Monthly Archives: May 2015

Quantative Easing & The Money Multiplier.

The bond purchasing programme undertaken by the Bank of England, spent £325,000 million, yes £325 Billion. This is known as the Quantative Easing Programme.

What is rarely reported in the media is the long term consequences of the programme. So the Bank of England created £325 billion of new money, used this cash to buy assets from the clearing banks, such as UK Government Gilts (UK Government Bonds), High Quality Corporate Bonds. These assets are bought by the Bank of England, the clearing banks then get relieved of these assets of their balance sheet, and in return get newly created cash from the Bank of England.

It is hoped that this fresh new cash is then pushed into the economy by creating loans for businesses, individuals and mortgages.

However has £325bn then injected into the economy ?

It is likely to be a figure much higher, perhaps 3 times that of £325bn. Why ?

Simple, the money multiplier. The £325bn that hits the balance sheet of the clearing banks, is lent out. This cash then hits other banks, and that gets re-lent. It is the foundation of our banking system, Fractional Reserve Banking, so in reality, perhaps the Quantative Easing Programme that created £325 bn could have created over £1 Trillion in credit.

We see rising assets prices in UK Housing, UK Shares. Is there a link ? Definitely Maybe.

The Investors of US National Debt.

The US Federal Government, runs a budget deficit, it spends more than it earns.
To fund this gap, it issues T-Bonds (Treasury Bonds), debt issued by the US Treasury to bridge the gap between income and expenditure.

The US National Debt is huge.


As you can see over $18 TRILLION is owed by the US Federal Government.

Over $6 Trillion is owned by foreign investors. What this means is that foreign investors are the creditors to the US Government.
So when you look at the $6 Trillion, this is over 30% of total US National Debt is held by foreign investors.

China owns the biggest chunk of U.S. foreign debt at $1.3 trillion, followed by Japan at $1.2 trillion. Just these top two creditors constitute a huge portion of US Debt.

How much does Greece owe and to who ?

Each day in the news we hear that Greece faces problems meeting its debt repayments to its creditors.

What is the amount it owes ?

The country is 323 billion euros in debt (£235 billion) – more than 175% of its GDP. That is €323 Billion

Its creditors are:

€20 billion The European Central Bank
€25 billion Spain
€32 billion IMF
€34 billion Other Eurozone Nations
€37 billion Italy
€42 billion France
56 billion Germany.

Total of €323 Billion = £235 billion

UK HM Government April 2015 borrowings…

Another month, guess what, take a lucky guess, it is the same old story, HM Government, spends more money than it receives via taxes and duties. Another deficit month, thus to bridge the gap, needs to borrow on the bond market.

In April 2015, the HM Government had to borrow money to meet the difference between tax revenues and public sector expenditure. The term for this is The PSNCR: The Public Sector Net Cash Requirement.

There were “only” 4 auctions of Gilts (UK Government Bonds) by the UK Debt Management Office ( to raise cash for HM Treasury :-

29-Apr-2015 2% Treasury Gilt 2025  £3,000 Million
21-Apr-2015  3½% Treasury Gilt 2045  £1,924.980 Million
16-Apr-2015 0 5/8% Index-linked Treasury Gilt 2040  £1,283.940 Million
08-Apr-2015 2% Treasury Gilt 2020  £4,010 Million

When you add the cash raised:-

∑(£3,000 Million + £1,924.980 Million + £1,283.940 Million + £4,010 Million) =  £10,218.920 Million.

£10,218.920 Million. = £10.2 Billion

On another way of looking at it, is in the 30 days in April, HM Government borrowed:-

£340 million each day for the 30 days. We are fortunate, while the global banking and financial markets still has the confidence in HM Government to buy the Gilts (Lend money to the UK), the budget deficit keeps rising. What is also alarming, is the dates these bond mature 2020, 2025, 2040 and 2045. All long term borrowings, we are mortgaging our futures, but at least “we are in it together…

The consequences of too much debt.

We see today that raising cash for corporates is done by debt issuance (bond issues) and currently this is the preferred method of company financing. Effectively due to the tax treatment of debt companies are given incentives to borrow instead of building strength on the balance sheet.

Apple issued bonds to finance a share buy back. Cynically speaking by undertaking a share buyback it reduces the numbers of shares on issue, and thus boosts the earnings per share.

Job creation 20  years ago during the telecoms and technology boom was financed by Equity raising, of course these new start ups had little hard assets to issues bonds but one thing for sure, the equity raising of the 1990’s had massive job creation.

Finally, when one looks at all the debt financed private equity deals, one has too accept once the company is acquired by a private equity fund, what then happens is massive cost cutting to meet debt repayments, or asset selling to repay the debt pile and in both cases, these actions can destroy jobs.

Perhaps wealth creation is better at creating wealth and prosperity by equity fund raising.



The Bond Market

Governments and Corporates raise cash to fund their activities via the process of issuing bonds. It is just another term for borrowing money, and thus getting into debt.

The Debt Market is vast. The global bond market is worth £59 Trillion ($90 US Dollars).

This debt is accruing interest to the creditors, such as fixed income investors like pension funds or ibsurance companies.

£59 Trillion is a lot of debt.

UK Election: The UK Debt

The UK has a structural debt. The current general election campaign is not talking about hard figures.

This is the reality. In 2015/16 the UK will borrow nearly £80 billion pounds and pay in interest on the total UK National Debt the grand total of £46 billion pounds.

That interest payments adds zero value or benefit to the economy, it is the creditors to the UK Government who get the benefit.