FOREX TRADERS

[Nettles]

this all still confuses me but here is more info

15:59 EUR ECON: Credit Easing Vs Quantitative Easing Mar 11
Quantitative Easing is the new catchphrase. While the theory of QE rests on
a belief that in a fiat system you can always increase nominal spending and
inflation by reducing the value of the domestic currency relative to goods and
services. The global charge toward quantitative easing is one of the reasons why
some are now seeing gold and commodities in general as attractive investments.
The problem is that when you add in the ingredients of debt deflation,
synchronized global slowdown, and excessive reliance on the US consumer then the
required quantitative easing needs to be that much greater. Despite BoJ's
quantitative easing the inflation rates in Japan are far from being
uncontrollable with the latest data showing core-CPI at -0.2% y/y.
When the velocity of money is difficult to measure there is a problem of how
much quantitative easing should be done. Related to this issue is how to
effectively measure quantitative easing...do you look at money supply or spreads
on risky assets vs gilts? But beyond these issues there are the differences from
an implementation perspective or what Willem Buiter has termed quantitative
easing vs qualitative easing. The main difference being that the former involves
keeping the liquidity and risk profile of assets constant in the balance sheet
constant while the latter involves the purchase of risky and illiquid assets.
The BoE has chosen the largely walk on the road of quantitative easing while
the Fed has been more aggressive in pursuing qualitative easing (or credit
easing). Understandably the impact of the BoE's move has been greater on gilts
than the Fed and this has led to a sharp narrowing in the gilt/Treasury spread
and even the gilt/bund spread. However, one needs to question how effective the
BoE will be in their policy given that holders of gilts will have been doing so
for a reason -- risk aversion. If these holders do decide to sell their gilt
holdings (and that is a big 'if' given the way in which the non-competitive
auction went today) then it seems unlikely that they would be willing to put
BoE's electronic and newly created cash to work.
For now the fact is that the BoE has adopted a different approach and as
long as the Fed is still credit easing and the ECB looking into credit easing
the gilt purchases from the BoE should continue to help gilts over Treasuries
and bunds. Expect to see the 10-year gilt/Treasury and 10-year gilt/bund spreads
to move significantly into negative territory with the latter already turning
negative. [e-mail]