Tuesday, 29 January 2013


UK 10-year gilt yield 2008-13 showing QE:

Why is there an evident spike starting autumn 2010 and continuing until early 2011 when there was no QE?

(larger version here).

For comparison, US 10-year Treasury yield:

(larger version here)

Correlation, wouldn't you say? (thanks to @wonkmonk_ for spotting this)

Well, the US was doing QE at that time. Could the UK's spike be due to the US's QE program? That suggests markets were arbitraging away differences between US Treasury and UK gilts yields. In which case one or the other effectively has no control whatsoever of monetary policy. Hmmm.

GBP/USD historical rates 2008-13:

(larger version here)

Steady, really. So this could be arbitrage. But we don't know the direction - are USTs driving gilts or the other way round?

Brent crude 2008-13:

Historical Data Chart

WTI crude 2008-13

(larger versions here and here)

If you remove the downwards trend on both US and UK charts (which we know is caused by monetary policy) there is reasonable correlation with this, too, particularly WTI.

Could the yield spikes have more to do with the oil price than QE? Oil price rises in a fragile economy are bad news.....


  1. Just looking at the demand side of the loan-funds market gets complicated. Without taking into account: the exchange value of the U.S. dollar (the collapse of the E-D market - not the Euro), & expanded FDIC insurance coverage, (i.e., the "flight-to-safety" & to "safe-assets", etc. you'll be confused.

    Then you have to take into account: where on the yield curve the Central bank's purchases & sales were focused. Then: the volume & timing of these transactions.

    Then you have to look at: short & long-term money flows (which are proxies for real-growth, inflation, & inflation expectations).

    Perhaps then look at the supply side?

    Otherwise comparing QE to yields is going to give you a headache.

  2. You have major cross-currents.

    E.g., both short & long-term roc's in MVt bottomed in March 2009. Then short roc's in MVt bottome again in Oct 2010 (long-term in Jan 2011)...

    The trade weighted exchange value of the U.S. dollar (broad) bottomed on 2008-07-01 @ 95.3704. Then peaked on 2009-03-01 @ 112.3382. It bottomed on 2011-07-01 @ 94.5911. It reversed & peaked on 2012-06-01 @ 102.1779...

    The Dodd-Frank Wall Street Reform & Consumer Protection Act provided unlimited insurance coverage of non-interest-bearing transaction accounts (beginning December 31, 2010, through December 31, 2012) initiating a flight to "safer-assets".

    1. Yes, I know this exercise is by no means straightforward. As always with an apparent correlation, nothing is quite what it seems.....

      The apparent correlation of the UK and US 10-year charts suggests to me that the spikes others attribute to QE are actually caused by exogenous factors, since the US and UK QE programs were not aligned. The only other explanation is arbitrage, which I suppose is possible given the more-or-less steady GBPUSD exchange rate, but unless differences in US and UK 10-year yields are normally arbitraged away (in which case monetary policy is a joke) I can't think of a good reason why this would apply now. So I think exogenous factors are more likely. There may be more than one of these, of course, though in this post I suggest it might be movements in the oil price, particularly WTI.

      The downwards trend on both yield charts can I think be clearly attributed to monetary policy - but not necessarily to QE.

  3. Peak Oil is a smart marketing campaign like Beyond Petroleum (BP).

    Pause for a second.

    Without the Sun nobody could have ever produced Oil Riggs & the Sun is free.

    Iraq Could Delay Peak Oil a Decade

  4. Here's a graph that might interest the residents of this blog. It shows the nominal cost of global oil consumption as a percentage of Gross World Product (GWP). The trend is rising, as you might expect, but still nowhere near the peaks of the early eighties.


    Last time I checked no scientists have confirmed without doubt the edge of any Universe.

    Gold/Brent ratio is fixed at 15

    The Iraqi oil will not reach the market until that changes.



    The formulation is not that clear, but it seems they are trying to say that the Swiss banks are hiking the fees on unallocated account in order to push their clients into allocated.


    1. I am very pleased to post constructive comments that abide by the rules of my blogsite:

      - please confine your remarks to the subject of the post

      - please be polite and refrain from personal attacks on me or on other commenters.

