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Bank to Treasury: Forget credit easing. It's your debt that needs queasing...
Unlike
Pringles tasty potato snacks, quantitative easing doesn't come with a resealable lid. So the famous sales line is only more
true for central bankers:
"Once
you pop, you can't stop!"
This, warns the historian, lurching out of
the library stacks, is how Germany's infamous Weimar Republic moved from
something like sanity to madness inside three years. A trickle when it
started, "more and more paper [poured] from the Reichsbank
presses" by January 1923, writes Adam Ferguson in his well-thumbed
history, When Money Dies.
"During
February the note circulation was being increased by a matter of 450
milliards every week. On a single day in early March, by way of Treasury
bills discounted at the Reichsbank, the floating
debt was increased by 800 milliards."
A
milliard? It used to mean 1,000,000,000 - formerly known as 1,000 million but
now called one billion even though it's a thousand times smaller. Still,
that's inflation for you. One billion buys much less than it used to. Just
ask Mervyn King.
"There
is not enough money in the economy today," the Bank of England governor told ITN News on
Thursday (and Sky, and the BBC, and everyone else) as he tried to explain why
his team is adding £75 billion ($115bn) to the £200bn of
quantitative easing they tried in 2009.
"That
is why we have taken this measure to create money, in order to ensure that
there is sufficient money to support the recovery, to support jobs, while
ensuring that inflation remains close to our target."
Oh
yeah? Mervyn King's target - of 2.0% annual
inflation on the UK's official Consumer Price Index
- hasn't been hit since autumn 2009. Inflation is now running at 4.5% per
year and has exceeded Mervyn's official 3.0% limit
in 20 of the 29 months since he first got his hands all covered with ink. So
whatever this apparent "lack" of money might be doing to the UK
today, it's hardly pulling down prices.
Nor
will the new money help private-sector investment, not directly, even though
- just this Monday - UK finance minister George Osborne declared he wanted
"Credit Easing" to kick-start new borrowing by business to
jump-start new growth. Poor George! He must have thought his birthday had
come on Thursday morning, when Mervyn wrote to say
the Bank wanted to print a fresh six per cent's worth of GDP in new cash.
"The
structure and operation of the Asset Purchase Facility would be unchanged
from that described [by] your predecessor," the governor winked in his
letter.
"The
APF continues to include facilites for eligible
private sector assets," the chancellor winked back, "authorised up to a maximum of £50 billion."
But
no! Within minutes of this cheery exchange being posted for the world to
enjoy on the Bank's
website, up went the
Bank's plan for how it will spend this new money - every last penny on government
bonds, and none of it on private-sector assets or loans!
And
here's why...
Of
its first £200bn in quantitative easing, the Bank of England spent all
but £1.7 billion on UK government debt. Like the name says, the effect
was to "ease with quantity" - pushing down longer-term interest
rates, which the Bank can't ordinarily change through trading short-term debt
bills, by bidding up longer-dated government bonds.
Government
bonds pay a fixed income each year, so the higher the price, the lower the
yield to new buyers. Hence the lower interest rates for other borrowers in
the economy.
Trouble
is, government bonds don't stand still. They shuffle
towards maturity - that happy day when the current owner gets repayment of
the money first borrowed from the bond market by the government. And as our
chart shows, this slow shuffle has changed the way the Bank of England's gilt
holdings stand, even though it's holding the very same UK gilts it bought
between March 2009 and Jan. 2010.
QE1
is moving towards the short-end of maturities. Time for QE2. Because since
the start of last year, that 70% of the Bank's £198bn spent on medium
and long-dated gilts has turned into 60%. That means the 30% of its money
spent on "Short dated" gilts has now become 40% held in
"Short" and - yikes! - "Ultra-Short dated" gilts, set to
mature in 3 years or less.
You
won't need reminding how tight the UK's public finances are right now. Mervyn King certainly doesn't. But he does seem to think
the chancellor needs telling - and pretty much in public, too. Fully 16% of
that money printed last time around is starting to pile up at the short
end...about to turn back into real cash. So to rebalance the queasing, trying to keep long-term rates down but with
the government's total debt very much larger, the Bank has no choice but to
target medium and longer-term gilts once again, buying (no
kidding) 3-10 year gilts on Mondays, 25-year-and-over on Tuesdays, and
10-25 year debt on Wednesdays.
Now
it's started, it can't stop.
Adrian Ash
Head of
Research
Bullionvault.com
You can Receive your first gram of Gold free by opening an
account with Bullion Vault : Click here.
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment gold,
vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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