Hi GS,
Apologies for my tardiness. Day job gets in the way.
GoSeigen wrote:P.S. If you wish to discuss about entities lending, as above, could I invite you to define who is lending, and to whom, and what the nature of that lending agreement is? I don't think we've agreed yet what it means.
In modern days, i.e. with commercial banks, the bank is the lender and the borrower, and customers (you and I) are savers and borrowers. In the olden days without banks presumably people were broadly speaking either lender/savers or borrowers.
The "entities" as you call them are you and I.
Agree.
Why do you hold money? Why do I hold money? Because we value it for its particular properties and uses. e.g. 1. no-one has a claim on you when you hold money 2. money is instantly exchangeable for goods, services or other assets 3. its value is defended by the central bank which has shown an extraordinary determination to prevent inflation 4. it is resistant to the zero bound (can be kept under the mattress), etc.
The way you argue it here it would appear to have some value. I agree with all this.
So how much do we value this money? Would we like to have 5% interest? Sure, but no bank is offering that now. The best we can get is maybe 1%. Yet we still are satisfied to hold money balances (or cash) though we receive practically no income from it. The reason is that the other benefits from holding the money are so great that we don't require an income. Thus the bold quote above about sentiment is exactly backwards. Before, we would hold money balances if we were offered 5%. Now we will hold those balances even receiving no interest.
To be completely honest with you, GS, you would've never have made Mel and I's acquaintance had it not been for the drastic decline in interest rates post the GFC. Seriously! I'm not just saying this to try to win a point. From 2000-2007 we would either i) put spare money in "best saving account" we could find or ii) pay off the mortgage. From 2010-2013 our money was tighter (2 house moves and my broken arm incident, and brief redundancy being main causes). From 2013 we bought our current house and I spent a few years putting £££ into repairs. From 2015 we started looking again for how to save our money. With despair! Around about 2016-2018, my Dad (who's owned HYP type shares since at least the 90s) taught us about the "Stocks and Shares ISA". And in Mar 2018 me and Mel bought our first shares. Motivated by 0 to very low savers rates.
When the central banks said "we are dropping our interest rates" some pensioner savers grumbled a bit but there was no real dissent at all.
No real dissent - correct. But one would need to survey some serious statistics to see whether (various ages of) people have moved from keeping any spare money in a saver account (bank or buildsoc.) into stocks, shares and "funds"[*].
Then the central banks said "Hey we'll issue a load more of this stuff and swap it for the government bonds you hold" and they had no shortage of buyers, even though they offered practically no interest.
But the organisations who "took the money" presumably made a large capital gain from the gilt sales and were suddenly liquid again. And indeed had more liquidity to i) buy more financial market instruments and ii) to lend this money at higher rates, e.g. (see
http://www.keystonemortgages.co.uk/interestrates.php for mortgage vs base rates).
This is not rocket science, though a bit confusing to get one's head around. Every asset whose yield falls experiences a price rise. (Remember, yields move opposite to prices?) Money's actual price can't rise because it is fixed, but you can think of the price as notionally rising if its future cashflows (therefore yield) fall. There are other ways to understand its value rising, but I won't extend the post.
I do understand this bit - i.e. yields vs prices. But I struggle to square the circle as to why post 2007 the bank won't give me anything interest for me to lend them money for them to re lend that money to borrowers. In my brain I keep coming back to them, somehow having more money supplied so private savers' money (i.e. mine) is less valuable to them.
Another interesting comparison to make, is (I struggled to find good data in a hurry, day job, etc), is to compare the value of our currency (which had QE) against another (which presumably did not) e.g. the chinese currency.
This
shows a small green graph which confusing has "monthly change" written above it. If you click the green graph you'll see the chinese curr VS £ from 1995-2016. There is a huge drop in £ relative value between 2007 and 2008.
Here's my definitions: Either, 1. in my earlier post I identified the bank as borrower, the deposit holder as lender and the nature of lending being a money balance, i.e. usually a variable interest demand deposit account or a (short) term deposit account. Alternatively, 2. if talking about Base Money, then the CB is the borrower, the reserve account holder (usually a financial corporation) is the lender and the lending agreement is a reserves account, again with a variable rate of interest or perhaps no interest. If you mean some lending other than these then as I say you need to define it.
When you say CB is that the central bank or commercial bank?
Personally I don't identify the (commercial, e.g. Lloyds) banks as a borrower (or lender) as such but rather as a profit making organisation, making it's business to trade in money in both directions, i.e. lending and borrowing.
Gotta to go, hope it makes sense
Matt
[*] I have several mates either shy of direct shares, or had fingers burnt by dot com, who now don't save in savers accounts, but buy funds.