      Unfortunately your comment breaks the first of these rules. This post is specifically about the behaviour of US and UK 10-year treasuries during the last five years. It is an attempt to solve a puzzle, and I asked for constructive suggestions. It is NOT an opportunity for goldbugs or silverbugs to peddle their ideology. I will delete any further comments from you along those lines. However, if you wish to comment on the questions asked in the post, you are very welcome to do so.

  5. This comment has been removed by a blog administrator.

  6. “In which case one or the other effectively has no control whatsoever of monetary policy.” Isn’t that just another nail in the coffin of monetary policy?

    In contrast, if say the UK government effects some fiscal boost like raising pensions and spending more on education, there is no way US pensioners or schools can spend that money.

    1. To highly educated individuals in a sophisticated civilised society requires no spending (tax) because each of us understands, quite clearly, the absolute imperative when it comes to educating our young...so thankfully the Internet means that now some of the best scholars on Earth can teach giant swaths of interested individuals simultaneously...and the teacher will even get paid MORE MONEY than before.


    2. The FT is leading the avant-garde in this regard (i.e. education policy)

  7. The way I would explain the yield spike in treasuries with a trough just prior to the commencement of QE1 and a peak just after the end of QE1, is that the market was set up to anticipate the pro-growth effects of QE and began to discount a rising yield trend. As QE was completed and the expansionary effects in terms of actual NGDP were negligible, yields continued their longer term downward trend. As far as the relationship of yields between Guilts and Treasuries two observations:
    1- The Treasury market is many times larger than the UK Gov debt market (haven't got exact statistics), so Treasuries always lead and Guilts follow.
    2- Capital markets are highly interlinked and although undoubtedly there may have been some arbitrage activity, I do not believe this to be the main cause of the correlation. Simply that the economic cycles of both countries are more synchronised and this is priced in yields.

    Finally, having mispriced yields the first time treasury yields this time continued a downward trend following QE2/3 albeit at a decelerating pace until real economic data would confirm otherwise. The difference this time is that the US economy is turning the corner and should thus longer term underpin the higher yields we are seeing. Please also see my blogspot on relationship of short and long term rates. www.rgdanon.blogspot.gr

    1. Yes, I discussed other causes of the yield spikes on my previous post. Over-optimism leading to trend decay is likely, along with various carry strategies.

      However, the correlation between USTs and gilts carries some serious implications. If you are right that gilt yields simply follow USTs, then as I observed in THIS post, that means the UK has effectively no control of monetary policy. It is locked into a quasi-currency union with the US.

    2. To the extent that both economies follow similar fiscal and monetary policies yields will tend to parallel each other. I would not go so far as to say that the UK has no control over monetary policy.

      For example the Bank may decide to be much more agressive and indulge in QE, buying up all types of securities from the banking system. This may have the following effects:
      1- An accelerated devaluation of sterling,
      2-A faster yield compression than equivalent UST's followed by faster yield increase as market perceives stronger growth.

      It very much depends on the policies the Monetary Authorities follow.

      Also I do not believe oil has played such a big role in the yield spike. I think causality is reversed. In other words QE asset buying and higher liquidity may have (partly) driven oil prices higher. i.e there is a speculative element in this rise in oil which in itself may have contributed to a slight rise in yields as the market discounts possible inflationary pressures.The relationship between oil & inflation is no longer what it used to be.

    3. I agree that QE may have contributed to the oil price rise. But I don't think it's the whole story by any means. There was a considerable oil supply shortfall in the second half of 2010 and early 2011, caused I believe by three factors: rising demand particularly from emerging markets recovering from the financial crisis, a production squeeze in the North Sea and the aftermath of the Deepwater Horizon spill (April-September 2010). Surely you don't think that these factors made no difference?

      I might add that if QE does raise the oil price significantly, then it is toxic for the real economy and should be abandoned as a monetary policy tool.

    4. Agree QE probably played a minor role in oil's price rise and it was supply/demand fundamentals mostly dictating.

      I agree with your assertion if QE instrumental in oil price rise then toxic. Difficult to quantify.

