The price of money


              In recent weeks the value of the pound has gone down. The government’s cost of borrowing money has gone up.

               Maybe the authorities are happy with the first of these changes. They are keen to create more money. That is always likely to lower its value. The pound has fallen from $1.63 to $1.56, and has also fallen against the Euro.

              The authorities will see this as evidence that the  Quantitative Easing is working. They might also hope it will lower imports and boost exports.  Last time the devaluation tended to boost profits more than the volumes of exports, as some companies took the advantage of the devaluation with higher  prices rather than volumes of exports.

               The danger is that a further devaluation can boost inflation. Ever since the crisis hit, private sector incomes have been falling once adjusted for rising prices. Inflation has ben higher in the Uk than in Japan, Germany and the USA. As we import such a large proportion of our needs, we are vulnerable to a falling currency. It makes things dearer and cuts the value of our pay.

               The authorities are probably not so happy with the rise in the cost of government borrowing. Despite the large bond buying programmes of the Bank of England, the cost of ten year money for the state has gone up from 1.5% to 2.1%. It’s still a low figure by historic standards, but it is a 40 % rise in the interest cost. As the state still plans large deficits for the next couple of years, and has record levels of debt outstanding, this is a problem to watch carefully. On £1.1 trillion of debt every 1% increase in the borrowing rate matters  as the debt comes to be refinanced at higher rates.


  1. lifelogic
    February 10, 2013

    I am always surprised that government in the UK, so bereft of any sensible leadership direction or sensible economic plan is able to borrow as cheaply as it does. Particularly with Labour in 2015 for 5-15 years.

    1. lifelogic
      February 10, 2013

      Lend to HMG and they will give you less back, in real terms, in just 5 years time, it does not seem much of an offer to me. Why not just put some silver under your bed, oil in your tank or buy some real income producing assets.

      1. Single Acts
        February 10, 2013

        I have some income producing assets which which are taxed, subject to four* different statutory requirements, are about to require a licence from the local council to operate and if I read Labour policy documents right, are about to be subject to further security of tenure laws and possible rent controls. A surer way to kill the market I know not.

        Hoarding precious metals is hardly the way to boost economic growth or make capital available to companies via the conduit of banks, but one can hardly blame hoarders, (though I don’t imagine that will stop whoever is in power doing exactly that when you have to surrender it ‘in the national interest’) Only good if your bed is in Switzerland and out of their reach I fancy.

        1. stred
          February 11, 2013

          Following the replies to LL’s comment yesterday about rent control being theft – high rents are theft, return to Rachmanism etc., it would appears that cyclical collective amnesia is about to arrive again.

          When in my teens, I used to have a weekend job decorating my grandmothers 2 flats, which my grandfather had built, using his life saving, for retirement income. His cash savings had been unwisely put in trust with a bank, so she saw little of these when he died. She had tenants who had taken the offer of a tenancy quite happily as the fats were new and they could pay. Then, following Rachman’s high rents for slums in London, Labour in the 60s brought in rent control and permanent security of tenure.

          The result was that Gran had to live in an annexe of my parents house, while her tenant, another old lady, lived in a big 2 bedroom flat , paying uneconomical rent which did not even cover the costs of the owner. The private rental sector was wrecked and everyone who had invested sold as soon as possible. The tenant had to die or leave first.

          This continued until, after both of them had died. Her grandsons took the building over. The Conservative government reversed the situation. We were then able to obtain a return which allowed refurbishment and a return of about bank rate + capital value.

          We were able to let at economic levels with tenants able to obtain HB at reasonable levels or pay themselves. Good tenants were easy to find. A couple of minor housing booms-to-bust happened but then, after a long period of bust in the 90s, the mega boom-bus arrived, thanks to Labour and the banking wunderkind. The BBC started their property investment programmes and everyone piled into BTL having realised that pensions had been pinched. Good tenants became harder to find and the housing had to be modernised with each new letting in order to let at all.

