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Wannaberich
New Member
£1 now around $1.44 
What say PropGuy and Brendan R ?
What say PropGuy and Brendan R ?
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Brendan R
New Member
back to 1.36£1 now around $1.44
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Wannaberich
New Member
Can someone explain quantative easing and how it will effect the pound in a negative way?Does this include printing money?The BOE chairman has said he may take this step.
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Brendan R
New Member
well, if ZIRP (zero interest rate policy) fails to kickstart the economy or put it back on track (this opens the debate of whether it makes to try to push banks to start lending again very aggressively again as it is this type of uncontrolled lending by banks that got us in this mess in the first place, but this is another debate),then quantitative easing may be next in line as an attempt to again kickstart lending.
The idea of quantitative easing is to increase money in circulation through the printing of money that will be used to buy most probably asset back securities (the same assets that got us into this mess).
One of the ideas is buying asset back securities collateralised by residential mortgages. By arguing that people do not buy houses because banks do not lend the money and banks do not lend them the money because they get rid of the mortgage risk that would sit on their books, well let's bring securitisation whereby you issue bonds collateralised by mortgages and you just need to find a buyer for them. That where quantitative easing steps in. The BOE prints money in order to buy these assets and effectively starts indirectly lending money to the economy.
Quantitative easing is negative for a currency because it increases money in circulation and the value of a currency is a function of relative money circulation in the world. If the UK doubles the money in circulation and nobody else does it, then on a relative basis and assuming nothing else changes (there is no effect on the economy for instance) the value of the pound should be instantaneously halved with respect to other currencies. This would be a negative obviously for foreign investors as it would be seen as debasing the currency on a relative basis to kickstart the economy but without benefitting the older of gilts for instance.
If the UK were to start printing money and I was a foreign investor I would dump my sterling investments. That's a natural reaction. I may come back sometime in the future if the economy gets back into shape and quantitative easing is reversed, i.e. if the BOE starts decreasing money in circulation.
Well, this could take a while so I'm better off exiting a depreciating currency.
Another debate would be to question whether it makes sense to force aggressive lending back into fashion when we got into trouble because of unbridled lending in the first place. Certainly banks are not lending aggressively anymore but they are in such a trouble that they can't increase the size of their balance sheet.
What the BOE is offering to do is to try to maintain a status quo by not allowing values to reach an equilibrium that would reverse the madness we have seen in the last few years. By letting borrow 5 times or more their salaries in order to buy properties for instance so that you put a floor to the real estate market and you start earning money again by charging a stamp duty for instance, you're just delaying the inevitable price adjustment that needs to occur in the housing market.
BOE needs to understand they cannot fight this readjustment. Quantitative easing is doomed. It may produce an impression of rebound in the economy because people would buy again because somebody would be ready to lend them but in the long term, this would only increase the amount of pain inflicted by the inevitable price adjustment.
We need to be done with these days of ultra borrowing and clean up the mess as quickly as possible, even if it is very painful in the short term otherwise we're talking about more than a generation of pain, indebtedness and misallocation of ressources.
The problem is the UK is in a very very bad economic situation. It is in the position of the gambler sitting at a table with such a huge loss. Either you call it quit and you try to rebuild but it's gonna be painful but you'll be back. That would be prudent and would show some good risk management.
The other solution, and it is the one favored by the BOE and the government, it is to go all in with a very weak hand. Well, it's called going for broke.
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mpat
New Member
Can some one pls tell weather the exchange rate will go back to 1.8 or higher from the present level ????
Any predictions based on economic stimulus package etc . . .
Thanks
Any predictions based on economic stimulus package etc . . .
Thanks
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Wannaberich
New Member
Great explanation Brendan,thanks.
Its it right to assume the UK is in worse shape than the US and this in turn will keep the pound weak against the dollar.
Its it right to assume the UK is in worse shape than the US and this in turn will keep the pound weak against the dollar.
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mpat
New Member
that means it will take longer to be strong as it was 6 months ago....
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PropGuy
New Member
yup. 2 years imo at least.
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PropGuy
New Member
it is in correction phase after reaching 1.49 from 1.35, it is expected to correct to more than half way down (1.38-1.37) before moving up again. This is according to fib sequence and trend line analysis.£1 now around $1.44
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Wannaberich
New Member
If the BOE bring in quantitive easing at their next meeting in 3 weeks as has been discussed,where might the pound end up and how fast?Thanks.
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PropGuy
New Member
That is meant to increase the money supply, but not sure what will happen. Lowering interest rates is suppose to lower the value of currency too but last interest cut increased the value of GBP as market rewarded the move on the expectations of growth. On the other hand, this not just 1 currency that is making this move, US$ is going through massive moves of quantitative easing, so if you are comparing with US$ you need to take that into consideration too.
GBP has smaller economy so relatively small changes can cause more fluctuations, but in the long term US$ style bailouts could end GBP.
Anyway, govts don't have any choice at the moment except to inflate money. But this inflating is basically debt, they are not handing out money, sooner or later this much debt increase will come again as recessionary shock.
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Wannaberich
New Member
'Speaking on Friday, Prime Minister Gordon Brown continued to suggest that the UK authorities were unconcerned about the pound's weakness, saying the decline in sterling's value has helped Britain's competitive trade position'
So maybe he should take steps to weaken sterling further ?
So maybe he should take steps to weaken sterling further ?
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georgihh
New Member
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Mendozo
New Member
Everything what you are saying, Brednan, is true and makes perfect sense to me. If the government keeps printing money, it won't solve the problem but rather will make things even worse leading to inflation and devaluing of the currency (mainly US dollar). The dollar will simply collapse as a global currency.The problem is the UK is in a very very bad economic situation. It is in the position of the gambler sitting at a table with such a huge loss. Either you call it quit and you try to rebuild but it's gonna be painful but you'll be back. That would be prudent and would show some good risk management.
The other solution, and it is the one favored by the BOE and the government, it is to go all in with a very weak hand. Well, it's called going for broke.
But don't you think that people in the governments do understand this even better than us and still they keep doing what they've been doing for decades, i.e printing debts? What if this course of actions is in fact held on purpose?
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PropGuy
New Member
weaker sterling is good for trade but people at home will start crying over inflation. Exports get cheaper but imports get expensive too. How much UK imports for daily consumption?
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Wannaberich
New Member
Inflation falls less than expected.Good or bad for the pound?
Inflation falls less than expected in January | Reuters
Inflation falls less than expected in January | Reuters
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PropGuy
New Member
Well it is good for now, because that is a sign of market stabilizing, but bad later. I don't how it will affect exchange rate, it is too complicated to analyze.
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Wannaberich
New Member
Sterling on the slide again.Now under $1.38.
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talk
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