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Is rising inflation looming?

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dealtn
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Re: Is rising inflation looming?

#297820

Postby dealtn » April 4th, 2020, 5:51 pm

TheMotorcycleBoy wrote:
dealtn wrote:Just remember if you are ever on the Serengeti and chased by a lion you don't need to run faster than it to survive, you just need to be able to run faster than somebody else (until the next time).

Sure. By the way if you get the time, can you take a look at this https://www.yardeni.com/pub/peacockfedecbassets.pdf my friend, and take another look at Page 9 please? This page is titled "US Treasuries & Agencies Held by Central Banks". Can you see the redline toward the right of the plot? Check the section equating to now, i.e. beginning of April 2020. It seems unreal. The gradient is stupendous - noticeably steeper than around 2009 and 2010 (must be "easing" regimes!). I can only imagine that the gradient of approximately 89 degrees is equivalent to the recent $2.2Trillion stimulus just signed. Correct?

Also, in the table I shared in my earlier viewtopic.php?p=297636#p297636 i.e.

TheMotorcycleBoy wrote:

I calculated the yield (I think!) that the purchasers actually demanded of these very recent gilt sales (I multiplied the coupon rate by nominal_value/value_actually_raised) and I deduced that the investors requested a lower yield (about 1%) for the 21yr maturities than for the 8 yr ones (about 1.6%). Is that a sign of "inversion?". As in, "Inverted Yield curve?"

many thanks
Matt


Yes it's crazy. But if you want unconventional policy to work it's better to go (very) big, as otherwise you just disappoint the markets, who will always want more. At the moment it's a bit like a surgeon doing whatever to keep a patient alive, worrying about how he recovers is for later.

Haven't checked the yields but yes that is an inverted yield curve. The long end had been distorted for what seems "forever" and inverted in the UK due to "pensions". The very short end is about zero I would imagine, so it actually isn't inverted bar the long end distortion, and the long end is very interesting. Is the inflationary cure in the long term enough to outweigh the deflationary drop in demand in the short, and possibly medium term? We don't know but expect long gilts to be quite volatile, when we get to focussing on the "recovery" stage.

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Re: Is rising inflation looming?

#297859

Postby 1nvest » April 4th, 2020, 8:52 pm

Pension funds have to buy gilts. As demand outpaces supply so prices rise/yields decline - so pension funds have to buy more, pushing prices even higher. For instance to liability match £1 to be paid in 20 years time when yields are -2% requires £1.50 to be invested now. So as its been a feeding on gilts frenzy, high demand for too few gilts, if rates rise even moderately, so pension funds will be required to hold fewer, so they would sell - which lowers the price, increases yields ... so they sell more ...etc. That could all unwind by changes in pension rules, or rising inflation/yields due to lack of faith/trust in the Pound relative to others ... and once that ball was rolling quite large moves could occur over a relatively short period of time (days/week/months).

All currencies have to periodically default. Some totally do so, others do so through more opaque partial means. The UK for instance likes to proclaim that it has 'never defaulted' on its debts - other that is than mixing copper into silver legal tender coins, or seeing inflation of double digits whilst T-Bill yield remained at low/near zero levels, or where inflation was high, gilt yields were high, taxation of gilt interest was high ...etc. 1933 to 1951 for instance had T-Bill yields down at sub 1% levels (at around 0.5% for around half of those years), whilst in some years inflation spiked to 10% to 14% levels. In nearly all those years real yields were negative. Over the total period T-Bills saw their purchase power halve, assuming no costs or taxes were involved. Lenders to the state received back half or less of what they lent to the UK Treasury.