          New LA and university requirements were brought in requiring minimum sizes, services certification, EPCs etc. Also, the redefining of Houses in Multiple Occupation from large blocks, which were more prone to fires to small 2 storeys houses which are not. Useless fire doors and mains alarms, which are unplugged after burnt toast. Now LA licensing is coming in over large areas of towns near any university. It is a full time job to keep up.

          As before, we have have problems in London. Foreign money has been flooding in, a few landlords are ignoring the already extensive rental regulations and charging high rents. This time there is no money for social housing and much has been sold off, often finishing up as private rental. Some social subsidised accommodation has been illegaly sub let.

          Young politicians are in charge, with no memory and history lessons not covering the last 50 years. Although rents make a return of just about the rate of inflation +1% at present and real capital values are falling, except in the middle of London-
          Here we go again! There is no money for housebuilding and no money for ridiculous London HB levels. Let’s screw the ‘Rachmans’ everywhere in the UK.

    2. Single Acts
      February 10, 2013

      Five years at the most. If you think its bad now (and it is, just wait until Ed takes the wheel in 2015).

  2. Single Acts
    February 10, 2013

    As you will be aware, a lot of the UK’s debt is long term so the effects of rising interest rates will be more drawn out for us, but on a debt of £1.4T (predicted for 2015) a rate of interest of say 7% (on all of it) would consume about £100B or one sixth of the tax revenue.

    To put this in context we spend about £40B on the armed forces and it is very roughly what we spend on the entire NHS.

    Regardless of who wins in 2015 it won’t matter; The debt is already beyond control. We will go either go bust or QE induced inflation makes everyone much, much poorer.

  3. Steve Cox
    February 10, 2013

    The government is playing with fire on both inflation and devaluation. If it believes that its own actions or those of its vassal Central Bank can fully control either, then it is simply deluding itself. One serious commentator has already written an article expressing his concern that Mark Carney’s first challenge might well be handling a full-fledged Sterling crisis and all the pain that will entail. Perhaps the economic simpletons running this government think that higher inflation will reduce the real value of the national debt and so is an unmitigated good, and that a lower pound will boost exports and discourage imports, and so is another unmitigated good. They should be careful what they wish for, as these matters can quickly run out of anybody’s control. The government and Bank of England are playing with fire, but it is we ordinary people who will get most badly burnt – again.

    1. lifelogic
      February 10, 2013

      Indeed. When will they cut the huge endless waste – start with all the renewable subsidies and the 50% of staff who do nothing useful or rather worse.

      1. Bazman
        February 10, 2013

        Like food inspectors?

    2. waramess
      February 10, 2013

      Higher inflation will reduce the National debt as will a weaker pound. Will the foreign investors in Gilts be quite so stupid to watch whilst it happens?

      A run on the pound is almost a foregone conclusion in the near future and it will certainly run out of control. The policies of this government, or rather the non policies, are of the madhouse and the rhetoric will soon fail to mesmerise the markets.

      The result of a run on the pound will be high interest rates, in order to attempt to entice foreign money back, broken banks, from the collapsing property market , and a shrinking financial sector resulting from the collapse of wealth invested in the stock market and in Gilts .

      The chums were really never up to the job but more fool those who ought to have known better for supporting them.

      All this when their saviour, fracking, was there as their redenption but as with all opportunities the trick is to move fast.

      1. zorro
        February 10, 2013

        They are hoping that the impact of their actions will be mitigated by the fact that the US, Japan, and Eurozone will be in the same boat because of their similar QE type programs…..


    3. Mark
      February 12, 2013

      Inflating away debt only works if you have the deficit under control. At present, we have debt increasing faster than inflation. We’d need inflation of around 15% to cover the deficit increase in nominal debt. That of course would likely lead to a still higher deficit, and a massive increase in borrowing costs.

  4. alan jutson
    February 10, 2013

    A sound money policy is the only sensible basis for a trading Nation to hold.

    For decades we have had politicians/governments attempting to manipulate the value of our money to suit their failed policies, on every occassion they have wanted to devalue.

