Interest rate cut

[stripy7]

berty37 said:

...the real last resort is what is termed 'helicopter money'. This is where literally an amount of money is dropped into each persons Bank account thinking they will all go out and spend it and lift businesses, inflation everything.

Been done already, PPI compensation

[berty37]

fblm said:

berty37 said:

...Reducing interest rates...reduces GBP denominated assets...

Thats not really correct. Anything that pays a future stream of cashflows (fixed income cashflows/dividends etc...) that are discounted at a lower rate will likely be worth more. Gilts being the obvious example. It might be correct to say that the value of GBP denominated assets will fall when valued in a foreign currency like USD but that depends how much the fx moves relative to interest rates.

Fair point on that. So what about when the currency has come off vs others and Fixed income like Govt Bonds are also yielding negative rates - I believe the 2yr Gilt is already negative, the 10yr way below 1% and prob heading negative like the German AAA Bund - do you not get stuffed with the weaker currency and effectively having to pay the Central Bank to hold that bond?

[sidicks]

berty37 said:

Fair point on that. So what about when the currency has come off vs others and Fixed income like Govt Bonds are also yielding negative rates - I believe the 2yr Gilt is already negative, the 10yr way below 1% and prob heading negative like the German AAA Bund - do you not get stuffed with the weaker currency and effectively having to pay the Central Bank to hold that bond?

2-year gilt index at 0.155%
10-year at 0.859%

[anonymous-user]

berty37 said:

fblm said:

berty37 said:

...Reducing interest rates...reduces GBP denominated assets...

Thats not really correct. Anything that pays a future stream of cashflows (fixed income cashflows/dividends etc...) that are discounted at a lower rate will likely be worth more. Gilts being the obvious example. It might be correct to say that the value of GBP denominated assets will fall when valued in a foreign currency like USD but that depends how much the fx moves relative to interest rates.

Fair point on that. So what about when the currency has come off vs others and Fixed income like Govt Bonds are also yielding negative rates - I believe the 2yr Gilt is already negative, the 10yr way below 1% and prob heading negative like the German AAA Bund - do you not get stuffed with the weaker currency and effectively having to pay the Central Bank to hold that bond?

OK apologies if you already know this; Government bonds, mostly, pay a fixed rate of interest. Eg. UK 10 year paying 2%. As this is higher than the prevailing market yield which is 0.85%, the bond is effectively paying too much interest so trades, today, well over £110 (for a £100 bond). What this means is that as market yields FALL, for example when Carney says he's going to cut rates, the price or value of the bond paying a fixed rate goes UP.

So to answer your question; it depends when you buy the bond. If you owned a bond a month ago it pays a fixed rate of interest based on the face value of the bond. Today it pays the exact same amount of interest. The difference is; that stream of future interest payments is now worth more because the prevailing market rates are lower. The value of your bond has gone up. (Bad economic news is usually met by trading floors with a groan and by bond traders with a cheer!) Now if you buy a 100Eur 5 Year 0% Coupon today for 103Eur your effective yield is negative (-0.57%) and you are paying ze fatherland to borrow your money. Doh. Thats your look out. Yields down; price up.

The currency issue is seperate, and opposite to bonds. As a very vague rule the currency becomes worth less as rates go down but it is not a mathematical rule like bonds.

[markcoznottz]

Jockman said:

sidicks said:

Jockman said:

I would not necessarily be wishing to be buying an Annuity at this moment in time

At least people don't have to anymore.

DB pension schemes are going to be looking decidedly worse off at the moment though.

QE wrecked annuities didn't it? Re the PPI being a form of helicopter money, I suppose it was in a limited form. The government has not really got a clue what to replace the high credit era, which stalled 2008, with. PPI and payday loans can't really get things moving, zirp supposedly makes people spend, but it can't stop asset bubbles. Astonishingly the government spent nearly all the QE on itself! Not forgetting funding for lending on its banker mates, same old.

[sidicks]

markcoznottz said:

QE wrecked annuities didn't it? Re the PPI being a form of helicopter money, I suppose it was in a limited form. The government has not really got a clue what to replace the high credit era, which stalled 2008, with. PPI and payday loans can't really get things moving, zirp supposedly makes people spend, but it can't stop asset bubbles. Astonishingly the government spent nearly all the QE on itself! Not forgetting funding for lending on its banker mates, same old.

Please explain;
QE involved the BoE buying government debt from investors (pension funds, insurance companies) Over the period of QE, banks were net purchasers of government bonds...

Edited by sidicks on Friday 1st July 18:10

[berty37]

Not entirely true Sid. Put into google credit Suisse gilt trader. He deliberately pushed the price of a bond for the Bank's own book (as a gilt edged market maker or GEMM) knowing it was one of the bonds the BOE was going to purchase and accounted for a sustantial holding of that bond until he was shopped by fellow gilt traders and the BOE decided that was not one of the bonds they would purchase. Causing a fairly substantial loss for Credit Suisse and his career being finished.

