discounting treasury bills = printing money?

deadpeasant

Apologies if this is the wrong place for a query like this. My holiday reading has been "When Money Dies" by Adam Fergusson, about the German hyperinflation. (Thought it might be relevant in an age of QE.) Turns out that the culprit was "discounting treasury bills"; but unfortunately the author doesn't explain what this means. Google searches suggests that it means selling govt. bonds for less than their face value (the difference being the yield), but Fergusson uses it as tantamount to "printing money". Can anyone either unpack this for me or suggest a book/website that will?

Linton

My understanding for what it is worth is:

"Discounted treasury bill" is succinctly described here.

Inflation happens when a significant number of people have more cash than there are desirable goods to buy so retailers can put up prices in the knowledge that there are sufficient people with the money to buy the goods. Employees then demand higher wages, the increased spending power pushes up prices even more etc etc.

So if a government desperate for money offers a large number of treasury bonds for much less than their face value, when they are redeemed within a year the purchasers have more cash ("printing money") although the economy has not generated more products. So we get inflation.

Miss_Havisham

Issuing such bills has been done for years as a normal process to raise short term money for the govt, and in itself has not had a significant affect on inflation.

I haven't a clue what impact it has now, given the amazing amounts raised as QE. Some informed opinions would be gratefully received.

Miss H

Linton

Miss_Havisham wrote: »

Issuing such bills has been done for years as a normal process to raise short term money for the govt, and in itself has not had a significant affect on inflation.

I haven't a clue what impact it has now, given the amazing amounts raised as QE. Some informed opinions would be gratefully received.

Miss H

Yes, the impact depends on the level of the discount and also on the availability of goods. In Germany goods were in short supply because of the mark exchange rate and war reparations.

Where QE would seem to be different is that I cant see any mechanism for the money to reach the general public. And, except for housing, there does not seem to be a shortage of things to buy.

Glen_Clark

Miss_Havisham wrote: »

Issuing such bills has been done for years as a normal process to raise short term money for the govt, and in itself has not had a significant affect on inflation.
Miss H

Er In case you hadn't noticed, Britain has had rather a lot of inflation

Glen_Clark

Linton wrote: »

Where QE would seem to be different is that I cant see any mechanism for the money to reach the general public.

Have you heard of the 'funding for lending' scheme?

Linton wrote: »

And, except for housing, there does not seem to be a shortage of things to buy.

No there isn't. But they are mostly imported. For that we need foreigners to buy our pounds. And, in the long term, they will only do that if we produce things foreigners want to spend their pounds on.
Unfortunately some people seem to think we don't need to make things for foreigners to buy.. We can just keep printing pounds - and foreigners will keep buying our pounds without spending them on anything, so we won't need to produce any goods for them to spend their pounds on. In the short term this might actually be true - the Greeks and Spanish buying pounds as a store of wealth in case they get thrown out of the Euro. But there will, inevitably, come a time when they want to spend these pounds and find there is little to buy with them because Britain doesn't produce much. This is where you get too many pounds chasing too few (British produced) goods - and hyper inflation.

Linton

Glen_Clark wrote: »

Er In case you hadn't noticed, Britain has had rather a lot of inflation

Average for past 30 years - about 4% annually
Current value - about 3% annually.

Glen_Clark wrote: »

Have you heard of the 'funding for lending' scheme?

Despite the FLS the rebuilding of the banks' reserves is still leading to a net loss of cash in the economy. Reference

lvader

It's similar to having super high yields so the opposite effect of QE, maybe the doom mongerers think that when QE is unwinded the BoE will discount it? Obviously yield will get higher from here but the BoE doesn't have to do anything with the QE gilts.

lvader

Linton wrote: »

Average for past 30 years - about 4% annually
Current value - about 3% annually.

When I left Barclays and they had to fix my pension income for when I retire it was done based on an inflation rate of 5%. We have had so low inflation in the past 15 years that people forget what is normal.

Glen_Clark

Linton wrote: »

Average for past 30 years - about 4% annually

You think its OK for a currency to lose 4% of its value a year?
Based on the fact that the pound has fallen against every major currency over the last 30 years its certainly well above average

Linton wrote: »

Despite the FLS the rebuilding of the banks' reserves is still leading to a net loss of cash in the economy.

Well unless the banks are keeping an extra £375 billion in pound notes locked in their vaults, QE has increased the pounds in the economy, one way or another.

Ultimately, the value of the pound is no more than the value of the goods that Britain can produce.
Printing more pounds simply dilutes the value of each one.
Politicians may rig the market until after the next election, but its the quantity of pounds in proportion to the quantity of British Produced goods that will ultimately determine its value.
You shouldn't confuse that with the current abundance of imported goods in the shops because Britain cannot go on increasing its deficit indefinitely.

lvader

The exchange rate with the USD is pretty much what it was 30 years ago.