    Makes you really wonder at the mindset and the thinking, when devaluation of the Nations savers, is seen as a positive solution !.

  5. Mike Stallard
    February 10, 2013

    “On £1.1 trillion of debt every 1% increase in the borrowing rate matters  as the debt comes to be refinanced at higher rates.”

    Here are some sums.
    1.5% on (say) £1,100 billion national debt = £16.5 billion
    2.5%. = 27.5 billion

    Here are some other figures:
    2011 national repayment of debt in interest: £44.4 billion

    Compare these figures with what we spend on these three important things:
    Defence: £45.7 billion
    Education (nationally) £35.9 billion
    Transport £12.2 billion.

  6. lifelogic
    February 10, 2013

    So Osborne promised in 2007 they would increase Inheritance Tax thresholds to £1 million, if they came into power. This morning we learn it will be reduced by the 4% inflation for three more years from the miserable £325,000. Why bother to earn it if it is not even yours when you have done?

    So in 2005 we will have, I assume, the proven CGT liar Osborne and cast rubber EUphile Cameron to vote for. True they are better than Miliband but only by one thou or 25.4 micros as they would doubtless prefer. Lets see how the deception goes down in Eastbourne, will they trust what they say this time.

    Also will Huhne finally come clear on the renewable racket now too I wonder. Perhaps another two years for that. Is he still saying disingenuous things like – I cannot say much with a trial still going on but I have (finally) taken responsibility for events of over ten years ago – humility is not his strong point it would seems. A politician too the very end.

    1. alan jutson
      February 10, 2013


      Yes another wonderful “U” turn on Inheritance Tax.

      Savers and those who have assets built up out of TAX PAID income will get scewed again.

      The farce is the new suggested limit of TOTAL ASSETS will be just £125,000 to exclude you from care bills in the future.

      £125,000 will not even buy you a one bedroom flat if you want to live within 40 miles of London.

      John, your leaders and senior Ministers have lost the plot yet again.

      When attempting to get elected we are promised all sorts of positive things for the workers, the savers, and those who are not a drain on the State because they attempt to look after themselves.

      One again the feckless get the bonus of free care and tax free benefit rises.

      Please , Please tell me why any of us should bother any more.

      Disgusted from Wokingham.

      Reply: This was a pre announcement for a policy that they wish to bring in in 2017. We are very unlikely to have a Lib/Con Coalition by then. I think it best to concentrate on the things they are doing prior to 2015.

      1. alan jutson
        February 10, 2013

        Reply to Reply

        Then why even mention or talk about it now, if its pie in the sky thinking.

        Unless they are looking for a reaction, in this case you have got mine.

        What was not pie in the sky was the rising to £1,000,000 inheritance tax limit promise, or once again is this just election banter to get into power.

        1. Disaffected
          February 10, 2013

          Absolutely Alan.

          It might be also convenient to forget Osborne’s 80/20% split between tax rises and spending cuts. Our host on numerous occasions has highlighted that no spending cuts are being made despite the rhetoric and political pain for Cameron and Osborne. Now add this to the other 299 tax rises.

          I am absolutely sick to death of hearing about tax rises, sick of hearing Cameron give away money that we do not have and then hear politicians say people need to pay a fair share and all this type of scandalous lies as a narrative. I complied with the rules of society, work, pay taxes, save and provide for a pension. I did not get the country into debt, I did not over spend. Why does the Tory party keep punishing me? I accept you cannot believe a word the Lib Dems say, but the Tories have turned out not be not any better. Clueless, utterly clueless.

          When do the cuts kick in for those who made welfare a life choice? When does the coalition say no to immigrants without jobs, deport those who fail to keep a job. Stop letting them have free access to all public services? Stop the green tosh to fill politicians pockets?

    2. waramess
      February 10, 2013

      The Liberals are in charge of the country Lifelogic, remember.

