Market comment 2022

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The QE programme has come to an end. The total government cash requirement is to be funded by financial markets. And, in addition, QE may begin to be unwound. This means that the Bank of England will not repurchase gilts when those it owns are redeemed. It owns 33% of all gilts right now. What this means is, broadly speaking (and all the figures are estimates, so broadly speaking is good enough) that in 2022/23 the financial markets will have to fund £100 billion of gilt purchases and at the same time the Bank of England will withdraw over £35 million from that market. 

That means there will be a cash call on U.K. financial markets of around £140 billion when over the last two years there has been none, in effect. This is a seismic change to funding. More than 6% of UK GDP is going to be required by government to be withdrawn from effective money supply. What are the consequences? Candidly, who knows? We can be sure that the policy is deliberately designed to push down government bond prices by increasing the number of gilts available to the market. The result will be increasing interest rates. That much is predictable. It is also predictable that without a change in policy more than £100 billion is going to be withdrawn from financial markets over the following few years. Apart from increasing interest rates no one can be sure what the consequence of this is. 

But, given that QE was always intended to push investor funds into riskier assets, and this has clearly happened, what we can reasonably expect is a reversal of this trend. There will be sales of riskier assets. In fact, those sales could be significant. The £140 billion required in the coming year has to come from somewhere within the financial system, and they do not create the money to fund this. What this might mean is three things. First, there will be net selling markets in riskier assets. Second, net selling markets reduce prices at the margin. Third, markets are valued at marginal prices, meaning that the overall sense of well-being amongst those with assets will fall.

 Bad as QE Was, Unwinding It Rapidly Could Be Worse | naked capitalism