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the elephant in the room

including Budgets
BT63
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Re: the elephant in the room

#479006

Postby BT63 » February 6th, 2022, 6:14 pm

seldomrite wrote:Quantitative tightening.....
Will it ever happen on a significant scale? At a time when government debt is balooning?


QT won't happen on a significant scale for a very long time, if ever.
The financial system is so addicted to QE that it will not withstand QT.

The Fed has merely been saying they'll start putting rates up next month and maybe some QT and that has been enough to cause the S&P500 to flirt with reaching an official bear market in January alone!
A similar 'Taper Tantrum' occurred a few years ago when the Fed tried raising rates and QT.

Central banks will talk tough but drag their feet.

Lootman
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Re: the elephant in the room

#479008

Postby Lootman » February 6th, 2022, 6:25 pm

BT63 wrote:
seldomrite wrote:Quantitative tightening.....

Will it ever happen on a significant scale? At a time when government debt is balooning?

QT won't happen on a significant scale for a very long time, if ever.

The financial system is so addicted to QE that it will not withstand QT.

The Fed has merely been saying they'll start putting rates up next month and maybe some QT and that has been enough to cause the S&P500 to flirt with reaching an official bear market in January alone!

A similar 'Taper Tantrum' occurred a few years ago when the Fed tried raising rates and QT.

Central banks will talk tough but drag their feet.

Yes, it was late 2018 as I recall, and the Fed quickly engineered a 180.

The benign rate environment has been so kind to equities that the resultant feeling of wealth by ordinary investors is a big part of what keeps the economy ticking over. So not only would aggressive rate increases skewer equities, but the resultant loss of confidence and spending power will damage the real economy as well.

So might as well keep things as they are. :D

gryffron
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Re: the elephant in the room

#479010

Postby gryffron » February 6th, 2022, 6:45 pm

BT63 wrote:The Fed has merely been saying they'll start putting rates up next month and maybe some QT and that has been enough to cause the S&P500 to flirt with reaching an official bear market in January alone!
A similar 'Taper Tantrum' occurred a few years ago when the Fed tried raising rates and QT.

If the fed can drive the fiscal effects they want just by talking about it, then surely that is a success ;)

Gryff

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Re: the elephant in the room

#479014

Postby NotSure » February 6th, 2022, 7:50 pm

seldomrite wrote:Quantitative tightening involves the government paying the principal of a bond back to the central bank and then the central bank removing the money from the system.

Will it ever happen on a significant scale? At a time when government debt is balooning?

Call me cynical, but I have my doubts...


I too have doubts. The sequence seems to be:

1. Threaten to taper QE
2. Taper QE
3. Threathen to cease QE
4. Cease QE
5. Threathen to QT
6. Begin to QT

So far 1. alone has been enough to hit QE/IR sensitive-asset values and caused a 'tantrum' and retreat.

But hey - you're seldomrite and I'm NotSure, so let's see what happens ;)

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Re: the elephant in the room

#479015

Postby NotSure » February 6th, 2022, 7:53 pm

gryffron wrote:If the fed can drive the fiscal effects they want just by talking about it, then surely that is a success ;)

Gryff


:)

Alas, the effect they want is to suppress inflation (of the CPI/RPI sort) without panicing markets. So far little evidence of the former yet much of the latter.

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Re: the elephant in the room

#479019

Postby Mike4 » February 6th, 2022, 8:06 pm

NotSure wrote:
seldomrite wrote:Quantitative tightening involves the government paying the principal of a bond back to the central bank and then the central bank removing the money from the system.

Will it ever happen on a significant scale? At a time when government debt is balooning?

Call me cynical, but I have my doubts...


I too have doubts. The sequence seems to be:

1. Threaten to taper QE
2. Taper QE
3. Threathen to cease QE
4. Cease QE
5. Threathen to QT
6. Begin to QT

So far 1. alone has been enough to hit QE/IR sensitive-asset values and caused a 'tantrum' and retreat.

But hey - you're seldomrite and I'm NotSure, so let's see what happens ;)


Exactly.

Just wait until rising base rates feed through into falling asset prices, in particular house prices and negative equity, then Boris (or whoever is in No.10 in the run up to next election) won't be able to take the brakes off fast enough. So we'll have rampant inflation and a govt scared to do much about it, with predictable results.

House prices holding up, rampant inflation eroding govt debt, what's not to like!

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Re: the elephant in the room

#479118

Postby seldomrite » February 7th, 2022, 12:55 pm

What strikes me is the lack of accountability of central banks members, and their arrogance in omitting any reference to QE in their talks about inflation.

And then you have Andrew Bailey telling people not to ask for large pay rises - it may cause inflation!

At least you can punish politicians by voting them out...

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Re: the elephant in the room

#479126

Postby NeilW » February 7th, 2022, 1:24 pm

seldomrite wrote:We agonise about 0.25% interest raises or about geopolitical factors leading to gas price increases and yet the trillions of dollars/euros/pounds created out of nothing by the central banks in the past few years are politely glossed over.


All very straightforward once you understand the accounting linkages.

It is currently as follows:

HM Treasury
Assets: Net Financial Assets 100, Liabilities: Gilts held by APF 100

Asset Purchase Facility (APF)
Assets: Gilts from HM Treasury 100, Liabilities: Loan from BoE 100

BoE
Assets: Loan to APF 100, Liabilities: Commercial Bank Reserves 100

Commercial Bank
Assets: Bank Reserves with BoE 100, Bank Deposit for punter 100

Punter
Assets: Bank Deposit 100, Liabilities: Net Financial Assets 100

Once you 'unwind' QE you get the following:

HM Treasury
Assets: Net Financial Assets 100, Liabilities: Gilts held by Commercial Bank 100

Commercial Bank
Assets: Gilts from HM Treasury 100, Bank Deposit for punter 100

Punter
Assets: Bank Deposit 100, Liabilities Net Financial Assets 100


The net result of all this is that Gilt coupons currently paid to the APF and returned to HM Treasury less the Bank Rate paid on reserves will instead by paid in full to the commercial bank holding the asset. And that's it.

What I've yet to see a sensible explanation of how giving more free money from Treasury to commercial banks is going to stop inflation. We gave them collectively an extra £2.25bn over the next year last week. Unwinding QE just gives them more. How giving entities more money is supposed to reduce demand for scarce supply is one of those great mysteries of belief over reality.

NeilW

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Re: the elephant in the room

#479206

Postby seldomrite » February 7th, 2022, 9:15 pm

HM Treasury
Assets: Net Financial Assets 100, Liabilities: Gilts held by APF 100

Asset Purchase Facility (APF)
Assets: Gilts from HM Treasury 100, Liabilities: Loan from BoE 100

BoE
Assets: Loan to APF 100, Liabilities: Commercial Bank Reserves 100

Commercial Bank
Assets: Bank Reserves with BoE 100, Bank Deposit for punter 100

Punter
Assets: Bank Deposit 100, Liabilities: Net Financial Assets 100

Once you 'unwind' QE you get the following:

HM Treasury
Assets: Net Financial Assets 100, Liabilities: Gilts held by Commercial Bank 100

Commercial Bank
Assets: Gilts from HM Treasury 100, Bank Deposit for punter 100

Punter
Assets: Bank Deposit 100, Liabilities Net Financial Assets 100


Commercial bank does not need to be involved for QT to take place. Once the bond expires, APF gets the principal of the gilt (100 in your example) from the Treasury and that amount of money goes back to BoE, where it gets electronically destroyed (same as it was electronically created).


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