  7. Brian Tomkinson
    February 10, 2013

    Thank you for once more showing that the Conservative-led coalition is just as incompetent as its Labour predecessor. You convinced me two years ago when you analysed the first budgets that there was no point in continuing to support your party; I frequently wonder how you can bear to continue as a Conservative MP when you know that so much of what is being done is wrong.

  8. CG
    February 10, 2013

    Its coming, a depression that will make the 1930’s look like a blip.
    Politics and economies will change so radically we would think we have been catapulted into a different society.

    The west cannot go on living in a fantasy world of throwing money away on useless progressive nonsense and top heavy states.
    It does not work, it is unaffordable, and penalises the productive in favour of the feckless and non productive sectors of which there are far too many to sustain.

    Of course we all know the ramifications of economic collapse.
    One of them in the UK will be the end of LibLabCon and the corporate state.
    Order will return from chaos it always does but the road will be long and painful.

  9. Denis Cooper
    February 10, 2013

    “In recent weeks the value of the pound has gone down.”

    The sterling trade weighted index has gone down slightly in recent weeks, but it is still well within the bounds of the range it has occupied for about four years now.

    February 7th 2013 – 80.7830
    February 7th 2012 – 81.2947
    February 7th 2011 – 81.7557
    February 8th 2010 – 80.4558
    February 6th 2009 – 80.2575
    February 7th 2008 – 96.1253
    February 7th 2007 – 105.9256

    The serious collapse in the external value of sterling was during 2007 and 2008, from an over-valued all time high of 106.8045 on January 23rd 2007 to an under-valued all time low of 73.7560 on December 30th 2008.

  10. Denis Cooper
    February 10, 2013

    “The government’s cost of borrowing money has gone up.”

    That’s not surprising when the Bank of England is no longer creating vast sums of new money and using it to rig the gilts market.

    1. Disaffected
      February 10, 2013

      There is a £90 billion black hole in pensions because of Osborne’s economics and QE, savings will not last our retirement because of their devaluation and we are expected to sell our houses to live in the same care homes as those we have kept all their lives!! Additionally Cameron now expects us to keep all Eastern Europe as well. Then Cameron and Co have the bare faced audacity to tell us we have to work longer…. He has lost the plot and those who listen to him and the likes of him have lost leave of their senses.

    2. zorro
      February 10, 2013

      Money printing QE style will continue at least up to the next election…..still some way to go.


  11. Denis Cooper
    February 10, 2013

    “Despite the large bond buying programmes of the Bank of England, the cost of ten year money for the state has gone up from 1.5% to 2.1%.”

    But the second programme ended in early November, three months ago.

    It was recently reported that the Bank would reinvest some of the proceeds from gilts which are maturing, but that is just replacing an existing holding with a new holding; it doesn’t involve the creation of new money to buy up gilts.

    1. Mark
      February 10, 2013

      I missed that announcement. Can you point to it?

      Nothing I can see here:

      The intention to use proceeds of redemptions to buy further gilts does throw into question how or if QE might ever be unwound. That has some serious consequences for its credibility.

      1. Denis Cooper
        February 11, 2013

        I saw it the Telegraph, but google finds it here:

        “The Bank of England will reinvest the first gilts to mature since it started its asset-purchase program four years ago as it sustains stimulus for an economy in a “slow” recovery.

        The Monetary Policy Committee led by Governor Mervyn King will buy more bonds with the 6.6 billion pounds ($10.4 billion) associated with a gilt maturing March 7, the BOE said in a statement today. The bank also held its target for quantitative easing at 375 billion pounds and said inflation may remain above its 2 percent target for the next two years.”

        Basically it will be rolling over from the maturing gilts to other gilts, and I suppose it could choose gilts with a longer maturity to put off the day when that part of the £375 billion of QE will be unwound.

      2. Denis Cooper
        February 11, 2013

        Response to Mark’s request missed for moderation.

  12. Denis Cooper
    February 10, 2013

    “The danger is that a further devaluation can boost inflation.”

    Over the past four years there has been no devaluation of sterling to significantly boost inflation.

