Duncan’s Economic Blog

Calm Down Fraser

Posted in Uncategorized by duncanseconomicblog on March 25, 2009

Fraser Nelson is getting very excited over at the Spectator blog about the ‘failure’ of a gilt auction today. I say ‘failure’ as the Debt Management Office did manage to issue £1.6bn of forty year debt at an interest rate of 4.5%. Not bad.

I suspect the auction ‘failed’ (i.e. sold only 93% of the allotted £1.75bn) for two reasons. First off it was a forty year issue. Second, Mr King’s comments yesterday.

Fraser says:

But given how dependent Brown is on being able to bum money from the City, a so-called buyers’ strike (ie, when investors say ‘we don’t want your crappy debt’) will be hanging over him like the sword of Damocles.

I’m not seeing this ‘buyers’ strike’. The yield on ten year government debt – which I keep saying is the think to watch – did rise after the ‘failed’ auction. It then fell back to its previous level of 3.32%. At the time of writing it is now down on the day – i.e. it is cheaper for the UK government to borrow now, than it was yesterday.

Sorry Fraser, don’t think we’re calling the IMF.

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What is Merv up to?

Posted in Uncategorized by duncanseconomicblog on March 25, 2009

I am concerned about Mervyn King’s comments yesterday. Not really so much about the headline grabbing ‘we can’t afford another stimulus’ noise. I think we can afford one, and we need one. And as Andreas says, Mr King is not infallible and always therefore correct. I do find it slightly worrying that a central bank Governor should be speaking out on fiscal policy (imagine how he would react if the Chancellor started saying ‘the BOE must do x’), but again this is a side point.

I’m more worried by the back tracking on the issue of quantitative easing. Mr King wrote yesterday in his letter to the Chancellor how the UK still faced the prospect of inflation ‘below the government’s target’. We are not out of the deflation woods yet. Given this there is a vital to maintain plausibility. Quantitative easing will only work, and can only work, if the market plausibility believes that it is a genuine ‘medium/long term’ policy . As market participant Macro-man observes this morning:

Less than three weeks into QE, and Merv was already talking about the possible need to hike rates aggressively at some point. He also suggested that the BOE might not deploy its fully alloted £150 billion of buybacks should the program prove effextive. While there was nothing technically wrong with these comments, they were the wrong thing to say to a teetering Gilt market, and were received with all the pleasure of a swift kick to the groin from an iron-tipped boot.

In other words much of the positive movements in the government debt markets, achieved through the announcement and start of the QE programme, are now unwinding on the back of the Governor’s comments. This is silly. And far sillier than anything he said about a fiscal stimulus.