Eurozone QE would be catastrophic for outside investors.

Discussion in 'Economics' started by morganist, Jan 14, 2012.

  1. There has been a lot of talk about the consequences of QE on a domestic economy. However I think there is a devasting consequence to foreign investors too. If the Euro did QE or if the states do it individually if the union fails, the investment made in the countries from outside will be damaged as much as a default.

    The value of the currency would be weakened when the QE took place reducing the value of the currency against other currencies. If for example the investment came from the US and the Euro was devalued by QE the amount of dollars you could buy with the Euro's which were owed would have diminished. The process of QE to payoff debts will have as damaging an effect as a flat out default by the effect the domestic currency devaluation would have on the exchange rate.

    In short not only is the purchasing power of the domestic economy diminished but the return foreigner investor will receive is too. Not only would QE do enromous damage to the Euro but the countries who lent money there will be damaged.
  2. I'm probably wrong on this but the money is just sitting in an account somehwere boosting capital reserves. Merely a function of accounting and consequently "Ceteris paribus".
  3. maybe money just don't exist all?

    Fed bought 1T$ bonds from banks and banks bought those 1T$ debt from the government and government spent those money and injected 1T$ fresh new money into the economy which boosted oil from $30 in 2008 to $100 in 2011 and gold from $700 to $1600

    so is it just accounting?
  4. So they should take the kind of hit like Greece bondholders may take? Typically they're labeled as 'risk free'. However, they're becoming anything but that.

    They need to stabilize bonds. That's the key. Investors are too scared to take the risk. Thus bond prices continue to make that region unstable.

    ECB needs to back them in a similar way the US did.
  5. I guess that's why foreign investors have been buying record amounts of UK gilts? The consequences of BoE's QE have been so devastating to those foreign investors they just can't stop buying and gilts can't stop rallying...

    Please, morganist, stop this rubbish.
  6. No the consequences of QE have not kicked in yet. Also you are stating two things. One is QE for the sake of propping up demand, as seen in the UK. The other is QE for the sake off paying of debt. The difference being that when debt is paid off there is a transfer to another country which requires a purchase of the said countries currency. This is the point I am making, if the QE is done to pay off the debt (not support artificial demand) then the currency of another nation has to be purchased. If the number of currency units is increased without an increase in output, which is the case in this scenario, then the number of currency units that can be bought in the creditor nation to pay back debts is diminished by the level of QE. This means that the QE money can buy less of the currency reducing the return to a level relative the amount of debasement.

    As the UK is not using the QE to pay off foreign debt this scenario does not occur. There has to be a purchase of foreign currency for this effect to work. It is a exchange rate consequence of QE.

    Your answer makes me think you do not understand what I am saying. It is very clear there was an element of foreign exchange in the scenario of the OP. This makes me think you don't understand a lot of things I put, which makes me wonder whether your opinion is valued on these kind of arguments. I think you are good at mathematical black and white scenarios that already exist. But any kind of new thinking or hypothetical situation you find difficult.

    So I think I will keep on with these posts. Besides I think I am right on this one but I don't want to be.
  7. I am basically saying the devaluation of QE is lost in the exchange rate. Do you see what I am saying.
  8. zdreg


    How to harness ultra low UK interest rates
    Europe may be living through its "toughest hour since World War Two" (Angela Merkel), but you'll be pleased to know that Britain has become safe haven in chief, a kind of beacon of hope and shelter for international money amid the financial and economic turmoil of the Continent.
    Europe may be living through its
    All things are relative, and compared to Europe, Britain looks well managed and decisive amid the storm. Photo: Alamy
    Jeremy Warner

    By Jeremy Warner, Associate editor

    9:00PM GMT 14 Nov 2011

    Comments80 Comments

    While spreads were again widening in Europe yesterday, gilt yields resumed their downward trajectory, with the 10-year yield closing within a whisker of historic lows.

    George Osborne, the UK Chancellor, thinks of these almost surreally low market interest rates as a vote of confidence in UK plc, and therefore a cause for celebration. And on one level, he is right. UK Government debt is in demand for much the same sort of reasons as prime London property. Foreigners are looking for "safe" places to park their money.

    All things are relative, and compared to Europe, Britain looks well managed and decisive amid the storm.

    Unlike other highly indebted governments, the Coalition has done well in seeming to get ahead of the curve with credible plans for tackling the deficit and eventually bringing the national debt under control. It's being rewarded for its prescience. With 10 year money at 2pc, and inflation at nearly 6pc, the national debt is being deflated away at the rate of around 4pc per annum. It's default by sleight of hand.