The recent paying of 80% of salaried staff wages is just another form of QE. The issues of the 2008 financial crisis have not been resolved. No bankers served time in prison, regulations have under banking pressure been watered down (more so by the EU where bank stress tests are a joke). If the Pound (Dollar) did not decline as 2 trillion Euros were created to bail out Germany (German bad debts post 2009 were transferred over to the ECB i.e. the risk/liability transferred over to the rest of the Eurozone) then that would have let the Eurozone/ECB off the hook, enabled it to export its problems onto others. Increasingly states are expanding micro-taxation methods towards macro levels. Print/spend money, legal counterfeiting, is a form of devaluation of all other notes in circulation by a very small amount. Treasury sell new gilts, BoE prints money and buys the older gilts, and returns all of the interest back to the treasury. Clearly not the independent body it strives to portray, same as for others. Ideally they're not supposed to buy Corporate debt, let alone stocks, yet the ECB has transitioned from first buying up Treasury debts, then corporate debts and now are even printing to buy up stocks. Pushed to the extreme and there's apparently nothing stopping them buying up all stocks and then houses - a grand nationalisation. All fiat currencies sooner or later fail. Under a gold standard there were finite limits (money was backed by physical gold of which there are finite limits), under fiat there are no limits other than how far it can be pushed before a tipping point is reached and a massive/rapid sell off occurs. For whomever loses confidence first will see the high levels of inflation, perhaps even hyperinflation.

Custodial banks no longer exist in the UK, where you could deposit your money/assets into their safe for safe keeping and for return whenever you asked. Nowadays any deposit you make is a transfer of that money from you onto the banks books, it becomes their money, to do with what they like within regulation limits. You deposit £10,000 and they lend it to Bob to buy a car and the car dealer deposits the £10,000 back into the bank - and they then lend to Carol ...etc. Or they might take the £10,000 and speculate with it wherever. That only works whilst people have the confidence that they'll get 'their' money back whenever they want. If concerns rise and everyone wants their money out of the bank at the same time, a bank run, then the bank fails and seemingly the taxpayers bails the bank out. But where that gameplay has transitioned from bankers playing a heads they win, tails the taxpayer bails them out into a gameplay where entire states/countries are now playing a game of pass the parcel bomb. For one/some, that will sooner or later go bang - it is looming. Whether its for the UK however ??? Brexit and diversifying more broadly than over concentration to the Euro will help if its the Euro that falters/fails. Same for individual investors, if you're diversified across Pounds, US $ ...etc. then a sharply declining Pound would see less losses than being solely in Pounds. And no, the FT100 with its proclaimed 70% of earnings via foreign isn't diversified, as around half of firms hedge their foreign currency exposure in order to better stabilise their earnings in the currency they report, so its more like just 35% foreign. 70/30 FT100 and US S&P500 for instance has around 33% Pound, 30% US$ and the rest in a mixed bag of currencies - better than being excessively exposed to whichever currency might bang.

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Re: Is rising inflation looming?

#297909

Postby colin » April 5th, 2020, 8:36 am

TheMotorcycleBoy wrote:
I can now see that Rishi might be able to raise the promised £330B if he can find buyers for the gilts either at home or abroad. In a sane world this *has* to come from private finance since aren't basically all CBs (central banks) in debt?



The issue-gilts-buy-back-gilts charade, seems exactly that - I think you agree, just money printing in disguise.


https://www.theguardian.com/world/2020/ ... y-expected


https://www.bankofengland.co.uk/markets ... march-2020
ECB's Pandemic Emergency Asset Programme
https://www.ft.com/content/a7496c30-6ab ... 70cff6e4d3
It's not disguised.

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Re: Is rising inflation looming?

#297919

Postby TheMotorcycleBoy » April 5th, 2020, 9:46 am

Thanks for your post, 1nvest,

1nvest wrote:Pension funds have to buy gilts. As demand outpaces supply so prices rise/yields decline - so pension funds have to buy more, pushing prices even higher. For instance to liability match £1 to be paid in 20 years time when yields are -2% requires £1.50 to be invested now. So as its been a feeding on gilts frenzy, high demand for too few gilts, if rates rise even moderately, so pension funds will be required to hold fewer, so they would sell - which lowers the price, increases yields ... so they sell more ...etc. That could all unwind by changes in pension rules, or rising inflation/yields due to lack of faith/trust in the Pound relative to others ... and once that ball was rolling quite large moves could occur over a relatively short period of time (days/week/months).

Interesting stuff. I'm guessing this is what dealtn was referring to in viewtopic.php?p=297820#p297820 re. the long end gilt distortion. Presumably pension funds need to do this in order to feed the hunger for annuities.