    However official actions to rig sovereign bond markets have led to bubbles in some of those markets, with artificially depressed yields, and that in turn has led to rises in the world prices of various commodities which we import.

    Although the Bank of England’s MPC has a paramount statutory duty to meet the consumer price inflation target set by the Chancellor, the latter seems unconcerned about its failure to do so; there is never any reproach in his replies to the Open Letters sent by the Governor to explain why his legally binding inflation target has once again been broken.

    1. Disaffected
      February 10, 2013

      No because it allows him, and I agree with Nick, to keep borrowing rather than making cuts to public spending.

  13. Pleb
    February 10, 2013

    “I frequently wonder how you can bear to continue as a Conservative MP when you know that so much of what is being done is wrong.”

    65k per annum plus expenses.
    Gold plated index linked pension


  14. Derek Emery
    February 10, 2013

    The UK debt bombshell website at gives UK facts and figures over several pages. It shows the fluctuating size of the deficit and how government spending has exceeded income for most of the time for many years.
    It shows that the 4 biggest spends (in order) are Benefits and Pensions, Health, Education and Debt Interest.
    These are current spends and the not investments and only 6% of government spend associated with capital investment.
    Many independent forecasters believe the the Government’s own economic projections are far too rosy . Could this be to allow over-spending to continue?

  15. Richard Hobbs
    February 10, 2013

    So, for some of us living outside UK, our ‘frozen pensions’ are going to be worth even less – again!!

    I am assuming no one in the UK government cares!!

  16. uanime5
    February 10, 2013

    I expect this means that the amount borrowed will increase this year as well.

  17. Mark
    February 10, 2013

    The sums work out like this:

    On the QE portfolio of £375bn, the Treasury and taxpayer are exposed to the tune of £30bn for every 1% point fall in gilt yields. A 0.6% point yield deterioration reduces the amount that Osborne can rely on as cumulated profit of the BEAPFF by £18bn.

    Of this financial year’s fresh borrowing represented by the gilt remit given to the DMO of £164.2bn, some £70bn has effectively been provided by further QE: losses on that element are included above. There are no losses on other gilts already issued so far as government is concerned.

    However, if you examine the forward anticipated gilt financing remit – see page 3 here:

    the scale of fresh borrowing to cover redeemed gilts and continued deficit spending shows £161bn, £167bn, £151bn, £139bn and £124bn over the next financial years to 2017/18. Assuming similar maturity profiles on the fresh borrowing to the current QE portfolio, that would imply extra borrowing costs of about £36bn on the £742bn total for a 0.6% yield deterioration. The immediate cash cost would of course be rather lower.

    Financing more of the deficit through further QE increases the exposure of the Treasury to losses at the BEAPFF should yields then deteriorate.

    Reply The Bank can hold the QE gilts to redemption, so it can get £100 back for every £100 originally invested. However, as you imply, it usually paid a premium over the redemption price to buy the gilts in the first place, so it will lose that unless it sells the gilts in the market at a favourable time.

    1. Denis Cooper
      February 11, 2013

      Thanks for that, I’ll have to think about what it means!

    2. Denis Cooper
      February 11, 2013

      I had a problem following this initially because you’ve accidentally written about the exposure to a fall in gilt yields, when it should be a rise in yields and a fall in prices.

      The fall in market prices, which would be exacerbated if the Bank went from just not buying more gilts to actually selling a significant part of its holdings, means that the BEAPFF is unlikely to recover all the money it spent on purchases of gilts at prices which it had itself artificially driven up through the large scale of those purchases.

      So then the Treasury indemnity would kick in, and the taxpayer would have to make up the shortfall.

      1. Mark
        February 12, 2013

        The exposure is still £30bn (well, £28.8bn on the latest market data – see below) – just that if yields fall, it is positive on P&L, where as if they rise it is negative! Actually, the fine numbers aren’t quite symmetric, because of “convexity”, but it’s close enough.