    But international credibility is not the only reason why government borrowing costs are so low, and though there is indeed reason to celebrate in such low rates, they regrettably don't seem to be benefiting the real economy very much. The Government's hope was that the low interest rates that fiscal credibility has generated would boost private sector investment. It has not.
    Related Articles

    British Land looks to future
    15 Nov 2011

    The euro is being held together only by fear
    10 Nov 2011

    This time, trouble over the channel is deadly serious
    09 Nov 2011

    Britain is still too inward looking to succeed
    07 Nov 2011

    Super Mario cuts the euro's last lifeline
    03 Nov 2011

    There's no pain-free escape from trouble
    07 Apr 2011

    So how might they be utilised more effectively? This is to be a major feature of the Chancellor's autumn statement in a couple of weeks time. There's one thing we can safely say would not work. Nothing would be more guaranteed to reverse all the good the Government has so far achieved than to do as the Opposition suggests by borrowing and spending a load more money.

    This kind of crude Keynsianism might work when public borrowing is down at 30pc of GDP, but it cannot credibly be done in a relatively small and open economy with 10pc budget deficits and the national debt heading up towards Italian levels of meltdown.

    For that reason, you are not going to see the UK Government shift one inch on plans for current and capital spending. Both have been fixed until 2014, and fixed is where they will remain. There may be a little re-profiling of capital spending, with planned projects brought forward, but the totality will remain the same.

    To see how otherwise these ultra low rates might be used, it is first necessary to understand what is causing them. Safe haven inflows of foreign money is only part of the story. Another is quantitative easing, a £275bn programme of Bank of England asset purchases concentrated substantially on longer dated gilt edged stock.

    As long as this persists, it both adds an extra source of demand and removes all meaningful risk of default from the price. Unlike buyers of eurozone sovereign debt, investors in UK gilts know that in extremis there is a limitless buyer of last resort, the Bank of England. Whatever happens, they will at least get their money back.

    The risk comes instead through inflation, which largely because of devaluation remains elevated in the UK. The Bank of England has thus achieved the faintly dubious success of manufacturing an ever more negative set of real interest rates.

    The purpose of this strategy is both to ease the plight of the over indebted, which includes the government, and to force those with the balance sheet capacity to do so (net savers) to support demand by spending and investing.

    It's massively unfair on the middle classes, who are being squeezed more acutely than at any stage since the second world war, but it is judged by the Bank to be preferable to the alternatives of rising unemployment and collapsing demand.

    Regrettably, it hasn't succeeded, or at least not as powerfully as might be hoped. Investors still seem to prefer a negative real rate of interest on gilts to spending or putting their money into productive assets. It's partly psychological. If investors expect a recession, or prolonged period of stagnation, they'll buy what they think of as the least risky asset available in an effort to preserve capital.

    But it is also technical. Tougher capital and liquidity controls require banks to invest in government debt in preference to ordinary lending. With pension funds and insurers, the more equities go down, the more they will liquidate their equity holdings and buy government bonds to support solvency.

    And because liabilities are measured by reference to gilt yields, the more these yields fall, the wider the pension fund deficits become. Money which company sponsors might have spent on job creation is instead diverted into filling the deficits. It's a vicious cycle.

    None the less, if we've got ultra low interest rates, we might as well try to find productive ways of using them.

    A starting point has to be reform of the regulation and conventions surrounding pension fund investment so that money which is presently flowing into gilts can be diverted into more productive investment. The economy is going nowhere if pension investment is driven progressively into funding government borrowing at ever lower rates.

    The trick is to persuade this £1.5 trillion national resource to invest instead in future productive capacity, including infrastructure, whose utility like characteristics makes it perfect for long term liability matching. Infrastructure has to be made as practical and attractive for pension fund investment as it can so as to provide a viable alternative to sovereign debt.

    But it may also be necessary for the Government to go further and underwrite bond issues attached to private sector infrastructure initiatives. Such government guarantees are always contentious because they amount to a form of off balance sheet finance – a contingent liability for the taxpayer.

    Direct government spending generally works out cheaper in the long run. Yet in circumstances where the Government essentially hasn't got the money to spend, more creative ways of doing the same thing must be found. It's high time to start turning depression level interest rates to economic advantage.
  9. I don't uderstand. What does the UK have to do with this. What I am saying is that a debasement of currency to pay off debt to another country will reduce return due to the effect on the exchange rate. The UK is not debasing money to send it abroad they are spending it domestically to create demand. The problem comes when debasement is done to pay off foreign debts and the exchange rate is effected by the increase in money supply of the debtor nation.

    Do you see. The loss is made by foreign investors through the revaluation of the currency. A lower value to the currency which owes the money means less of the foreign currency can be bought.
  10. pupu


    #10     Jan 15, 2012