All currencies have to periodically default. Some totally do so, others do so through more opaque partial means. The UK for instance likes to proclaim that it has 'never defaulted' on its debts - other that is than mixing copper into silver legal tender coins, or seeing inflation of double digits whilst T-Bill yield remained at low/near zero levels................Lenders to the state received back half or less of what they lent to the UK Treasury.

Sure. I guess a more blatant default was in 1967, when Callaghan lowered the exchange rate from $2.80 to $2.40 per £1. Then effectively to a foreign owner of UK debt they experienced, what to them equated to a 14.3% nominal default.

The recent paying of 80% of salaried staff wages is just another form of QE. The issues of the 2008 financial crisis have not been resolved. No bankers served time in prison, regulations have under banking pressure been watered down (more so by the EU where bank stress tests are a joke). If the Pound (Dollar) did not decline as 2 trillion Euros were created to bail out Germany (German bad debts post 2009 were transferred over to the ECB i.e. the risk/liability transferred over to the rest of the Eurozone)......................Treasury sell new gilts, BoE prints money and buys the older gilts, and returns all of the interest back to the treasury. Clearly not the independent body it strives to portray, same as for others. Ideally they're not supposed to buy Corporate debt, let alone stocks, yet the ECB has transitioned from first buying up Treasury debts, then corporate debts and now are even printing to buy up stocks. Pushed to the extreme and there's apparently nothing stopping them buying up all stocks and then houses - a grand nationalisation. All fiat currencies sooner or later fail. Under a gold standard there were finite limits (money was backed by physical gold of which there are finite limits), under fiat there are no limits other than how far it can be pushed before a tipping point is reached and a massive/rapid sell off occurs. For whomever loses confidence first will see the high levels of inflation, perhaps even hyperinflation.

Yes the BoE link and the FT link (clear your ft.com cookies and google for "avert a eurozone crisis ft", if you aint a subscriber) that colin just posted, this, i.e. QE is now being publicly stated.

To be honest, this is the new normal is it not? In other words it's https://en.wikipedia.org/wiki/Modern_Monetary_Theory

It is important to note that the central bank buys bonds by simply creating money — it is not financed in any way.

"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press
That is: this is the only mechanism which maintains the economy of humanity as it is. We can moan about it as much as we like. But we are (all) currently stuck with it.

Custodial banks no longer exist in the UK, where you could deposit your money/assets into their safe for safe keeping and for return whenever you asked. Nowadays any deposit you make is a transfer of that money from you onto the banks books, it becomes their money, to do with what they like within regulation limits. You deposit £10,000 and they lend it to Bob to buy a car and the car dealer deposits the £10,000 back into the bank - and they then lend to Carol ...etc. Or they might take the £10,000 and speculate with it wherever.

Actually due to the money-multiplier, that £10,000 actually breeds see https://www.intelligenteconomist.com/money-multiplier/. I believe this is why the Govt. tasks itself with "monitoring the growth of the money supply".

And no, the FT100 with its proclaimed 70% of earnings via foreign isn't diversified, as around half of firms hedge their foreign currency exposure in order to better stabilise their earnings in the currency they report, so its more like just 35% foreign. 70/30 FT100 and US S&P500 for instance has around 33% Pound, 30% US$ and the rest in a mixed bag of currencies - better than being excessively exposed to whichever currency might bang.

Hmm.. Very interesting. I must admit I do tend go quiet when folk proclaim "that's ok this one's blah-blah-blah hedged". Aint no such thing as a free lunch.

So back to my OP. The occurance of rising inflation is partially linked to however many plates Rishi Sunak can keep spinning at once. I'm glad he's a clever chap.

Matt

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Re: Is rising inflation looming?

#297923

Postby GoSeigen » April 5th, 2020, 9:51 am

TheMotorcycleBoy wrote:
dealtn wrote:Just remember if you are ever on the Serengeti and chased by a lion you don't need to run faster than it to survive, you just need to be able to run faster than somebody else (until the next time).

