Some questions are easier than others.
The reason why bond traders don't like People's Quantitative Easing is easy to explain: they can't make money out of it.
That's the complete answer. Nothing else need be said.
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they can’t make money out of it…another excellent reason to do it!
No, bond traders would love people’s quantative easing. You just short the bonds or pay interest rate swaps and watch the money roll in as interest rates go higher with inflation – as this has happened every time money printing has ever been tried.
Oh yes?
QE sent interest rates higher?
Total BS
I think what Silas is trying to say is that PQE and quantitative easing are very different things.
QE has the BOE buying bonds. As a bond trader you would then go long bonds.
PQE has the government or BOE printing money. Which tends to devalue the currency and send inflation higher. Which makes holding nominal bonds a fools game, especially when foreign holders flood out of the market. There might be a bond shortage but it becomes pretty irrelevant pretty quickly as soon as a government starts monetizing debt. As a general rule (which in history has had no exceptions) when a government starts monetizing debt or printing money you can simply short the currency and the bonds and make a large profit. Normally the biggest problem is when the inevitable exchange controls get put in place as the last desperate gasp of the government trying to salvage the situation.
Maybe you haven’t noticed that the aim of QE is to create inflation
I suggest that’s a big oversight
Last time I checked interest rates were used to control inflation as the second order variable. Not the other way around.
Regardless, printing money is a pretty good way to generate too much inflation, as the Argentines and Venezualans are finding out.
QE has printed or will print $6.5 trillion in the US, Japan, EU and UK without delivering inflation
Those are the places we need concern ourselves with
If you honestly think small amounts of PQE will deliver what QE has not suggest I am the genius who has solved this problem by all means, but comparison with South America is just trite
QE doesn’t “print” money as you claim. It swaps bonds for cash, but it doesn’t increase the money supply directly. QE works by reducing the supply of bonds and therefore increasing their price, which lowers their yields and thus lowers interest rates. PQE of course just prints money. Which is exactly what Argentina have been doing to finance their budget deficit – with predictable results.
You seem to have a shifting target on the amount of PQE. First it was 50bn a year, which is not a small amount. Then it was a “small” amount only when needed. At the moment the UK economy is growing. So how much PQE is needed currently, and have you done any analysis on the effect it would have on inflation? I can’t find any.
Respectfully, you are raising questions dealt with many times here already
And denying what QE really is, seemingly deliberately
So I won’t be wasting my time answering
So there’s been a rise in interest rates ever since they were reduced to 0.5% five or six years ago?
Why wasn’t I told? 🙂
And has someone ever told you that higher interest rates actually curb inflation? At least for a time anyway.
To be fair to Silas, he might be meaning to distinguish times when QE, which I suggest is now social shorthand for money printing in the sense of creating it from nowhere, ex nihilo, has been used to create money direct into the economy with a view to expanding it. Recent UK QE, used to expand bank reserves at the BofE and also remove toxic securities from their books in the hope they’d then create money into the economy, didn’t do that. So, he might be thinking of different circumstances altogether – but still falling under the now generic banner of QE. Silas?
Silas,
I think you might lose heaps if you did this so I’d advise another think. If the Govt sold fewer bonds , which they would if their expenditure was partially funded by PQE, then the demand for the remaining ones would be higher, meaning their price would be higher, meaning their yield and effective interest rates would be lower.
If all expenditure was by PQE the effective interest rates would be zero.
That would possibly have an effect on the exchange rate so you be better betting on a fall in the pound! Don’t forget to cut me in on your winnings if this tip turns out to be useful!
Just an aside here – in reference to shorting PQE bonds, wouldn’t those who want to do the shorting have to buy or at least borrow the bonds first? Or at least manage to get hold of computer details for them?
I may be wrong here, but won’t the government be involved in every step of the process and no private bondholders will be involved?
If this is the case, then how are they going to short the bonds?
Spot on Stevo
There would be no bonds available for them to short
It would be like shorting my house when it is not on the market
By using naked shorting? The practice is not exactly unheard of…
The whole point of shorting the bonds is that you don’t need them in the first place. Regardless, you could still easily short through the interest rate swap market, or simply buy/short other assets which are highly correlated to interest rates.
Or, as I say above, when money printing comes to town the simplest way to profit is simply short the currency, and leave all your money in USD or EUR or similar, which is easy enough to do as you can have UK bank accounts denominated in those currencies quite legally. Tax free too.
To short you have to be able to settle
How are you going to do that when there may be no market in the bonds?
To short the bonds you need to be able to borrow them, true. That in itself isn’t hard. But you could also trade bond futures – which are probably more liquid than the underlying bonds themselves. Or you could get very similar exposure to interest rates by paying interest rates swaps. Or through FX swaps. Or by going long/short highly correlated assets such as listed property funds. Etc.
Or more simply still, by shorting Sterling against another currency. Which you can do easily and tax free.
You don’t need as market in the underlying bond to be able to make a good turn if some idiot government starts paying for things by printing money.
If you think PQE the only influence in exchange rates you are again seriously deluded
You really are wasting my time
When did I ever say that PQE would be the only influencer of exchange rates?
All I said was that it is very easy to find other ways to go short the interest rate market, not only through bonds, but by far the easiest way to take a financial view if a government starts printing money is through the FX market. It’s cheap, simple and quick to do and without fail money printing has lead to currency devaluation every time it has been tried. It would be foolish to assume that this time (or were the UK government to fund itself by printing money/PQE) would be any different.
