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Capital Markets White Papers

Quantitative Easing and the Yield on the Ten Year Gilt

John A. Morrison, Asymptotix

Table of contents

Executive summary

  • 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 LabourGovernment. 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 beginsto 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 settledthen they factor into rates not only at the short end.

  • It’s a one-way bet rates for now, the up-escalator!

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White Paper details

Original publication date:
March 2011
URL:
www.asymptotix.eu

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