Sure. By the way if you get the time, can you take a look at this https://www.yardeni.com/pub/peacockfedecbassets.pdf my friend, and take another look at Page 9 please? This page is titled "US Treasuries & Agencies Held by Central Banks". Can you see the redline toward the right of the plot? Check the section equating to now, i.e. beginning of April 2020. It seems unreal. The gradient is stupendous - noticeably steeper than around 2009 and 2010 (must be "easing" regimes!). I can only imagine that the gradient of approximately 89 degrees is equivalent to the recent $2.2Trillion stimulus just signed. Correct?


Matt, one has to be very cautions of drawing any conclusions from these contextless charts. Here are some problems I see immediately:
1. No log charts. Charts of financial quantities should be plotted on semi-log. If I ever see charts not plotted this way I am immediately sceptical/cautions about conclusions drawn from them.
2. All seem so start in 2007. Misleading because a. this is only 12 years of data when central banks have been working for generations and b. there were some important innovations starting around this time and you don't see the preceding history.
3. Presumably one is looking at monetary policy, but that encompasses commercial banks and other financial intermediaries as well as CBs and leaving out the former gives only a partial picture.
4. Many charts are concerned with money as an asset, and it is but one asset in the asset universe. We need to see what is happening with shares, bonds, property etc to get a fuller picture.

Perhaps you've already taken account of all these things, but I think your reaction above implies maybe not. Sorry I haven't gone round to find the info for you, but in the old days there was a lot more useful stuff in the BoE (quarterly?) Financial Stability reports. If they still issue them look at the latest one and see if it builds a more complete picture.


GS

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Re: Is rising inflation looming?

#297926

Postby GoSeigen » April 5th, 2020, 9:56 am

TheMotorcycleBoy wrote:Thanks for your post, 1nvest,

1nvest wrote:Pension funds have to buy gilts. As demand outpaces supply so prices rise/yields decline - so pension funds have to buy more, pushing prices even higher. For instance to liability match £1 to be paid in 20 years time when yields are -2% requires £1.50 to be invested now. So as its been a feeding on gilts frenzy, high demand for too few gilts, if rates rise even moderately, so pension funds will be required to hold fewer, so they would sell - which lowers the price, increases yields ... so they sell more ...etc. That could all unwind by changes in pension rules, or rising inflation/yields due to lack of faith/trust in the Pound relative to others ... and once that ball was rolling quite large moves could occur over a relatively short period of time (days/week/months).

Interesting stuff. I'm guessing this is what dealtn was referring to in viewtopic.php?p=297820#p297820 re. the long end gilt distortion. Presumably pension funds need to do this in order to feed the hunger for annuities.

This is a mantra that has been parroted for close to two decades now. I wonder if anyone has actually bothered to check whether it has any validity?

On the basis of the above (or the "labour borrowed too much" canard), people have claimed for those two decades that gilts are uninvestable, or even tried to short them. They have been proved completely wrong.

Not making any predictions here, just emphasising the value of treating this sort of statement with scepticism.

GS

EDIT: Oh and BTW both MMT and the mythical "money multiplier" are a crock IMO...

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Re: Is rising inflation looming?

#297954

Postby TheMotorcycleBoy » April 5th, 2020, 11:12 am

GoSeigen wrote:
TheMotorcycleBoy wrote:Thanks for your post, 1nvest,

1nvest wrote:Pension funds have to buy gilts. As demand outpaces supply so prices rise/yields decline - so pension funds have to buy more, pushing prices even higher. For instance to liability match £1 to be paid in 20 years time when yields are -2% requires £1.50 to be invested now. So as its been a feeding on gilts frenzy, high demand for too few gilts, if rates rise even moderately, so pension funds will be required to hold fewer, so they would sell - which lowers the price, increases yields ... so they sell more ...etc. That could all unwind by changes in pension rules, or rising inflation/yields due to lack of faith/trust in the Pound relative to others ... and once that ball was rolling quite large moves could occur over a relatively short period of time (days/week/months).

Interesting stuff. I'm guessing this is what dealtn was referring to in viewtopic.php?p=297820#p297820 re. the long end gilt distortion. Presumably pension funds need to do this in order to feed the hunger for annuities.

This is a mantra that has been parroted for close to two decades now. I wonder if anyone has actually bothered to check whether it has any validity?

On the basis of the above (or the "labour borrowed too much" canard), people have claimed for those two decades that gilts are uninvestable, or even tried to short them. They have been proved completely wrong.

