to tell me who the gilt is a revenue generating asset for, I presume the BoE?

No, for the pension fund, bank, etc that holds it.

Ergo net-new issuance this year is roughly £25bn (assuming BoE continue to purchase gilts to near the £200bn limit). Which leads us back to the original point made in the Guardian article:

Stephen Lewis, chief economist at Monument Securities, notes: "Unless the Bank of England continues its gilt purchases on a massive scale, net private-sector purchases of gilts could have to rise roughly sevenfold compared with this year. It beggars belief that this change in conditions would not have an adverse effect on gilt prices. If we add to this the market's suspicion that Mr Darling has a strong political motive for resisting fiscal retrenchment, gilts seem set to underperform other government bonds in the months ahead.

Which is a horribly oversimplistic way of looking at it.

The demand for gilts was far more than 25 billion a year prior to QE.

The fact that the BoE has decided to buy back gilts being held by financial institutions to increase liquidity in the system has no bearing on the overall demand for gilts, UNLESS, the natural demand for gilts has somehow dried up during the recession and the purchase programme is effectively replacing demand, which is little short of monetising debt.

I don't think I'm communicating clearly today, so I'll try a simple example (that may not help!!!!).....

If I am a company, and I sell 100 bonds a year which will be repaid through my future profits, and I do this every year, then surely an increase to selling 120 bonds per year is an increase of 20%....

It makes no difference if in one year I decide to buy back 80 bonds from the investors that hold them..... The demand for newly issued bonds remains the same.

So even though the net amount issued that year would be 20 bonds, not 100, an increase to 120 bonds the next year is not an increase of 600% (from the net amount), it is an increase of only 20% (from the gross amount)..... UNLESS you can provide definitive proof that the demand for my bonds fell off a cliff, and the only way I was able to sell those 100 bonds was to buy back 80 of the old ones first.

WHich is a huge leap from merely observing a net position......

HAMISH_MCTAVISH

Mr_Mumble wrote: »

The seven-fold increase is for the amount of gilts that will have to be bought by someone other than the Bank of England next year..

No.... The BoE did not buy any of those new gilts directly!!!!!

It bought old gilts sitting as assets with financial institutions, with the stated aim of increasing liquidity.

You are making a huge leap from that to assuming that if they had not bought those old gilts nobody would have bought any new gilts.

How many gilts were bought in 2007 and 2008?

If QE had not happened, how many gilts would have been bought in 2009?

If the answer to any of those questions is more than 25 billion, then the 7 fold increase is a fantasy.