Wednesday, 11 March 2009

Robert Peston talks of real problems and likely outcomes and is well 
worth the read.   Nick Robinson - as befits a political editor, I 
suppose - deals with political posturing; -the stuff that makes his job!

It's bad enough to report on the extreme worries of the British 
economy but one's sympathy must go to him that has to report on the 
politicians'  reactions only!!

The first reports of the Bank's attempt to sell are unpromising timed 
at 2,27pm but more will come later .  The Telegraph 2.27pm report
starts "BoE's first move to 'print money' finds no takers
The Bank of England today officially launched quantitative easing - 
effectively printing money - to pull the economy out of recession but 
its first offer to buy UK government bonds drew no response from non-
bank institutions such as pension funds and life insurers"

I will try and report on my City enquiries today before I shut down!

xxxxxxxxxxxxxx cs
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BBC Blogs   11.3.09
1. Will QE work?
. Robert Peston
The Great British Experiment begins today, when the Bank of England's 
wades into the market to buy £2bn of British government bonds for 
ready money.

Note it down in big red letters: it's Quantitative Easing Day, QE 
Day, when the Bank of England attempts to stimulate economic activity 
by its new initiative to reduce the interest rates we actually pay 
and to increase the amount of money in circulation.


Actually, the Bank of England's announcement that it was proposing to 
spend up to £150bn - and £75bn initially - on public-sector and 
corporate debt has already had a substantial market impact.

he price of medium and long term gilts (British government bonds) has 
risen between 17% and 20% over the week since the size of the 
operation was disclosed.
The corollary of that is a fall in the yield on gilts to levels we've 
not seen since the 1950s.

If you'd bought gilts yesterday, the yield was around 2% for a five 
year loan to our government, 3% for ten years and 4% for 20 years.

For the Treasury, this looks like a triumph.

The Treasury has to pump out over £100bn a year of new government 
bonds over the next two or three years, to finance the ballooning gap 
between what the public-sector spends and what it receives in tax 
revenues. [The gap is entirely caused by reckless government spending 
added to completely misdirected and ineffective bail-outs.  We have 
not only to pay for that but all the continuing borrowing that Peston 
outlines- cs[

And the device of authorising the Bank of England to buy up a huge 
proportion of these IOUs has apparently reduced the cost of all that 
borrowing to an astonishing degree.

Which seems a bit bananas, since surely all we're talking about here 
is one arm of the state buying debt issued by another arm of the state.

Surely if markets were rational and efficient, there would be no 
impact on gilt prices, or yields or interest rates at all.

Isn't there a kind of Ricardian equivalence going on here, where 
nothing of economic substance has actually changed?

It seems to me that this policy only works on the basis that markets 
are irrational and short-termist.

All investors apparently see is the volume of Bank of England money 
going into the market that's increasing demand for gilts and driving 
up their price.

In a way, investors are not wrong. These are real purchases.

But what I find slightly odd is that investors don't think through 
what the Bank of England and Treasury are trying to achieve by doing 
this - what a successful outcome might look like.

The point of the Bank of England's exercise is to increase money in 
circulation, to ward off the threat of deflation and to stimulate 
economic activity.

In slightly simplified terms, if the Bank of England today buys a 
load of gilts from pension funds, those pension funds will put the 
money on deposit with our banks (the reason I mention pension funds 
is that the Bank of England tells me it wants the bulk of its 
purchases to come from non-bank financial institutions, such as 
pension funds and insurers).

Two things should then follow. The liquidity of our banks should 
improve - and with any luck they would then lend some of that cash to 
businesses or households, who would then do a bit of useful spending 
or investing.

And the pension funds should use some or all of that cash to buy 
other assets, anything from more gilts, to shares or property - which 
should have a beneficial downward effect on yields and interest rates 
and also a helpful upward effect on asset prices.
Now it's very uncertain how much of that good stuff will actually 
happen.

In an extreme case, where banks and pension funds are terrified of 
taking risks, the money could simply sit in the banks, doing nothing. 
[which is precisely what most investment advisers predict will happen]

And one important reason why it may be naïve to anticipate any 
significant impact on real lending to the real economy is that banks 
are still engaged in the vicious process of reducing their excessive 
exposure to other banks and financial institutions - and the new 
money injected by the Bank of England may be totally absorbed by that 
so-called "deleveraging".