GS: I really do have absolutely no emotions whatsover with regard to gilts.

I just like reading and learning new stuff.

Matt

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Re: Is rising inflation looming?

#297958

Postby TheMotorcycleBoy » April 5th, 2020, 11:17 am

GoSeigen wrote:
TheMotorcycleBoy wrote:
dealtn wrote:Just remember if you are ever on the Serengeti and chased by a lion you don't need to run faster than it to survive, you just need to be able to run faster than somebody else (until the next time).

Sure. By the way if you get the time, can you take a look at this https://www.yardeni.com/pub/peacockfedecbassets.pdf my friend, and take another look at Page 9 please? This page is titled "US Treasuries & Agencies Held by Central Banks". Can you see the redline toward the right of the plot? Check the section equating to now, i.e. beginning of April 2020. It seems unreal. The gradient is stupendous - noticeably steeper than around 2009 and 2010 (must be "easing" regimes!). I can only imagine that the gradient of approximately 89 degrees is equivalent to the recent $2.2Trillion stimulus just signed. Correct?

Matt, one has to be very cautions of drawing any conclusions from these contextless charts. Here are some problems I see immediately:
1. No log charts. Charts of financial quantities should be plotted on semi-log. If I ever see charts not plotted this way I am immediately sceptical/cautions about conclusions drawn from them.....

To be clear. I was merely curious as to if anyone had a thesis on the gradient of that redline close to time=now.

but in the old days there was a lot more useful stuff in the BoE (quarterly?) Financial Stability reports. If they still issue them look at the latest one and see if it builds a more complete picture.

I'm sure there was. What's the relevance regards a question pertaining to "US Treasuries & Agencies Held by Central Banks?"

Matt

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Re: Is rising inflation looming?

#298007

Postby GoSeigen » April 5th, 2020, 2:26 pm

TheMotorcycleBoy wrote:To be clear. I was merely curious as to if anyone had a thesis on the gradient of that redline close to time=now.

What is there to say? The Fed is purchasing $50bn of Treasuries each day, so the growth in its balance sheet is fast. Maybe as fast as 2010/11. In the past few weeks they've bought 4.5% of outstanding US treasuries.

but in the old days there was a lot more useful stuff in the BoE (quarterly?) Financial Stability reports. If they still issue them look at the latest one and see if it builds a more complete picture.

I'm sure there was. What's the relevance regards a question pertaining to "US Treasuries & Agencies Held by Central Banks?"

(r. US Treasuries held by the Fed)

Context. e.g. The Fed's QE is large. The ECB's and BoE's are twice the size relative to their respective economies. Do you know how much each program expands the money supply by? How much larger is the money supply than it was in 2007, for example?


GS

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Re: Is rising inflation looming?

#298086

Postby tikunetih » April 5th, 2020, 7:13 pm

First off, TMB, far too many questions overall for me to answer, plus my knowledge is limited.

But, you seem to be going about this the right way, ie. by referring to primary sources wherever possible rather than relying on 2nd, 3rd or 4th hand reportage, which can often turn out to be written by people who maybe don't know so much and who then supplement that limited knowledge with all their own biases and opinions. Like me for example. Always look stuff up yourself, which is what you seem to be doing.

I think you said you've been investing only a while, so not around for the GFC. The policy responses to that, inc. QE, meant it was helpful for investors to pay more attention to CBs and attempt to get their heads around the "unconventional" policy tools being used.

Just to cover a few things...

TheMotorcycleBoy wrote:This page is titled "US Treasuries & Agencies Held by Central Banks". Can you see the redline toward the right of the plot? Check the section equating to now, i.e. beginning of April 2020. It seems unreal. The gradient is stupendous - noticeably steeper than around 2009 and 2010 (must be "easing" regimes!). I can only imagine that the gradient of approximately 89 degrees is equivalent to the recent $2.2Trillion stimulus just signed. Correct?


Sort of yes. A smorgasbord of tools/programs are being deployed by the The Fed [Commercial Paper Funding Facility (CPFF), Primary Dealer Credit Facility (PDCF), Money Market Mutual, Fund Liquidity Facility (MMLF), Primary Market Corporate Credit Facility (PMCCF), Secondary Market, Corporate Credit Facility (SMCCF), Term Asset-Backed Securities Loan Facility (TALF)] in addition to the stuff they were already doing.