  8. I work in the Oil Industry and would like to comment on the WTI/Brent spread

    There has been a marked difference between WTI and Brent with West Texas oil now below $100. This is because the WTI is within a closed system centred on Cushing, Oklahoma with no external outlet. Oil production in the Texas/Louisiana/OK area has also risen in the last year or so due exploitation of tight/shale oil from formations such as the Eagleford.

    Brent oil (actually now a blend of North Sea crudes icluding the Forties field system) is open to the world markets and has been affected lately by shut downs to key North Sea fields such as Buzzard and Elgin (which represent over 10% of production and may have contributed to a decline in UK GDP in the last quater.

    I am not sure how much the increase in the crude price over the last 10 years can be attributed to QE (which has only been going for 3-4 years) rather than an over all rise in demand from the non OECD world

  9. Central banks use interest rates as a monetary transmission mechanism. There are few if any world-wide capital controls.

    Commercial banks are permitted to buy their liquidity (not following the old fashioned practice of storing their liquidity). I.e., domestic CBs buy what they already own.

    Thus from arbitrage in the international interbank markets (foreign financing), we end up with hot money flows & currency wars (which have to be offset by domestic Central Bank open market operations).


    http://research.stlouisfed.org/publications/review/80/06/Eurodollars_Jun_Jul1980.pdf ANATOL B. BALBACH and DAVID H. RESLER Eurodollars and the U.S. Money Supply

    Given that the relative size of the E-D banking system (is many times that of, for example, the Federal Reserve System of commercial banks, it's not surprising that price of gilts is influenced by QE.

  10. Don't forget the S&P rallied a good 30% from July 2010 through to April 2011. At the time punters seemed quite optimistic about the world economy in general (until Greece first started hitting the news). I am leaning more and more towards the camp that thinks government bond yields are almost entirely determined by growth expectations, unless there are some really glaring extrinsic forces at work.

  11. "Oil price rises in a fragile economy are bad news......"

    Perhaps not if you felt compelled to encourage high cost/low net energy, indigenous (to the West) sources of energy for future security of supply reasons.

    We should probably say an appropriate regulated high price rather than freely rising prices ?

  12. " In which case one or the other effectively has no control whatsoever of monetary policy. "

    Well yes if monetary policy was about controlling yields in the gilts market you could say that. However, the monetary policy remit of the MPC is to hit their CPI target. They may choose to flatten the yield curve as a monetary policy tool if they feel that helps to achieve their remit. However, yields are still not the target remit of monetary policy. The current lot of politicians often speak as if low interest rates are the target of monetary policy but they are not.

    Important to remember when speaking about oil that you are describing oil priced in USD. If US QE depreciates the USD, that would be the transmission mechanism whereby Fed QE raised the price of oil. However, that is raising the price of oil priced in USD, the Fed QE would not be raising the price of oil priced in currencies other than the USD. They are appreciating as much as the dollar is depreciating so the QE oil effect is neutral. The oil that GBP and USD can buy is relatively lower because they have depreciated in value in recent years. Whereas oil is not as expensive for currencies like the Aussie dollar and Canadian loonie which are relatively stronger. Probably worth looking at a chart with bond yields, oil prices and the US Dollar Index (USDX).

    1. Hi Richard

      Monetary policy is not just about controlling gilt yields, but that is one policy tool. If that tool is completely ineffective, what makes you think the others are any better?

      I included the GBPUSD chart in the post for precisely this reason. Sterling did appreciate a bit against USD at the time of the 2010 oil price rise, which would have neutralised the effect to some extent. However, we know (anecdotally) that the UK did experience a real oil price rise at that time. I agree a composite chart would help.

  13. That is why I have always liked you, Richard, such a fine mind. So clear. So to the point. You just don't waste any time and that's the best type of economy imaginable, isn't it? To be able to avoid wasting time and just do the things you love instead? We will live long and happy lives, Richard. Our thoughts are spontaneous, though, not guided by any particular God, thankfully. You and only you, in other words, control what you think because even absolute authority fails to escape the spontaneous state of our Universe.

    We should, just the boys and us, all have summer drinks in the Botanical Garden sometime :)

    1. Alister,

      Do you have any constructive remarks to make about the contents of this post? If not, please go away.

