Curve control

Here is a rough transcription of the presentation for people who are hard of hearing. Apologies for the lack of grammar, I am working to improve the automated transcriptions -
Elwood twos forums day now and then hit you up with this stuff which I don’t think is in a mean much to you you are really grasp the importance of it which is a shame because I think the the big happenings of the next five years ago to be based on this sort of shipped so he knows what it used to it or start a new study now sod who are we introduction type playing and then I’ve feel that harm I’m going to be talking an awful lot more about this sort of thing in the future are on the short word Q4 this is Bonds herky-jerky right so I’ll hit us up with Colin Roesch Cragg To start with as are easing into where I am going with this and I think the world will be going with this okay so how could this work? Good start this is not the whole of the article this is just the bottom bit first the reason why QE and we know: Roche prank Knows his QE has been failing due to a large degree is because monetary policy is about setting prices don’t worry about that our comeback to it in future not in this video when the Fed sets the Fed funds rate target they name the price and essentially challenged the market to compete with them over that price if you don’t understand that there were the Fed could do the exact same thing at the long end of the curve they could come out and challenge the market to try and move the 30 year bond above 1% for instance by the 30 year bond 1% the Fed can just go this can be 1% kids yet at what I say the market will move it to 1% knowing that if the market doesn’t move it to 1% of the federal move it to 1% so the market will move first the banks would lose if they went against the Fed because the Fed has an unlimited pile of reserves at their disposal this is how the Fed conducts monetary policy they are really and all the other children know they are a bully and very mean bully who you just don’t mess with two got the power of the Fed I’m not sure that describing them as having unlimited pile of reserves is quite clear but we understand that at least don’t way slamming the 30 year bond down to something close to 0 but let’s say 1% would pancake in Thai yield curve almost definitely yes not absolutely definitely yes but almost definitely yes if the 30 year is a 1% the 10 year is likely to be around half of percent slamming the 30 year bond down to something close to 0 would pancake the entire yield curve to the point where borrowing for long durations didn’t just become affordable it would become a no-brainer for many business businesses and households etc are come back to that and with housing being the crux of this balance sheet recession and the most important part of the consumer balance sheet I think it would make a substantial impact on the economy yes I really think that the extra to 2 1/2% in current yields would make a difference but like in Daisy ass he’s talking about am an article by matting glaziers at slate that was I’m not necessarily saying that this is what the Fed should do but the mechanics behind it aren’t terribly complex and not terribly complex at all quite understandable so the opening thing here which isn’t quite the basis of arm what I intend to talk about but it’s something that you were these can think about how do you think about that highlighted yellow bit awkward done the Fed has done or a central bank has done for your local central bankers slammed the long end of the curve down borrowing is now dirty cheap to the point where borrowing for long durations just becomes affordable doesn’t just become affordable it would become a no-brainer for many businesses and households etc that think about this now this very day if you could get a 25 year low loan at what to percent say 2% if you could get a 25 year loan at 2% would you take it would that be a no-brainer for you can tell you how to think about exact owner your particular circumstances if it’s if you’re just a household harm think about the household or Logan your imagination if you were a small business owner or even the furore huge multinational corporation would be a no-brainer to take that money over 25 years at 2% and if so why moving on now go to insight introducing bonds here are my comeback to this very same article or might just go to the IMF dock in future when talking about bonds but this is just an arm and introduction of armed bonds in this case government bonds and just go through one aspect of it which is an important aspect but hopefully in the future are developed many important aspects in sludgy green on this chart frustrating in Japan are who are the nonresidents of a particular country that owned that particular countries bonds for example Australia three quarters of their bonds are in sludgy green three quarters of Australia’s government bonds are owned by non-Australians Three quarters not say where or why it’s important at the moment just introducing concepts it as opposed to Japan where it’s only 5% are owned by nonresidents hopefully this’ll all become an intelligible in the future go to the United Kingdom 30% are owned by nonresidents in the United States are very similar number 31.6% to just under a third for United Kingdom and United States are owned by non-residents are France and Italy here at the sludgy green for their unknown reason haven’t has now turned to sludgy pink and we can see nonresidents own 60% of Francies debt 58 are getting offered to 30 huge swatch of over half of Italian debt is owned by nonresidents which I didn’t think was right because I thought bitterly owned a lot of its own debt shows how wrong I can make anywhere it’s just introducing the concept right because this can be a lot going on that I should talk about the bonds and this gives this in the euro area as a whole that am with dropping the nonresidents think we’ve gone for now banks in the euro area because this is going to be one ongoing to talk about is when they mess about with bonds who is going to be affected or whoever is owning the bonds will affect how and why they mess about with the bonds but messing about with bonds is what they going to do and who owns the bonds is going to dictate what messing about is done in what area and there are different things happening in different areas which will dictate what will happen in different areas when the central banks the central banks mess about with bonds okay and for the important thing for the euro area that 25% of euro debt is owned by Euro banks are on the German one domestic banks own less than a quarter nonresidents own 60% of armed the debt nonresidents over half of the euro area debt that’s from individual countries and important that the quarter is owned by the banks the banks own an awful lot of the sovereign debt of the euro area something I been talking about over last few weeks right so I’ve done my who owns the bonds is going to be important to what central banks do and for the European area while a the countries will want to be voting to get the central bank involved and why they will do that number three is the IMF working paper which goes into a lot of this in a lot more detail government bonds and their investors what are the facts and do they matter you can read that if you like and then get ahead of me so you’ll understand when talking about otherwise I’ll be trying to explain all of this harm to you and it’s not could be easy and it’s going to be thoroughly boring maybe even for a lot of people and the might only be a couple of people semi-asleep in the audience when I’ve finished and I expect to be finished in about two months time but it won’t be solidly this but I am really thinking this is the most important thing that is going down I just finish with this because it’s a great links a few things up in my mind you won’t understand the links Nokia stupid but because I haven’t explained the links are this is euro area again are come by go back to America and the rest of the world come in later times that this these list chart which is quite simple you can see it’s gone basically at the start of the crisis the pink and blue were about half a half feet and now that thinks only 20 and the blues 80 we had here is cross-border and assets being poured into the European Central bank to get cash cross-border assets would be ownership of arm say are France would put in Italian type assets to the central bank to get our money your all of the those sort of assets are shifting back home basically the arm France is now not happy to own Italian debt Italians on how happy to own French debt and vice versa all over the place and it is represented by this chart now that it’s gone from 50% of armed banks were putting in cross-border assets to get cash and now it’s only 20% lead the movement towards only holding your own sovereign and assets who has moved that far in the short amount of time and that fantastically important because this is edging towards a place where the euro could split up this is lessening the crisis that would be caused if the euro area split up because you can imagine if France are put in Italian bonds and then Italy splits off the farce that is caused and this is why they’re doing it they are now banks and institutions of one country are using only their own countries assets liabilities and because they just don’t trust the rest the countries it’s like at the start of the crisis where the credit crunch started and what a bank eight wouldn’t stop dealing with bank all the rest of the banks it’s what’s happening in Europe on a countrywide scale and if this keeps accelerating it just will push it won’t actually push the euro part it will make euro coming apart an awful lot easier in other words the wouldn’t be so many people are absolutely the banks would not be demanding against it so much and knowing that their own balance sheets were under control because they assume is the shifted the fan they would run for the protection of their own sovereign and probably get it and that’s the way they’re moving their balance sheets writer colleagues that there am sorry it was a lot bitty but it’s just the introduction for what I think could be a long series of staff are yes and don’t forget the first question from prank If you could get a 25 year loan over 242% is it a no-brainer would you take it what would you use it for why etc by