The Fed produces a weekly report called the H.4.1, and you can read those here: https://www.federalreserve.gov/releases/h41/

If you look at the last couple of reports you can see the giant ramp up of assets as these programs kicked into action. That's the balance sheet expansion occurring that you can see on the Yardeni chart.

NB see this for simple background to the Fed's balance sheet (maybe the Fed has a better primer?): https://www.investopedia.com/articles/e ... -sheet.asp

Central bank accounting can appear very unintuitive - like stepping through the looking glass - so again best to refer to primary sources. eg. the BoE explaining things in detail (light reading!):
https://www.bankofengland.co.uk/-/media ... -sheet.pdf


Regarding the recent Gilt auctions. Your maths must be wrong (I'm not a bond math expert - maybe you should be accounting for the capital loss when held to maturity - I don't know) - but your yields are wrong (way too high), and there is no curve inversion at the maturities you're looking at. The BoE publishes fuller results from the auctions/tenders, "Results of Gilt Operations", accessible from this page, which include the actual yields at which the gilts were purchased (ie. no need to calculate yourself):
https://www.dmo.gov.uk/data/gilt-market ... perations/

Here's a quick way to see the UK yield curve:
https://www.investing.com/rates-bonds/u ... ity_to=310

...as you can see, no inversion in the maturities you were looking at.

NB I have no specialist knowledge in this area or most others. I simply look stuff up and try to avoid reading opinionated reportage that can often be heavily biased. This tends to make it easier to see reality as it is rather than how you might have it be, which for an investor seems like a very useful goal!

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Re: Is rising inflation looming?

#298106

Postby Nimrod103 » April 5th, 2020, 9:49 pm

I foresee deflation, not inflation:

https://www.telegraph.co.uk/business/20 ... s-carnage/

The oil price crash and economic carnage triggered by the coronavirus is set to cause record deflation in the eurozone, reviving fears of the region sliding into so-called Japanification.

Capital Economics predicted that inflation would sink to a record low of -1pc in the summer and price falls would stoke tensions at the European Central Bank (ECB). Morgan Stanley said it expected prices to turn negative as soon as next month and remain in deflation territory until August.

David Oxley, an economist at Capital Economics, warned that the demand shock would “dwarf” any upward pressure to inflation caused by disruption to global supply chains.


The UK may have trouble avoiding being sucked into this deflationary black hole.

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Re: Is rising inflation looming?

#298182

Postby Lanark » April 6th, 2020, 10:04 am

Russell Napier makes a good case that the risk of deflation has now passed and all the stimulus spending will ensure we get an inflationary boom.
But then he is writing for Newsweek who don't exactly have a great track record for predicting the markets.
https://moneyweek.com/economy/global-ec ... s-too-much

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Re: Is rising inflation looming?

#298201

Postby TheMotorcycleBoy » April 6th, 2020, 10:44 am

Yes given the reduction of activity I can see a case for deflation too!

My point for the inflationary case, was grounded on that of supply: large numbers of factories being shut. But ppl still having spending money due to the financial easing and payroll provisions furnished by governments.

Matt

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Re: Is rising inflation looming?

#298203

Postby tikunetih » April 6th, 2020, 10:51 am

There are different timeframes to consider.

Negative demand shocks such as we have are at least near-term deflationary.

Following the GFC, the nature of QE (which was predominantly an asset swap, whereby CBs bought mostly long-dated govt bonds from financial institutions who in return ended up with increased reserve deposits at the CBs - and less income than they had previously!) didn't increase the money supply and had limited effects upon the "non-financial" economy, the primary effect being lower-than-otherwise medium/longer-term interest rates and higher asset prices (cheers from investors!).

The policy response to this crisis has been broader, including very large fiscal stimulus and incentivization for banks to lend, so greater transmission mechanisms to the real economy than the post-GFC response, the means to increase money supply and the potential to raise inflation in the medium term.

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Re: Is rising inflation looming?