  14. It's the danger of looking for correlations between variables where there is collinearity. In this case correlations are meaningless. At least partial correlation should be used (ie correlation between the residuals after all linear effects have been removed).

    Of course correlation does not imply causality and as you demonstrate looking at a sterling QE chart in isolation is totally misleading when the US is doing much the same thing.

    Any analysis of time data runs into this problem then it is only detailed study that can sometimes extract the 'truth'.
    Economists should of course have done a stats 101 course and hopefully rather more.

    1. John, that is indeed the problem. It's a considerable puzzle, not least because there are so many variables it all gets exceedingly complicated.

      Stats 101 is nowhere near adequate. Even I, maths bozo though I am, have done considerably more stats than that, and most economists have done far more than me.

    2. In a completely different industry I have always been amazed at how otherwise brilliant people find it difficult to get their heads round quite fundamental statistical principles. Stats is the science of uncertainty and there are fundamental principles that need to be obeyed and yes, >> 101 level!

      People play with numbers all the time as if they were statistically independent while the underlying dimensionality of their massive datasets can be quite small. Since the 'proper' calculations can be incredibly computer intensive, we end up with decisions taken on the basis of laptop spreadsheets driven by the ignorant.

      The frightening thing is that these same people hold so much sway over decisions taken that affect us all. Rumour-based ideology has replaced science and investigation, particularly recently.

  15. Where I think you are wrong is to concentrate on a monetary tool and not the actual target. You are assuming and defining the tool as ineffective if yields move unrelated to CB actions. I don't see why that would make a transmission mechanism ineffective. Remember the BoE is not targeting interest rates or the exchange rate, it is targeting CPI. Their only interest in those variables is in relation to how they help it to fulfill its remit. Yields rising would only be a failure of monetary policy if they caused CPI to fall below the target.

    The BoE interpretation of failure to fulfill its remit is for CPI to fall below the target and success is to keep it at or above the target. They have achieved that so within the definition of the remit the monetary tools have been effective. If the monetary tools were ineffective the economy would have suffered from deflation. They have been quite clear for years that they considered below target to be something that they would avoid even if it meant being above the CPI target, as long as inflation expectations remained anchored. The Bank was quite right about that because imported inflation, tax changes, tuition fees etc affecting headline CPI is no reason for the MPC to tighten policy. Also important to remember that when CPI surprised the Bank and hit 5%, it was a surprise to them because Keynesian output gapology had led them to believe that business would be unable to pass on price increases in a depressed economy. Well they did pass them on suggesting the output gap is not that large or the UK economy has supply side problems that the Bank can't fix. In the long run monetary policy can't change real variables. Only the government can fix supply side problems. Of course, maybe the economy is not as depressed as indicated by the GDP figures. A monetarist would just say they injected too much money in 2010.

    I seem to be rambling on, but it is not the monetary tools that are ineffective because the BoE has not failed in its remit. What is deficient is the remit in that it has been inadequate in promoting a full recovery. Change the remit and you get better outcomes.

    1. I did not suggest that the UK's monetary tools were ineffective. That was implicit in Robert's statement that UK gilt yields always follow USTs. All I did was note that if that is true, and gilt yields therefore rose as a consequence of US QE rather than anything in the UK economy, then the UK does not have control of gilt yields. And as variables are not independent of each other, it therefore seems unlikely that the UK would have control of anything else either. My pointing out the implications of someone else's statement does not indicate that I agree with it.

      CPI inflation rose to well over 4% during 2010-11 when the MPC was not doing QE. There is no way that rise can be attributed to monetary policy. But there is noticeable correlation between the rise in CPI inflation, the rise in UK gilt yields and the rise in the oil price at that time. To me the supply-side problem in the UK economy is obvious. 1970s redux, but with more supportive monetary policy, a much more sensible attitude to sterling and far tighter fiscal policy.

  16. " CPI inflation rose to well over 4% during 2010-11 when the MPC was not doing QE. There is no way that rise can be attributed to monetary policy. "

    The CB monetary policy stance affects expectations immediately. Money affects output with a 6 month lag. Money affects prices with a 12-24 month lag. So it is prior monetary policy that would affect CPI during 2010-11.