And as I have said, and as David Cameron quoted, any attempt to create a sterling crisis in this way would be very short lived as the fundamentals would be against it: PQE will be popular with markets
raising finance via bond issue without PQE can also be inflationary. For both methods of finance, supply side resources, ie suitably skilled labour, need to be available to carry out the productive work for infrastucture required. This would also apply to funding from banks for private productive purposes. I think that Richard and many others have highlighted this many times.It is well documented if you were to spare a little time to read some mmt.
Same reason for trying to implement a Fiscal Charter that ties a UK sovereign government to perpetual surpluses. Helps stop the “dumb serfs” thinking their government can create “rent-free” money!
Central bank determines the interest rate. Full stop. The level of QE or PQE is irrelevant unless Mr Carney judges the economy to be overheating. Then he just raises them.
Sorry Andy but that just ignores the economic reakity of the last seven years
On the topic of making money from bonds, I’m reminded of some thoughts I had reading this by Simon Wren-Lewis today:
“Creating money is no longer a taboo: with Quantitative Easing huge amounts of money have been created.”
Creating money was never a taboo. The only ‘new’ thing in recent years is that it is being created by the central bank instead of by private banks.
But I guess it doesn’t really matter who creates the money; instead, there are three separate questions. Who decides how much money should be created (or destroyed)? What will it be spent on? Who will own the resulting asset?
Helicopter money is very democratic because ordinary decide what to spend it on, and they own the purchases.
Can we have a system where the last two questions are separated? Where private bankers make the investment decisions on behalf of a national investment bank that actually creates the money and owns the output? Equivalently, private banks shouldn’t be allowed to create money themselves, instead they should buy/borrow money created by the central bank.
Although I guess this isn’t very new.
I am sorry
I find your question too confused to address in reasonable time
Are you promoting the Positive Money view? I am not sure
I’ve never heard of Positive Money before. I guess my vague idea is related to the Chicago Plan. I don’t claim to know any of these proposals in detail, I’m just an interested layman.
But for something like that to really work, I think we need more equity and less debt in the broader economy. Because otherwise the central bank would need to own lots of equity (to balance the liabilities associated with huge amounts of state-issued money.)
I will try to address these issues if I get to writing my summary of PQE
aaronmcdaid
‘I guess it doesn’t really matter who creates the money’.
It does matter.
If the banks are encouraged to lend via QE then a significant part of that lending will be used to inflate asset prices especially property. Nothing of real worth produced, just the transfer of ownership of an existing asset. Note also that a bank’s creation of money (in the form of a loan) also creates more private indebtedness
If a government created the money for infrastructure projects then that directly creates jobs in the private sector but does not cause indebtedness but actually directly increases incomes. Plus of course society gets the benefit from the completed projects.
If the banks create the money, then they use it as the basis for wealth extraction, the reason, I believe, we have money in the form we do. If the BofE does it on our behalf, or if we have a network of publicly-owned banks doing it a la North Dakota, then the banks are denied that wealth creation and extraction. So, from that perspective alone, I’m in favour. It leaves us better off.
I don’t think I understand this post.
The process of raising a bond is complex and will involve a number of well remunerated bodies including investment bankers and lawyers, some will be employees of the NIB, but by no means all, some of these would undoubtedly be what you describe as bond dealers.
Also, in earlier posts you have described the bonds issued by the NIB as safe, long term assets ideal pension funds, the transmission mechanism to these funds will certain,y involve market making by bond dealers.
There may be bond dealers who have an aversion to PQE but I don’t think that this is because they can’t see a profit opportunity.
You have cleatly missed the point of PQE
If it works as I expect the apportioning will be one off, and very small, at most
I’m acquainted with a couple of less than pleasant gilt traders. They act a little too pleased with themselves that government deficit spending allows them to make a decent living from their niche. One of them has a Brompton cycling jacket and the other has the latest Burberry punting coat which admittedly is very fashionable but is also jealousy-inducing.
The one thing that would decimate their trade though would be a government that ran a tiny but consistent surplus.
That is the last reason in earth for running a surplus
“By using naked shorting? The practice is not exactly unheard of… “
Yes, I am aware of naked shorting. That is why I added the comment about access to computer details, serial numbers and such like.
The thing is, wouldn’t they have to be still available to buy privately in order to do this?
I think one trades in hypothetical examples. On the stock exchange though, these exchanges become real, such is the bizarre nature of the beast, which rather obviously wildly distorts the market making any attempt at price determination absurd. I confess I’m going from vague memories as I used to know more about this than I do now.
I did read about naked shorting in Ellen Brown’s excellent book ‘Web of Debt’. She described how someone had obtained a million shares and put them in his sock drawer.
The shares had not been bought or borrowed – obviously not as they were all in his sock drawer, but he observed that those same shares changed hands hundreds of times over due to naked shorting. This is because you can create a facsimile of a share on a computer, you don’t even need to borrow or buy them. As I said though, those shares or bonds would probably have to be on the market first before they could do any such naked short selling, and it would be the case that these PQE bonds will not be available for private sale. I fully admit I am unsure on this point, so I do admit the possibility that I could be wrong.
There are as such no things called shares now in quoted companies
Just entries in registers
So this at best sounds very out of date
I don’t know, I’m quoting from memory, but possibly. I would have to read it again.