#298210

Postby dealtn » April 6th, 2020, 11:14 am

Nimrod103 wrote:I foresee deflation, not inflation:

https://www.telegraph.co.uk/business/20 ... s-carnage/

The oil price crash and economic carnage triggered by the coronavirus is set to cause record deflation in the eurozone, reviving fears of the region sliding into so-called Japanification.

Capital Economics predicted that inflation would sink to a record low of -1pc in the summer and price falls would stoke tensions at the European Central Bank (ECB). Morgan Stanley said it expected prices to turn negative as soon as next month and remain in deflation territory until August.

David Oxley, an economist at Capital Economics, warned that the demand shock would “dwarf” any upward pressure to inflation caused by disruption to global supply chains.


The UK may have trouble avoiding being sucked into this deflationary black hole.


That's negative inflation, or disinflation, not necessarily deflation. It might come, of course, but a few months in negative territory, as predicted by Morgan Stanley, aren't sufficient in themselves to be a period of deflation.

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Re: Is rising inflation looming?

#298231

Postby TheMotorcycleBoy » April 6th, 2020, 12:03 pm

tikunetih wrote:Following the GFC, the nature of QE (which was predominantly an asset swap, whereby CBs bought mostly long-dated govt bonds from financial institutions who in return ended up with increased reserve deposits at the CBs - and less income than they had previously!) didn't increase the money supply

I agree with the asset swap part. That is cash for gilts. But given that 1) the cash was electronically created and 2) that gilts don't come under the definition for the monetary M types I very quickly googled for, I'd be inclined to differ and state that the QE following GFC must have increased the money supply.

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Re: Is rising inflation looming?

#298259

Postby tikunetih » April 6th, 2020, 12:41 pm

TheMotorcycleBoy wrote:I agree with the asset swap part. That is cash for gilts. But given that 1) the cash was electronically created and 2) that gilts don't come under the definition for the monetary M types I very quickly googled for, I'd be inclined to differ and state that the QE following GFC must have increased the money supply.


Remember, it's not "cash" being created by the BoE to buy gilts, it's central bank reserves. After the BoE have bought the gilts, the seller (eg. commercial bank) now has commercial bank reserves to the value of the gilts they sold.

Now you're correct - commercial bank reserves do form part of M0 money supply, so the money supply has now technically grown - BUT since banks' lending is capital constrained, not reserve constrained, there is no transmission of this increased money supply to the broader economy. From an inflationary perspective, it might as well never have happened.

The main effect on the commercial bank is that their income's been decreased since the reserves they now own pay less interest than the coupons on the long-dated gilts they sold (although they were likely able to sell the gilts to the BoE at a higher price than they would otherwise have been able to).

The main impact of these QE transactions was on the yield curve, ie. giving CBs the ability to directly adjust (lower) and set expectations for (lower) rates along the curve rather than solely at the short end, which conventional interest rate policy is concerned with.

EDIT: just to add - after the GFC, capital adequacy rules were tightened (stable doors, horse bolted etc); this was a very big deal because the majority of money in the economy is created by commercial banks making loans. All those commercial bank reserves that arose from the banks having sold gilts to the BoE do (did) absolutely nothing to help.

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Re: Is rising inflation looming?

#298279

Postby Nimrod103 » April 6th, 2020, 1:26 pm

dealtn wrote:
Nimrod103 wrote:I foresee deflation, not inflation:

https://www.telegraph.co.uk/business/20 ... s-carnage/

The oil price crash and economic carnage triggered by the coronavirus is set to cause record deflation in the eurozone, reviving fears of the region sliding into so-called Japanification.

Capital Economics predicted that inflation would sink to a record low of -1pc in the summer and price falls would stoke tensions at the European Central Bank (ECB). Morgan Stanley said it expected prices to turn negative as soon as next month and remain in deflation territory until August.

David Oxley, an economist at Capital Economics, warned that the demand shock would “dwarf” any upward pressure to inflation caused by disruption to global supply chains.


The UK may have trouble avoiding being sucked into this deflationary black hole.


That's negative inflation, or disinflation, not necessarily deflation. It might come, of course, but a few months in negative territory, as predicted by Morgan Stanley, aren't sufficient in themselves to be a period of deflation.


