Can someone explain this sentence to me?

[Kombaiyashii]

Just reading an article about the printing of money and how it's driving up the stock market.

The particular part which I don't understand is where it says:

"This extra money (referring to the printing of money) has driven down the returns on government debt, making other assets, such as shares, more attractive."

Returns? I am completely at a loss here.

Here is the article in full:
http://www.bbc.co.uk/news/business-21696467

 

[dannno]

The returns on government debt - bonds maybe?

 

[Zippyjuan]

People (and retirement funds) buy bonds, including government debt, for secure, steady income. But low interest rates have reduced the amount of money they can expect from such investments. If they are not yielding enough (offering a high enough interest rate or rate of return), then people are forced to seek other investments to maintain their income flow so they move money out of bonds and into stocks- often dividend paying ones which offer a similar income stream like the bonds did.

Right now, if you lock your money up for the next ten years in a ten year US Treasury bond, you will get a 2.6% rate of return. http://www.treasury.gov/resource-ce...interest-rates/Pages/TextView.aspx?data=yield That is OK if inflation stays below that amount but you have the risk of inflation rising during that time and losing in terms of real income on it. A dividend stock may be able to offer a 3% dividend yield and give you more flexiblity to change your investments if interest (and inflation) rates go up.

 

[Kombaiyashii]

Government debt interest rates confuse me. Am I making sense of this correctly?:

1. So the government is going into debt and must someday pay back this money with interest.

2. The government sells these debts to investors.

3. When the government reduces the interest rates across the board it is also reducing the amount they are paying back on their own debt.

 

[ronpaulfollower999]

Government debt interest rates confuse me. Am I making sense of this correctly?:

1. So the government is going into debt and must someday pay back this money with interest.

2. The government sells these debts to investors.

3. When the government reduces the interest rates across the board it is also reducing the amount they are paying back on their own debt.

For the most part you are correct, except the government doesn't set the interest rates. Theoretically, the market does, but the Fed has been buying $85 billion in bonds a month which artificially lowers the rate.

 

[Kombaiyashii]

So was this how Greenspan lowered interest rates? Is this the same in England?

I just thought he threw out a number somewhere.

 

[Natural Citizen]

Probably off topic but note worthy...

A little more than half of that amount ($45 billion) goes to buy Treasury bonds to finance the federal government. The rest ($40 billion) goes to the continued banker bailout that buys their sour (and I think fraudulent) mortgage debt. The money printing is what’s causing Chuck O’s “30%” loss in purchasing power for his retirement dollars. As the money printing continues, the buck will buy less and less.

Why doesn’t the President divert just 2 months of the $40 billion the Fed creates every month to continue the banker bailouts to stop most of the $85 billion of spending cuts? In case you haven’t noticed, the bankers are a sacred cow. The big banks have gobbled up trillions in bailouts already, and there is no end in sight. After all, the Fed action is “open-ended.” The banks are the reason why the U.S is in financial trouble, and the continuing banker bailout is why the economy will never get better. The only reason why the economy has not collapsed is the Fed can print money to buy sour debt that no one else would touch.

Because of all this money printing, the rest of the world is in the process of shunning the dollar and the U.S. Treasury. It looks like gold, or some other gold-backed currency, will facilitate global trade in the not-so-distant future.

http://usawatchdog.com/government-spending-cuts-2013-what-happens-if-the-us-doesnt-cut-spending/

There was a thread here some place.

 

[Carson]

Just reading an article about the printing of money and how it's driving up the stock market.

The particular part which I don't understand is where it says:

"This extra money (referring to the printing of money) has driven down the returns on government debt, making other assets, such as shares, more attractive."

Returns? I am completely at a loss here.

Here is the article in full:
http://www.bbc.co.uk/news/business-21696467

I'm not sure if I can but I'll try and give you my take on it.

"This extra money (referring to the printing of money) has driven down the returns on government debt, making other assets, such as shares, more attractive."

I could be blinded right now by anger after reading of the sentence and have it all wrong...but I think this may be referring to one of the biggest fraud's spanning decades.

It sounds to me like they are trying to perpetuate the scam of the stock market going up and making you think your making a killing. If they double the money supply sure your Uncle Phil gets twice as many of something worth half as much. He may have kept up with inflation but once he is stiffed with capital gains taxes on the illusion of a profit he has lost money.


