dealtn wrote:
When was the last time the BoE and Treasury didn't permit it? The sterling money market is, and I continue to believe will continue to be the rate setter.
They haven't been permitting it for ten years - hence QE. And of course base rate setting artificially maintains the Bank Rate above zero, which is where it would drop to naturally in a pure market under excess reserves (since banks can't get rid of them in aggregate).
April 9th last year on the three month bill is the best example of expectational control of rates. But the whole of QE over the last decade here and three decades in Japan is the same. It's yield curve management. The central banks will drain bond issues until the price goes up to where they want it, which forces the yield down - because everybody ends up with floating rate debt (ie Sterling) they can't get rid off in aggregate and they fight each other for what is left since the alternative is 0.1% overnight.
QE is setting interest rates higher up the yield curve than overnight.
You trust a government, any government, to understand when there is spare capacity, when that is exhausted, when economically it is better, even if not politically, to act in such fashion?
You don't need to trust them, and neither do you need to trust unelected wonks in a central bank ivory tower who have proved just as useless. You can do it all automatically. If the government is purchasing off the floor then they won't be able to buy anything if the private sector wants it, since the private sector will just pay more for it and the government won't up their bid - because Parliament has banned them from doing so.
It's entirely driven by the current desires of the private sector, but guarantees that nothing remains unused - particularly the unemployed. That leads to greater GDP and greater output for any given interest rate. More profit, more investment, more automation (because "what about the jobs" no longer matters, ie no more bailouts of firms that should die), more productivity and a greater standard of living. Much better than debt millstones around people's necks.
It's just an automatic stabiliser system, and those have been in place for the thick end of a century now. If government wants anything else then it has to stop it being bought - which means raising the necessary taxes to remove the private sector's purchasing capacity. And justifying that to the voting population.
If the private sector doesn't like the amount government is spending then it can control that itself. Just bid it away from government and spending will automatically reduce.
The functional rule is far more direct mechanism for controlling government spending than messing around setting interest rates.
And that then leads to the Sterling exchange rate. For those who don't believe in functionalism to leave, those who do have to come in. And the latter are the ones with the money, particularly in the Silicon Valley fraternity. Why would they not pick up British assets while they are going cheap, when they know there is going to be a demand boom due to the stabilisers?
That's just a market operating. The old guard with their out of date beliefs lose money, and the new people who understand how stocks and flows work make money. It's just a transfer from the old to the young - as needs to happen.
NeilW