    The MPC pay little attention to where CPI is today because that is bygone MP. What they are basing their decisions on is where CPI will be 2 years later. So whether the MPC do QE or not is determined by where future prices will be because that is the target of their MP remit. For obvious reasons that relies heavily on their forecasting models being accurate. What they got wrong is they did not believe UK businesses would be able to pass on price increases (output gapology).

    I don't want to put words in your mouth but one often reads people assuming that things would have been exactly the same in the absence of MP actions. They do not consider the counterfactual that output and nominal GDP would have been much lower in the absence of activist QE MP. Perfectly valid to say the MP actions were not enough or too much. The Bank research calculates that their QEs raised nominal GDP 6% from where it would have been in the absence of MP activism. Basically those who believe QE has been ineffective are assuming NGDP would have been the same in the absence of QE. Others calculate the impact at a lower level and at the cost of credibility. This was an interesting post by Simon Ward on the counterfactual..

    1. No, I'm certainly not suggesting that monetary policy has no effect. But you really can't claim that an increase in inflation to more than double the target was what the MPC intended. There were other factors at play - as is evident from the fact that the MPC didn't raise interest rates early in 2011, which might have been expected from the inflation figures. Those other factors in my view would have included the oil price, along with the VAT rise and other mostly exogenous factors. The MPC interpreted the 2010-11 inflation as temporary and the underlying trend as deflation, and therefore decided to tolerate inflation well above target.

      I think the answer is that we don't know how much impact QE really has. There are so many other things affecting output and NGDP that it's very hard to identify QE-specific effects. In 2010, for example, there were three "black swan" events - the Japan earthquake, the Deepwater Horizon oil spill and the Icelandic volcano - all of which shocked the global economy. How much each of these shocks contributed to the 2010 downturn and subsequent recovery and how much was due to other things is very hard to say. But I regard it as highly unlikely that the oil price rise in the second half of 2010 had less effect on inflation, output and NGDP than monetary policy.

  17. There should be NO monetary policy whatsoever on planet earth. The idea that groups of people should be constrained in their purposeful actions by a body of elite humans (that think they know what is best for all) is quite frankly absurd. The welfare/warfare state is dying. We are living the world of Atlas Shrugged Frances, I suggest you read it quickly.

    1. I don't agree with you. I have read Atlas Shrugged and it isn't a world I recognise or would want to live in.

    2. The world in Atlas Shrugged describes the one we are currently living in, complete with Pirates and the talented leaving our shores for better climes. You are a Christian Frances, who heartily believes in the social contract and running the planet like a train-set as an altruist who wishes to use the brute force of the state to rob its way to create your vision.

      You were taught from a very early age that theft is wrong Frances, but you heartily agree with collective theft and cannot fathom this is wrong. How about respecting civil society, you know,voluntary networks, peacefully formed to solve SOCIAL problems?

    3. I remind you of the rules of my blog:

      - please confine your remarks to the subject of the post

      - please refrain from personal attacks on me or on any other commenters

      Your comment breaks both of my rules.

      You are welcome to post polite constructive comments here, but I will delete any further comments from you that attack me or my beliefs or promote your ideology.

      I would remind you that the world of Atlas Shrugged is an atheist one. My Christian beliefs therefore have no relevance to your comment.

    4. This comment has been removed by a blog administrator.

    5. This comment has been removed by a blog administrator.

    6. Christ didn't believe in the use of violence, yet you advocate theft as a social more? Seriously, if you see a contradiction, check your premises out. Theft and the use of violence is wrong IN EVERY OCCASION, isn't it?

    7. I have never advocated either theft or the use of violence.

      I asked you to abide by the rules of my blog. Unfortunately you are not doing so. You are no longer welcome here.

  18. " But you really can't claim that an increase in inflation to more than double the target was what the MPC intended. "

    Of course it was not intended and that was not what I meant. The Bank knew there would be exogenous factors because the large depreciation of the currency during 2008 also affects prices with a 12-24 month lag. The reason I am banging on about how they see the output gap is because it impacts their policy decisions over the quantity of QE that they estimate the economy needs to maintain the policy target. They can't do anything about exogenous factors such as VAT or much about the oil price effect on the economy. However, a traditional monetarist would say if they had not overdone the QE, sterling would have appreciated offsetting some of the impact of the oil price rise. Note a monetarist would not criticise QE, especially in 2009. What they would say is the later QEs were overdone.

