We know that interest rates are going to go up eventually. But no-one wants the cost of borrowing to go up right now - least of all the world's overextended governments. That's why the ructions in the US government bond market this week has people nervous.......
But the second lesson is more fundamental: we all have higher interest rates in our future. And when I say higher, I don't just mean higher than the record lows they are at today, I mean higher than they were before the crunch. An era of cheap money partly got us into this mess. Thanks to the mountain of public debt now sitting on government balance sheets, it's a fair bet that money is going to more expensive when we come out the other side....
The financial crisis has generated a "scrambling for public funds of war-like proportions". Other things equal, basic economic theory suggests that a rise in government borrowing on that scale will push up the long-term cost of borrowing once the recovery gets going. Of course, that might not happen overnight, especially with so much slack in the big economies due to the recession. But even sceptics about the effect of borrowing on rates would probably accept that this kind of rise in government debt will have an effect on the cost of debt....
When the advanced economies pull out of this crisis, the level of public debt is going to be the central fact of economic and political life for years to come.
Stephanie Flanders at BBC.
The Fed has been buying up corporate bonds for several months, but the Chairman, Ben Bernanke has so far resisted calls to buy US government debt. Does he know something that Mervyn King doesn't?
When asked, Ben Bernanke says he has no ideological objection to buying government debt - he simply thinks that right now, it's more effective to tackle the corporate credit shortage directly.
There are several reasons the Bank can't follow his lead. One is simply that the US corporate bond market is much, much bigger relative to the size of the economy than ours is.
If the Bank of England tried to buy £75bn-worth of corporate bonds it would find itself buying up roughly the entire market. It would then be in the uncomfortable position of being the sole purchaser of the debt of some of Britain's biggest companies...
Our central bank is also concerned about taking too much corporate risk onto its balance sheet. That doesn't seem to be much of a worry to the Fed (though some at Threadneedle Street wonder why not).
Stephanie Flanders explaing why the Bank of England is buying Gilts (government debt).
Stephanie Flanders at Stephanomics tries to find the difference between Credit Easing and Quantatative Easing.Things are complicated - especially monetary policy things. Central bankers, of all people, have to be precise.
But it's odd that two former teachers, previously known for their crystal clarity, should decide now is the time to be wilfully complex.
I suspect that the real reason they want to distance themselves from QE is that from there, it's only a small leap for commentators to a phrase that people understand only too well: printing money.
But here's the funny thing: they may not be doing QE. But they are very definitely printing money.
Stephanie Flanders at Stephanomics explains quantative easing. But the most popular definition of printing money - the one the politicians are terrified of - is simply central bank financing of government deficits. Also known as "monetizing the government debt".
Since the Bank will be purchasing gilts on the secondary market, not from the government directly, the government will almost certainly say that this is not monetizing the debt. To say otherwise conjures up vision of Weimar and Zimbabwe.
To preserve this distinction, the Bank of Japan was legally forbidden to buy debt directly from the Ministry of Finance when they undertook QE in the 1990s.
Funnily enough, the Bank of England faces the same legal constraint: Article 101 of the Maastricht Treaty (of all things) forbids direct central bank financing of deficits.
But it is a distinction without a difference. When the Bank of England buys up gilts, one arm of the government is buying up debt owed by another arm of the government in exchange for money created by the central bank. Whether the gilt is brand new, or issued the day before, is quite simply irrelevant.
