BOE could launch further QE in order to keep rates low

ILW

chucky wrote: »

The need for rates to go up so that those who complain about it being 'unsustainable' can hopefully see families be repossessed and suffer so they can buy a cheap house at their expense.

Most don't understand the dynamics but still like to rattle off a few soundbites to self justify their own financial position blaming others instead of their own misfortunes.

Bear in mind that too low rates were one of the main causes of the cash.

chucky

ILW wrote: »

Bear in mind that too low rates were one of the main causes of the cash.

Really? My impression was it was because of the amount of debt people were allowed to take on due to relaxed lending criteria.

OffGridLiving

Anyone who took on a huge mortgage (and therefore a dream home) at the start of the credit crunch, gambling that interest rates would be low for years would be quids in.

By the time rates do rise, these 'lucky' people will have paid their mortgages down to levels usually expected of a run of the mill 3 bed family home.

Good for em, I say!

ILW

chucky wrote: »

Really? My impression was it was because of the amount of debt people were allowed to take on due to relaxed lending criteria.

The "cost" of the money is always a factor as with any other item.

chucky

ILW wrote: »

The "cost" of the money is always a factor as with any other item.

Rates or the "cost" of money could have been as low as they like but you have to have liquid funding.

If there is a low level of funds or stricter lending conditions you don't have every Tom, !!!!!! and Harriet taking on debt. It's simple logic, rates are secondary.

ILW

chucky wrote: »

Rates or the "cost" of money could have been as low as they like but you have to have liquid funding.

If there is a low level of funds or stricter lending conditions you don't have every Tom, !!!!!! and Harriet taking on debt. It's simple logic, rates are secondary.

Higher rates would have moderated the debt boom of the early 2000s.

michaels

Graham_Devon wrote: »

Yes, that's what the thread is about Hamish. But thanks for informing us again.

The question is whether it is "acceptable" to do such a thing.

Afterall, what do you do next time we hit the same problem (which will happen). More QE again?

You are quite right, rather than using QE to fund govt borrowing the govt should either:
a) eliminate the need to borrow by immediately increasing all taxe rates by 5% and reducing all expenditure by the same amount (as tried in Greece etc, didn't seem to work there but who knows...) or
b) allow interest rates to increase resutling in large tax increases and expenditure cuts being necessary just to keep the deficit at the current level after allowing for the increased debt servicing costs.

Certainly seems like a no brainer, either (A) or (B) with the resulting unemployment and hardship seem infinitely preferable to increasing QE. For those who would decry more QE, which of these options do you advocate?

Graham_Devon

michaels wrote: »

You are quite right, rather than using QE to fund govt borrowing the govt should either:
a) eliminate the need to borrow by immediately increasing all taxe rates by 5% and reducing all expenditure by the same amount (as tried in Greece etc, didn't seem to work there but who knows...) or
b) allow interest rates to increase resutling in large tax increases and expenditure cuts being necessary just to keep the deficit at the current level after allowing for the increased debt servicing costs.

Certainly seems like a no brainer, either (A) or (B) with the resulting unemployment and hardship seem infinitely preferable to increasing QE. For those who would decry more QE, which of these options do you advocate?

Well theres a loaded question if ever there was one.

It appears the answer, if I don't want to take your A or B is QE forevermore from this point forward?

Afterall, if, as you suggest there is only A and B, and both are terrible, how else, bar continual QE forevermore will the situation ever change?

princeofpounds

This is pure manipulation, is it not?

Will the markets really take kindly to being manipulated? What about we, the nationm who could suffer the consequences or markets turning their backs on us?

Yes, pure manipulation is what central banks do. And whilst they used to confine their manipulation largely to the base rate for the money markets, it seems that the conclusion made by many of them after the crisis is that we all need more manipulation to cure the problem.

So they interfere explicitly in long-term rates further up the yield curve, as well as short-term. They interfere in riskier assets, widening the Lombard lists of securities that they accept as collateral for providing liquidity funding.

Doing this sort of thing allows them to fix great swathes of the debt markets, at least in GBP terms.

If they keep rates low then you would expect the cost of USD debt to head upwards, but given that the Fed is playing a similar games then that is much less of a factor than it would be otherwise.

The other vulnerability is the pound, which would become weaker - that's the most likely way the market will push back. Certainly vs real assets anyway - vs other fiat currencies that can pursue competitive devaluation is more questionable. This has some benefits - it reduces the real terms value of the debt and is essentially a 'soft' default through inflation, the time-honoured way of a government escaping its liabilities.

The nasty side effect is that it devalues all our nominal savings (but as a nation of debtors we may not care that much) and will also send the prices of imports spiralling.

I think the authorities will be quite happy to pursue default through inflation until the point where people are on the streets complaining about the rising cost of living. We are some way off that yet, so we can print merrily away for a while.

michaels

Graham_Devon wrote: »

Well theres a loaded question if ever there was one.

It appears the answer, if I don't want to take your A or B is QE forevermore from this point forward?

Afterall, if, as you suggest there is only A and B, and both are terrible, how else, bar continual QE forevermore will the situation ever change?

I'm not asking you to like it and a 'solution' not involving QE would be great but I don't see any other better options. The problem is the defict and the debt. Trying to solve these via fiscal tightening appears to make things worse, the deficits do not seem to fall as reduced economic output leads to greater unemployment and reduced output also makes the debt to GDP denominator worse, the only mathematical 'cure' would appear to be 'growth' whioch is easier to say than acheive.

Given neither QE nor the consequences of no QE appeal, do you have any suggestions?