    The Bank use a New Keynesian model to estimate how much slack they think there is in the economy, the output gap. The output gap can't be measured, it can only be estimated or inferred. The reason why that is important and relates to CPI is because when the Bank estimate a large output gap they believe price pressures, exogenous or domestic will be absorbed. That is firms and retailers etc will lack pricing power to pass on their increasing costs to consumers through higher prices i.e. they will be forced to take the hit to their profits. That did not happen and firms passed on their higher input costs to customers. Therefore, that is what I mean about the earlier QE being too much for the Bank to hit their target and why the failure relates to output gapology. Personally, I am fine with CPI being above target and would be unperturbed with CPI at 5%. However, the Bank really need a better policy target that people know what to expect.

    " There were other factors at play - as is evident from the fact that the MPC didn't raise interest rates early in 2011, which might have been expected from the inflation figures. Those other factors in my view would have included the oil price, along with the VAT rise and other mostly exogenous factors. The MPC interpreted the 2010-11 inflation as temporary and the underlying trend as deflation, and therefore decided to tolerate inflation well above target. "

    Yes it would be a big mistake to raise rates based on headline inflation. The future is what they are concerned with and within the constraints of their remit they would only raise rates if inflation expectations were becoming unanchored.

    " In 2010, for example, there were three "black swan" events - the Japan earthquake, the Deepwater Horizon oil spill and the Icelandic volcano - all of which shocked the global economy. "

    Sorry to be a pedant but an earthquake, oil spill and volcano are maybe low probability or tail risks but they are not black swan events. A true black swan event is something that is generally considered impossible until it happens. My apologies for diverting your thread.

    1. Hang on. I think you are getting confused. At the time that I am talking about (2010-11) there had only been one round of UK QE. Look at the chart.

      I would be the first to say that the later rounds were questionable in objective and even more questionable in achievement. But if you think inflation rose in the second half of 2010 because of UK QE, then you are arguing that the FIRST round was overdone. Unless you, like others, are arguing that the UK economy was reacting to the US's QE2 programme. And as I have already pointed out, if that is the case then how effective can the UK's monetary policy really be anyway?

      About the 2010 shocks - well, ok, maybe not strictly "black swans". But for me they fit the "black swan" description rather better than the financial crisis, which was not only entirely possible but widely predicted. "Generally considered impossible" = heads in sand.

  19. Hi Frances- scpeticus here. Just clocked that you are Cat in a Box. Thanks for acknowledging my input via FTAV on that negative rate stuff by the way. It would be nice if Izzy did the same occasionally. Anyway, never mind.

    I have written at considerable length in the past about the impossibility of independant national monetary policy given that we are all so tightly coupled, on my blog which is at "liminalhack".

    The coupling of policy like this represents a very important constraint on how the global system can evolve and significantly limits degress of freedom in policy.

    All that said, its vital to look through all this monetary stuff to get at the underlying economic variables which are information and energy.

    People talking about the end of banking and the current monetary system are trying to imagine what comes next. I suggest that what comes next is not some insane government driven banking utility but, whether we like it or not, the complete financialisation of energy.

    The only genuine store of value existing in sufficiently vast quantity and of sufficiently guaranteed desirability lies buried under the earths surface in the form of the remaining fossil fuel stock.

    It will, regardless of policy, become the place in which unrecycled profits of the private sector (aka government debt) are deposited.

    1. An 'energy standard' no less !

      That suggests any additional money entering the system (via borrowing or printing) not matched by a corresponding increase in prevailing quality raw energy provision, or proportionate efficiency savings, will, by definition, be inflationary.

      I think we may already be there? The year of 2005 is claimed to be a watershed.

  20. " Hang on. I think you are getting confused. At the time that I am talking about (2010-11) there had only been one round of UK QE. Look at the chart.

    I would be the first to say that the later rounds were questionable in objective and even more questionable in achievement. But if you think inflation rose in the second half of 2010 because of UK QE, then you are arguing that the FIRST round was overdone."