[sidicks]

berty37 said:

Not entirely true Sid. Put into google credit Suisse gilt trader. He deliberately pushed the price of a bond for the Bank's own book (as a gilt edged market maker or GEMM) knowing it was one of the bonds the BOE was going to purchase and accounted for a sustantial holding of that bond until he was shopped by fellow gilt traders and the BOE decided that was not one of the bonds they would purchase. Causing a fairly substantial loss for Credit Suisse and his career being finished.

I'm not familiar with that case, thanks.

Having said that, the BoE had previously outlined what type of bonds they would buy (conventional between x years and y years) so the price of all those bonds rose.

Banks were new buyers (for Solvency reasons) and hence 'suffered' from buying at higher prices following QE. Some people seem to believe that QE means the BoE giving money to banks...

[markcoznottz]

sidicks said:

markcoznottz said:

QE wrecked annuities didn't it? Re the PPI being a form of helicopter money, I suppose it was in a limited form. The government has not really got a clue what to replace the high credit era, which stalled 2008, with. PPI and payday loans can't really get things moving, zirp supposedly makes people spend, but it can't stop asset bubbles. Astonishingly the government spent nearly all the QE on itself! Not forgetting funding for lending on its banker mates, same old.

Please explain;
QE involved the BoE buying government debt from investors (pension funds, insurance companies) Over the period of QE, banks were net purchasers of government bonds...

Edited by sidicks on Friday 1st July 18:10

Hardly any of the £375 billion of new money created by the Bank of England went to bail out commercial banks, and nor was that its purpose. Almost all of it went to bail out the government, although Osborne did not really need the second lot of £175 billion anything like as much as Darling needed the first £200 billion.

[sidicks]

markcoznottz said:

Hardly any of the £375 billion of new money created by the Bank of England went to bail out commercial banks, and nor was that its purpose.

Unless I;m missing something obvious that's basically what I just said...

markcoznottz said:

Almost all of it went to bail out the government, although Osborne did not really need the second lot of £175 billion anything like as much as Darling needed the first £200 billion.

In what way do you mean?

Edited by sidicks on Friday 1st July 20:31

[markcoznottz]

This is old news but heavy reading, no doubt about it, government benefits the most from qe, at least until another crisis comes along..,,

http://johnredwoodsdiary.com/2015/04/26/quantitati...

[sidicks]

markcoznottz said:

This is old news but heavy reading, no doubt about it, government benefits the most from qe, at least until another crisis comes along..,,

http://johnredwoodsdiary.com/2015/04/26/quantitati...

I don't dispute that they benefit (from lower funding costs), i'm just not sure they are a bigger beneficiary than those who were able to benefit from selling gilts at inflated prices and then benefit from a rise in the price of risk assets!

[turbobloke]

'FTSE 100 has best week since 2011' as Osborne ditches plans to clear the deficit by 2020.

[Steffan]

turbobloke said:

'FTSE 100 has best week since 2011' as Osborne ditches plans to clear the deficit by 2020.

Good to see the recovery of the FTSE!!

Now is the time for some fresh thinking in the UK to acheve sustained economic growth!

As I think we have all learned from our personal experience of life, life is a very peculiar game. As my favourite Banker, who lent me a hell of a lot, in fact more than I needed, over the years, always reminded me when we met, that, "most bsinessmans dreams of breeding Swans turned out to be Geese, if you were lucky and Ducks, if you were not". Sensible apprach I think. he lent widely and never did a bad deal for the Bank!

I have become increasingly concerned over the last few years that the continued Austerity program offered by the government would never create the conditions necessary to foster economic growth and expansion within the UK. Continually cutting the most powerful driving force, government spending, that might result in increased economic growth, if invested effectively in suitable projects capable of making a return, has not produced the resultswe were all hoping for in the UK's economy. Growth is needed given the seriously altered circumstances we now face. I have become less and less enamoured of both Cameron and Osborne who I would prefer sought alternative employment. One of them is of course going and I sincerely, hope that the other does pretty quickly?

Care must always be taken when suggesting more government sending. So many champagne socialists have seen this as the way to an easy life. It is not, it can never be, and must therefore always be very carefully controlled. But in the circumstances that the UK now finds itself, economic growth is critical. I do think this needs serious informed consideration. Interest rate cuts are a tricky tool especially when the base rate is already 0.5%.!

I am deeply suspicious of Negative interest rates and I fear for the monetary system if we get into that very risky game! But I do think that the time as come to seriously explore how bet the UK can drive the prospects of business and economic growth forward?

[BlackLabel]

turbobloke said:

'FTSE 100 has best week since 2011' as Osborne ditches plans to clear the deficit by 2020.

He was never going to meet that target anyway, In fact this will go down as the only deficit prediction Mystic George gets correct.

Edited by BlackLabel on Sunday 3rd July 12:22

[Tonberry]

https://www.youtube.com/watch?v=OyapOtD4msY