Friday, October 9, 2009

The Debts of the Spenders: UK Policymakers Defend Quantitative Easing

UK gilts (government bonds) have rallied significantly since the Bank of England intervened in the markets.

David Cameron, a UK conservative leader that is widely believed by political pundits to become the next Prime Minister, attacked the policy of quantitative easing on ideological grounds earlier this week. But critics responded vociferously in defense of the policy that has lowered borrowing costs for refinancing of big ticket items like housing. They called his comments bizarre and dangerous.

Here are Cameron's original comments:

"The longer we wait for a credible plan, the bigger the bill for our children to pay. The longer we wait, the greater the risk to the recovery . . . U.K.'s debt is a "massive risk" to its economy."

He also added that a Conservative government wouldn't seek to inflate the country back into solvency and warned that allowing inflation to take off would be not just an economic disaster - it's a social disaster too because it erodes people's savings. [Paraphrasing here].

Also, here is an old video featuring Jim Rogers on the pound:


Jim Rogers made the rounds earlier this year by calling the pound a worthless currency and that the UK had nothing to sell. Well, his ultra-bearish comments have to be taken into consideration. While the FTSE and gilts have both rallied, they have done so largely at the expense of the pound.

Of course, the main benefits of the gilt government buying program is that intermediary dealers are involved in order to keep the financial community fed through commissions and guaranteed spreads (just like the US). But UK readers just have to look at what happened in the 1950s-1960s when the UK downshifted from an empire and the pound suffered accordingly.
Those astute or well connected enough to take advantage of this massive carry trade made a fortune on the FTSE and other markets. Not coincidentally, the rich got richer and the poor got poorer.

*Keep the speaker from the Arab-European Bank's comments in mind here regarding these points. Both men are right but it depends on which perspective you are on.
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