You are currently browsing the daily archive for November 8th, 2009.
Last week was quite a week in the money merry go round.
On Monday, we had what the City hopes to be the final bail out of Lloyds and RBS costing £38bn, just a week after the Government robbed the private sector banks of their deposits when it offered it’s market leading, 100% backed, 1 year fix of 3.95% gross. I don’t think RBS is out of the woods just yet.
On Tuesday, Australia put up their interest rates again from 3.25% to 3.50%.The likelihood is that the UK will be among the last to put up rates. Together with the likelihood of on-going Quantitative Easing (QE), that will make less people wanting to hold pounds pushing down sterling.
Thursday saw another £25bn added to the QE programme, that’s the Bank of England buying gilts using money from thin air to increase cash assets at the banks which in turn are meant to be loaned out. Evidence suggests not much is being loaned out, but the low gilts yields and low interest rates have meant that to get a decent return, money has gone into risk assets, creating a boom in share prices and a better climate for new share issues/fund raising for flagging PLCs. For big business to start with, it seems that QE is working. It is especially beneficial for the Government. Low gilt yields mean the cost of servicing Goverment debt is kept low – for now.
Had the Bank of England bought private sector debt then borrowing costs might have lowered in that sector, helping small businesses like policy does in the US. Hmmm.
What we can deduce from last week alone is that the UK’s enormous hangover from the debt bubble is still having to be repaired with the loosest monetary policy seen in our lifetimes whereas the likes of Australasia are looking to put the brakes on. This will keep sterling weak, providing a prolonged break for UK tourism and a boost to international investment returns for UK investors.
Oh, and the investment banks have been doing quite okay from all of this. Huge gilt issuances have been profitable for the banks and George Soros recently asserted that “banks are getting … hidden gifts from the government” because they can “borrow at effectively zero and buy 10-year government bonds at 3.5pc”. Hmmm. What with the QE programme of buying gilts from banks, it sounds like a merry go round of debt in the UK to me, further pushing gilt prices up and gilt yields down until someone or something puts a stop to all of this.