AIUI disinflation is just a reduction in the rate of inflation. It could be 5% to 3% or 1% to -1%. But Capital economics are predicting actual deflation of -1% over several months. So actual falls in prices, just like we have seen in the oil price.

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Re: Is rising inflation looming?

#298286

Postby dealtn » April 6th, 2020, 1:42 pm

tikunetih wrote:
The main effect on the commercial bank is that their income's been decreased since the reserves they now own pay less interest than the coupons on the long-dated gilts they sold (although they were likely able to sell the gilts to the BoE at a higher price than they would otherwise have been able to).

The main impact of these QE transactions was on the yield curve, ie. giving CBs the ability to directly adjust (lower) and set expectations for (lower) rates along the curve rather than solely at the short end, which conventional interest rate policy is concerned with.



To be clear the commercial banks are not selling Gilts to the Bank of England, other than in a transmission sense.

The BOE Asset Purchase facility allows the Central Bank, via its agent the BOE Asset Purchase Fund, to buy Gilts. This agent only buys them from approved counterparties. This isn't strictly true that these are the GEMMs, but in a sense it is the same process whereby a different agent, the DMO issues Gilts and only does so via transactions in the primary market with GEMMS (but in reverse).

The "GEMMs" in turn are buying the Gilts they offer to sell to the BOE in the secondary market from a variety of "customers", Pension Funds, Central Banks, Hedge Funds etc. The BOE credits the "GEMMs" with "cash". The "cash" here isn't bank notes, but a settlement credit to their bank account. In turn the settlement system ensures that the "GEMMs" account credit is used to credit those that sold the Gilts to the GEMMs etc. So the GEMMs are sitting in the middle here. Most GEMMs are themselves commercial banks, but it is a very tiny proportion of Gilt transacted here that were owned by the commercial banks.

So The Central Bank has purchased an asset, the Gilt, and its balance sheet has to also increase the liability side, which is "reserves". The sellers of gilts have at this stage sold an asset, and now have a higher bank account balance as an asset instead. They might choose to use this increased balance to purchase something else, such as an equity, or a foreign bond, or property, or.... If they choose to do so this "bank account balance" is used, and in turn creates an increased "bank account balance" for someone else (the seller of the alternative asset).

Now all of these "bank account balances" sit at commercial banks, and if that commercial bank doesn't have a reserve arrangement with the Central Bank, it will have a bank account with another, that does. So ultimately all this increased "bank account balances" accumulate at commercial banks reserve accounts with the Central Bank.

What is important here is the myth that the Central Bank is buying Gilts from commercial banks who in turn deposit the "cash" created back at the Central Bank, so "nothing" is created, and QE doesn't work as it's a circular transaction. There is a whole transmission system, with potential real assets, real cash, real multiplier effects along the way.

QE worked (works?) but the magnitude of it, and the lack of inflation created, is hard to quantify, there being no observable control experiment in parallel to know what would have happened without it. The thinking is that those selling Gilts, swapped them in practice for alternative financial assets. Prices of Gilts went up, but the "proceeds" went into other financial assets which in turn had price rises. However the real world transmission mechanism of this "wealth effect" is weak. The main sellers, pension funds etc. didn't pass on this newly created wealth since their payments stretch way into the future. Individuals whose share portfolios benefitted didn't spend this increased wealth in the real economy, or did so only partially.

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Re: Is rising inflation looming?

#298294

Postby dealtn » April 6th, 2020, 2:01 pm

Nimrod103 wrote:
AIUI disinflation is just a reduction in the rate of inflation. It could be 5% to 3% or 1% to -1%. But Capital economics are predicting actual deflation of -1% over several months. So actual falls in prices, just like we have seen in the oil price.


Without reading their piece (which I used to get), or Morgan Stanley's (which I never thought much of) I wouldn't know. They may, both be predicting falling prices, but if that is just for a few months (August?) and not a persistent general fall in prices and aggregate demand in the longer term, then it isn't the kind of "deflation" that economists worry about. It maybe this is semantics about language.

If they are indeed predicting "deflation", that is interesting. But absent their research I can't really comment on it, and I wouldn't trust a journalist's interpretation of their research packaged into a newspaper article I'm afraid.


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