    3. Mark
      February 12, 2013

      Reply to reply:

      The Bank did not pay £100 per £100 nominal for the gilts it bought: most of them were purchased at a significant premium to par, and therefore if held to redemption, there will be a capital loss. We know precisely what that would be: £48.3bn, because the Bank holds gilts which it purchased for £375bn with a nominal par value of £326.7bn. Potentially offsetting this capital loss is any coupon income that the Bank retains.

      You may recall that the Treasury has indemnified the Bank against loss on its portfolio of BEAPFF holdings. By the same token, the Treasury is entitled to any profit. The mark-to-market profit and loss is actually included in the PSND figures including financial interventions, but excluded from PSND excluding financial interventions. Prior to Brown there was of course no such distinction.

      You may also remember that Osborne plans to raid the accumulated surplus of coupon payments as cash towards funding the deficit, rather than leaving the cash lying in an account at the Bank. That will reduce the cushion of cash that protects against capital losses.

      When I last valued the APF portfolio (in mid November after its purchase programme was complete), it was worth £398.3bn at market prices. This shows a capital gain over acquisition cost mainly because yields are lower than during its first phase purchases during the Labour government.

      At COB 11th February, the mark-to-market value had fallen by £14.4bn to £383.9bn because of rising yields. The difference between that figure and the £18bn I estimated above will be due to more detailed calculation, and the fact that the original calculation wasn’t at the low point for yields. The cushion against acquisition cost is falling, and only a small further deterioration would show a value lower than cost. At that point it would no longer be possible to draw down the accumulated coupon income in its entirety, because the Bank would effectively be lending more money to the Treasury to cover the guarantee on the BEAPFF.

      A very small silver lining is that the Macaulay modified duration has fallen slightly, and is now £28.8bn for a 1% change in yield across the portfolio. That is partly because of convexity – as yields rise, the amount of capital loss for a given further rise in yield reduces, and partly because of the passage of time.

  18. Lindsay McDougall
    February 11, 2013

    If it is QE that is causing sterling to go down, then the markets believe that the banks will steadily lend more of the £375 billion that they are currently sitting on. I am assuming that the Bank of England is mainly issuing the QE money via the banks.

    We had better be aware of who the winners and losers are. QE does not increase real GDP; there is no theory that says it should and there is no empirical evidence that it does, so forget this nonsense about loose money helping business.

    QE has provided a cushion to the banks, who retain control over their lending policy, although HM Government has put in place a scheme for subsidising certain types of investment.

    HM Government has benefitted hugely from the low base rate and QE. They have been able to borrow cheaply and are on course to repay their creditors in clipped coinage. It is the government’s proud boast that they have reduced the annual deficit by a quarter. They are underselling themselves. Because of inflation (7% over 2 years, 10% over 3 years), they have reduced the annual deficit by about 30%. The reason that they don’t boast about this is that they know this policy has been at the expense of their creditors. The US, a much larger economy, has been pulling the same trick and the Chinese, one of their main creditors, are spitting tacks. And when the weaker Euro zone economies are forced out of the Euro, there will be more of the same cheat-your-creditors-by-inflation behaviour.

    Pension funds and anybody foolish enough to take out an annuity are big losers.

    So there you have it; wise virgins paying through the nose for foolish virgins.

    1. Denis Cooper
      February 12, 2013

      Except that sterling is not in fact going down, notwithstanding the widespread assumption that it is; see the figures for the sterling trade weighted index given above.

      And that only a minor part of the QE money has been issued to commercial banks because they are relatively minor gilts investors, and the Bank has needed to buy a far greater volume of previously issued gilts than banks were holding.

      And that the various gilts investors who have sold previously issued gilts to the Bank have often used the sale proceeds to buy new gilts from the Treasury, with the Treasury selling in parallel to the Bank buying, and the overall effect has been the migration of money through the gilts market from the Bank to the Treasury to fund the budget deficit, while gilts have moved in the opposite direction and the Bank is now by far the largest of the government’s creditors.

  19. Mark
    February 12, 2013

    More disappearing comment syndrome here…

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