Quantitative Easing and the Yield on the 10 Year Gilt
UPDATE 6th August 2012,
this is really an announcement page and reference to QFinance;
we keep an updated page on this paper,
where DISQUS commentary is available & we can post on-going references
.............so you are probably better off THERE
Asymptotix and QFINANCE produced a White Paper on Quantitative Easing and the Yield on the 10 Year Gilt.
For those of you following this laughably termed “exit strategy” from QE being “worked out” by those pointy heads following George around the drawing rooms of number 11; “wet finger in the air” more like & every single morning its different, I’ll bet! Anyway, current trajectory appears to be to get the Governor all confussed and “hot and bothered”; blame the inevitable rate rises ahead on him and then dump him out on Threadneedle Street (roll him down the steps of Bank Tube), blaming it all on him! Whilst at the same time using the Treasury’s now almost unlimited muscle in world markets (nothing else is paying in CMs!) to tinker with the yield curve at the long end on the (flimsy) theoretical basis that (such as it is) the only way out of Crowded Out markets must be to alter the signalling on the yields wire hoping for a re-shuffle!!
So far all HMT seem to have got is inflation; insane equity markets and commodity prices noone could afford! Oh Yes and the Big Society; extrapolating from IBM’s ‘Do More with Less’ to ‘Do everything for nothing’.
Actually the strategy or is it more of a tactic (?) being pursued in the Treasury (and to an extent the Bank) is ‘once painted into a corner simply pull any lever you can reach’; or at least that’s how it seems to appear to a number of commentators. I mean just look at that nutty position, now, in regard to the RBS and LBG equity – the lock-in to expected issue price ‘thing’; both stocks have now become game-theoretic synthetic layered options. They are as exotic as a x-dresser at a dinner party, right?
The rate of interest has a pivotal role across the economy, in a sense it is the link variable between the Real and the Monetary systems.
In that role it becomes some discount function of Productivity; itself being a measure of ‘capital performance’. When its wearing that hat, its not the current base rate you should be looking at it’s the 10Y, the yield on the 10Y.
There are two consequences of any form of Central Authority activity in Financial Markets (including QE); the first being “Round Tripping”; and the second is “Crowding Out”. The latter is by far the more serious. The important issue is whether or not QE is normal or not.
Between 1979 and 1983 it took the strict Monetary Control policies of the Thatcher Government to bring under control; to tame if you will, that monetary tsunami which was exploding through the macroeconomic system as a result of the crazy parallel universe Neo-Keynesian “multipliers for all” policies of the previous Labour Government. In a way exactly as it is today.
In effect HMT are facing into a similar set of problems as they were in 1979; a wall of crowded out, government generated, financial market assets a lot of short duration but not all. Of which they have no idea of when and where this bundle of ‘marked money’ will burst out of the world Capital Market system and actually make an impact on the real economy.
So, at some point this supply of money is going to break through into the UK economy. It will be recognised in the form of growing Money Supply numbers, the pound begins to behave like the dollar; exactly the same place as Thatcher and Co. found themselves in 1979. “Bank Rate’ (BR) got to 16% (I think it made 17) to choke off that Money in the longer run and then rates settled at an equilibrium 10 or so. Oil Prices rising, commodities, crucially generalized as ‘Inflation Expectations’; if these become settled then they factor into rates not only at the short end.
It’s a one-way bet rates for now, the up-escalator!