Here is a chart made by Dr. Robert Sahr showing the devaluation of the dollar as a result of inflation. Notice how it show it now taking $130.00 to do what $5.00 used to do back where the chart is pretty much a flat line.

Next take a look at this chart showing the Dow Jones Industrial average. It is an average of a handful of stocks. For the sake of argument lets say it's made up of 100 different companies.

Notice how the average goes up proportional to the Dr. Sahr's devaluation chart? If your having trouble try knocking off two zero's to show what an average of one stock would have done. You will see while Robert Sahr's chart went from $5.00 to $130.00 so did the one Dow Jones Industrial stock.

So see what I'm saying? While we've all thought we were really making a lot of money as our stocks went up we they were only keeping pace with inflation. That in itself could make some of us feel okay. The thing is though is that the very people that made the inflation possible are now cashing in on the inflation by charging people capital gains taxes on the illusion of a gain.

Illusions...illusions everywhere!

 

[Madison320]

I'll take a crack at explaining this. One thing to keep in mind is that the Fed does 2 things. They loan money to certain banks and they print money by purchasing assets like govt debt and mortgages. When the Fed loans money to banks they SET the rate of the loan, when they buy stuff like govt debt they can only INFLUENCE the rates of the govt debt. I think that's where the confusion comes from about the Fed setting rates. If you are the one loaning the money obviously you can set the rate. If you are merely buying someone else's debt you can't set the rate, only influence it.

 

[acptulsa]

I think you do have it down, OP, except that the money printing is increasing the supply of dollars, making them worth less (or, in other words, causing inflation). Bond interest rates do not self-adjust for this. Stock prices do. Companies are worth what they're worth regardless of the dollar's value, and when they pay x percent of their profits that, too, self-adjusts for the value of the dollar (or lack thereof).

That help?

 

[Seraphim]

Yes, but there are two primary mechanisms to push rates down.

The first and more conventional is for the Central Bank to reduce the overnight lending rate to big banks. That is what the Central Bank interest rate is. It is short term lending to the Primary Dealers (BofA, JPM Chase, Citi....) who then turn around and relend it at higher rates, to businesses and households.

So if the overnight rate from the Central Bank is lower, the banks are able to reduce their own rates and attract business for themselves on the lending side of their balance sheet.

The second method of pushnig rates down is the newer, less conventional Quantitative Easing (bond buying programs).

What it entails is the Central Bank expanding its balance sheet and base money supply SPECIFICALLY to purchase bonds on the market.

What this does is it creates an added, constant tranche of demand for bonds. In this case, US Treasuries and Mortgage Backed Securities.

When bonds are in demand, the bond price goes up and the interest rate goes down. It's a supply/demand function.

Now that the Zero Interest Rate Policy (ZIRP) has been exausted in it's ability to drive debt growth, Central banks the world over are now creating base money supply inflation specifically to purchase bonds to expand debt and keep rates down.

So was this how Greenspan lowered interest rates? Is this the same in England?

I just thought he threw out a number somewhere.

 

[Madison320]

Now that the Zero Interest Rate Policy (ZIRP) has been exausted in it's ability to drive debt growth, Central banks the world over are now creating base money supply inflation specifically to purchase bonds to expand debt and keep rates down.

Yes! As you may have noticed from previous posts I think QE is a much more potent and dangerous form of stimulus, compared to ZIRP. With ZIRP you can always raise the rates back up but you can never reclaim the lost purchasing power from QE. Also most people use Japan as an example of stimulus and debt not leading to price inflation. But Japan did not do QE!! They only lowered rates. However just recently they started doing QE and guess what? Prices are rising rapidly in Japan.

 

[erowe1]

Just reading an article about the printing of money and how it's driving up the stock market.

The particular part which I don't understand is where it says:

"This extra money (referring to the printing of money) has driven down the returns on government debt, making other assets, such as shares, more attractive."

Returns? I am completely at a loss here.

Here is the article in full:
http://www.bbc.co.uk/news/business-21696467

You promise to give me $110 a year from now in exchange for me giving you $100 today.

I give you $100 and expect to make a profit of $10 in one year (a return on my investment).

You print money, devaluing the dollar.

In one year, you give me $110, that are worth only as much as what $100 today is worth.

Thus, by printing money, you decreased the return on my investment.