    Your chart relates to nominal 10-yr gilt yields, not inflation. The first 2009 round was probably around £50 billion overdone to strictly meet the target. However, I am not saying that as some sort of inflationist criticism merely an observation. Moreover, CPI would rise above target in the second half of 2010 and 2011, not just from an overly expansionary QE, but from an economy with supply-side rigidities and not as much excess capacity as the MPC assumed. That is the point I am making that the MPC overestimate how much excess capacity there really is in the UK economy. If there is not much you just get price increases without output rising.

    I see the point you are making with correlations. But I think you are reading way too much into yields. Always dangerous to reason from price changes but the same influences over the last 4 years would be impacting the UST market and the UK gilt market at the same time. So yes, correlation. Some causes of spikes and dips over the last four years. There was an utter collapse in the index-linked bonds during the financial crisis as investors expected deflation. When the BoE and Fed commenced QE and raised inflation expectations there was a shift out of nominal bonds towards index-linked bonds. See charts below. Huge influence of the ebb and flow of the EZ peripheral crisis leading to safe haven flows. GDP growth expectations in the economy.

    " Unless you, like others, are arguing that the UK economy was reacting to the US's QE2 programme. And as I have already pointed out, if that is the case then how effective can the UK's monetary policy really be anyway? "

    I really can't see how you get from seeing correlations in government debt markets to " the UK economy was reacting to the US's QE2 programme." The bond market is not the economy. The bond market is usually reacting to what is happening in the economy.

  21. Making a distinction between the bond market and the "real" economy is wrong. They are both part of the economy. The real economy is the real (physical) part, and the bond market is one component of the informational machinery.

    There is no determining a particular sequence of cause and effect here. The bond market neither leads nor lags the real economy, they influence one another on a continual basis.

    Certainly you could posit that the real economy tends to dominate the informational one, and that may well be a reasonable position but you can't possibly prove or disprove such an assertion.

  22. "In which case one or the other effectively has no control whatsoever of monetary policy."

    Maybe monetary policy is better understood as some sort of worldwide weighted average of every (major) central bank's policy (within a floating exchange rate area with no exchange controls), which individually can only pull so much as their own weight. In which case everybody is in control without anybody being fully so; which, if so, is probably a positive feature, as it smooths the impact of single agent mistakes.

    This is consistent with there being effectively one worldwide (developed) stock market, with national indices all strongly correlated.

  23. There is a reason for QE.

    Correlations. Be careful.

    A former coworker and friend of mine had to investigate data (in the 80s) in steel plant. These days the IT was in the upward curve. They investigated data and tried to find trends ... After weeks they found an something amazing relation. Every year in the time from September to October the quantity of steel ordered increases significantly. They investigated and investigated, IT department leads appointed one meeting after the other. After a few weeks having no idea where this spike did come from. Then they called the sales. It finally turned out that the 'Russians' (at the time of centrally planned economy) got the numbers and had been allowed to order the quantities planned for the next year. It's good to ask those who know.

    In the year after the crisis in 2010 an Austrian Bank an expert committee found out that not hiring (new young employee) for one year leads to an increase of the employee's average age by one year. What a surprise.

    The correlation can be anything. Maybe something we don't know. Compare DAX and ATX. Until 2009 they have been very similar. Why is the ATX so low. Both Indicies are heavily dependent on bank stocks. What you must know is that profits from buying and selling stocks are now subject to 25% tax. This simply killed the Vienna stock exchange and the ATX simply represents this. On the other hand Vienna is niche market still. Pension funds who do no longer hold a huge quantity of stocks (due to laws and rules enforced by the governments) don't buy either. What can you learn form this - political decisions are evil. Because they took away from the pensions funds the opportunity to regain the loses from 2008.

    I am not sure if you can explain what impacts the charts - I think what you can do is to find indications that your theory does make sense. You can find indications on this chart that the government did QE (one part of the puzzle) or that the exchange rate is adjusted in order to buy the raw materials at a constant price or within an accepted bandwidth (adjusting the screw in one place). But it will not work the other way around.

  24. Please allow me to share (you will very likely know it)...
    Hyperinflation in Hell by Yoram Bauman

    Thank you very much for all the interesting articles.