But let's look on the bright side and assume that at some point the 
new money starts to do its job: lending increases, spending 
increases, prices rise, investors' appetite for risk returns.
Now guess what one inescapable consequence of that kind of economic 
recovery would be?

Well, interest rates would rise and the price of gilts would fall.
Here's the funny thing, therefore.

If quantitative easing is a success, the Bank of England will 
inevitably make a loss on the gilts it buys.

How big could that loss be?

Well the Bank of England may buy £100bn of government bonds in the 
coming weeks and months, or possibly even more. And if there were 
then a bit of a rise in inflation, coupled with investors becoming 
keener on purchasing riskier assets (such as equities, property and 
lower-grade corporate debt), well a 30% fall in the price of 
government bonds would not be out of the question.
And that would generate an eye-watering loss for the Bank of £30bn.

Not nice.

There's also a worse case scenario - which is that inflation could 
take off with a vengeance. [Again this is what most City advisers are 
expecting -cs] And in those circumstances, the Bank would probably 
have to dump a load of bonds on the market to drain surplus money 
from the system as quickly as possible.
In those circumstances, goodness knows how substantial the losses 
could turn out to be.

That said, many would see that as a price worth paying, however 
chunky, if it helped to deliver an economic recovery.

But there is a paradox here - which I have already alluded to.
If investors have confidence in what the Bank of England is trying to 
achieve, the price of gilts would not have been rising over the past 
few days - because if Quantitative Easing were to work, demand for 
gilts and the price of gilts would both fall very substantially.

So in a curious way, markets seem to be voting that QE won't work 
(unless you believe that markets are wholly irrational, which may 
well be the correct explanation).
==============
2.What they're not telling you
. Nick Robinson

Spending cuts are coming, whoever wins the next election, however 
deep this recession is, whenever it comes to end. It does not suit 
politicians, however, to tell that stark truth.


The Tories have come the closest - George Osborne has warned that the 
cupboard is bare. However he and the Conservatives don't want to fall 
into a trap which they can see Gordon Brown setting.

The prime minister always says that he wants the election to be a 
choice and not merely a referendum on his government. The Tories 
sense that what he really wants is a referendum on them and their 
spending plans. In other words another election campaign could be 
dominated by debate about Tory cuts. Thus team Cameron are determined 
not to give them the ammunition by spelling out which cuts to public 
spending might be necessary.

Labour in the meantime, behave as if cuts are avoidable but their own 
public spending figures make clear that they are not. The Treasury's 
plans for the next three years show spending rises at a third of the 
rate since they came to power and less than the average in the 
Thatcher years. Aah! But you may say, they are still planning rises 
all be it small one's. However, the figures were produced before the 
depth of the current crisis became clear.

What's more, if schools and hospitals are to be shielded, other 
departments will have to suffer. The Institute of Fiscal Studies 
calculates the total departmental expenditure will be frozen for the 
next three years in real terms. Since costs and demands in those 
departments will not be cut, they will have to be cut elsewhere.
Just one example, the Treasury has already announced that the capital 
budget of the English NHS will be reduced by £1.4bn next year.

All this is not to deny that there is, and will be, an important 
debate between the parties about when to cut spending and by how 
much. The government will no doubt unveil another stimulus in its 
next budget. The Tories will no doubt oppose it. There will also have 
to be a debate on how and when to increase taxes. In other words 
voters will still have to choose. It is however important for 
everyone to be clear just what we're choosing between.
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POLITICS HOME  11.3.09
BBC- 'The World at One' at 13:24
Adam Afriyie: Government have "brought the country to the brink of 
bankruptcy"

Adam Afriyie, shadow Minister for Universities, Innovtion and Skills

Mr Afriyie accused the government of bringing the country "to the 
brink of bankruptcy", and added that financial help for businesses 
through government schemes wasn't arriving.


He said the government have, "brought the country to the brink of 
bankruptcy.

"We've had 12 years of Labour government. If there are problems with 
the regulatory system the government should have dealt with them."

Commenting on schemes designed to help businesses he said, "actually 
nothing has hit the streets. It's great talking about it but it 
hasn't actually arrived."