Moneyweek: 0% interest rates are dangerous...

WTF?_2

from Moneyweek (https://www.moneyweek.com)

http://www.moneyweek.com/news-and-charts/economics/0-interest-rates-are-dangerous-heres-why-14296.aspx

[FONT=Verdana, Arial, Helvetica, sans-serif]In short, the massive rate cuts aren’t working. So what’s plan B, Mr Bernanke?

The Fed’s answer: print money like water, electronically, via ”quantitative easing”. Basically the central bank can increase the amount of money splashing around the system by ramping up the size of its balance sheet. And it’s already fired the first shots by increasing its assets (and correspondingly, its liabilities) by some $1.3trn, with the promise of at least another $700bn on the way.

Slicing through all the monetary technicalities – there are enough of those to cure virtually anyone’s insomnia – the bottom line’s very simple. The Fed, and the Bank of England, which is soon likely to join the printing party, can churn out as much extra folding stuff as they like.

[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]And even though central banks may not be able to persuade companies and businesses to take on more debt, there’s one group of people who definitely won’t be able to resist – the politicians. And we all know what governments – and yes, Germany’s a very honourable exception – are like when they get the taste for a bit of Keynesian-style borrowing and spending. So presumably, together they can eventually – though we can’t be sure of exactly how long it will take - ‘succeed’ in pushing the price of assets like property and shares, and also the cost of commodities, back up again. In other words, back to inflation again – not just in the States, but worldwide.

The trouble is that it’s a very narrow tightrope. The central banks will need to turn off the money taps again as inflation bites. But by then, the chances are it will be too late. The politicians will have blown all that borrowed cash, and then been voted out of office, leaving the rest of us to pick up a very large bill. [/FONT]

Fits in with Pestons observations too:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/12/deflation_or_inflation.html

At the moment our economies turn, there's a genuine risk that central banks won't be able to drain all this cheap money from the system quickly enough to avert quite a surge in the inflation rate.
Against that background, I conducted an unscientific poll of leaders of some of our biggest multinational businesses at a lunch a few days ago.
I asked them to think about 2010, and whether they were planning for that to be a year of deflation or inflation.
To a man (this isn't me being sexist, it's that world: they were all men), they said they expected a sharp rise in the inflation rate.
They said this in a resigned way, as though it was the bill for a party that had been far too expensive and had gone on far too long.

Those of us with savings, including those earmarked for a house, are going to need to be very vigilant as to the state of the markets. It's going to be falling prices in the near term as deleveraging continues but once inflation takes off it's going to go up like a rocket, decimating the value of cash.

FoxtonsRIP

Interest rates should be at least 5%. We'll have rampant inflation very soon. Labour are trying to say 0% interest rates will stave off recession, it won't.

Dithering_Dad

If you really believe that we're heading towards hyper inflation, then shouldn't you be buying a house right now and getting a long (5 yr?) fixed rate mortgage deal, while interest rates are low?

Even with a hefty deposit, it can take anything from 3 to 6 months to find a place and then for all the paperwork, etc to go thru - plenty of time for inflation to take off. Especially if the OPEC cut in oil production works and oil starts to climb again.

purch

The central banks will need to turn off the money taps again as inflation bites

That will be the key decision, along with how much 'easing' is required to haul us out of the deflationary spiral we have fallen into.

I do think, that by the time this is all over (if it ever is....we could be looking at a decade :eek: or more) many of the traditional monetary and economic theories and models will need to be re-written.

Sir_Humphrey

0% rates did not cause high inflation in Japan. Even the crudest quantity theory of money has to take into account velocity. Aligning Robert Peston with Moneyweek's more eccentric wing is pretty dishonest IMO. The reason IRs are being cut is to make the return on investment higher than the return on savings. If investment is lower, then savings fall to match, the mechanism being falls in income and unemployment. You cannot pay off debt if you are unemployed. The reason people borrowed was to off-set declining relative income. If you cut people's incomes, you discourage saving, no matter what the IR is. Keeping IRs high now would lead to debt deflation.

luvpump

!!!!!!? wrote: »

from Moneyweek (www.moneyweek.com)

http://www.moneyweek.com/news-and-charts/economics/0-interest-rates-are-dangerous-heres-why-14296.aspx




Fits in with Pestons observations too:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/12/deflation_or_inflation.html



Those of us with savings, including those earmarked for a house, are going to need to be very vigilant as to the state of the markets. It's going to be falling prices in the near term as deleveraging continues but once inflation takes off it's going to go up like a rocket, decimating the value of cash.

Yep, its something a number of us have suspected might happen, so for me circa 2010 is the time to buy in ... We have been right befor & i think its a fair bet most of us will be right this time, time will tell I guess.. crash gordon will print 24/7 to turn this around !!!!

purch

Even the crudest quantity theory of money has to take into account velocity

Yes

It is the velocity of Money Supply that is often overlooked (maybe deliberately)

the_ash_and_the_oak

i am wary of comparison to japan as japan was saver nation rather than debtor nation, japan exported its inflation and many of its low rates were not available at home (though there is ironically something of a similarity at this particular moment i concede), and japans problems occurred in isolation I do think there is a danger of excessive inflation (and this brings in the interesting point about well time to buy a house then). However i'm unconvinced it will manifest itself this way. I think any inflation that does occur won't appear in asset prices. It seems to me the best way to try and predict how it might play out is to look at Iceland, and see how much can be applied here Over the last 18 months my strategy has been to split mostly between yen and gold with some canadian dollar. I'm not confident enough to back any horse exclusively!

Lotus-eater

I think you'll find we are savers, every time we go to the shops we save a magnificent 2.5% vat on everything we buy.
Apart from fuel of course.... and food and childrens clothes

ChiefGrasscutter

Another factor which may keep down any future inflation is that we now have a global labour market.
In short if the workers demand pay rises the company will offshore the jobs to Bangalore or wherever: This will keep down wage inflation. In earlier times that option was not feasible.

Cannon_Fodder

Just had a little brainwave...had to sit down...bear with me.

If there are a fair number of deliberate and accidental STRers, then that has increased money supply (most of it sitting in deposit accounts awaiting the right time) by extracting it from bricks and mortar...banks appreciate the extra funds in the absence of wholesale markets, no doubt.

(overall mortgage lending has gone from, off the top of my head, £10 billion per month(?) to being negative, i.e. repayed, for an example of the size of cash injection involved)

Now, during the limbo period between selling and buying, interest is being earnt (unlike HPI which was only on paper), some of it being paid in rent so Landlords have income they would not otherwise have had, and STRers might spend some interest - on removals, white goods, etc - so further increasing the circulation of money...(?)

Then, when in say, 9-12 months, people start to "cash in" on the HPC, STRers will withdraw funds and turn it back into bricks and mortar by buying, removing the cash from money supply.

Is that shift of funds into and back out of the banks, going to be a factor (possibly a very small one - no idea!) in the supply of money, so there could be a kind of self-fulfilling easing of inflation, i.e. will STRers be performing their own reverse of quantitative easing, by taking their deposits and locking them up in assets, reducing money supply...?

Not in the trillions, like various Govts, but anywhere near enough to matter?

Does that make any sense?


And if that does make some sense, and the effect is more than negligable, then presumably that inflationary effect on money supply was proping up the economy through the summer and stopping deflation from hitting sooner than it otherwise would...

...so STRers are the saviours of the economy, buying time for Govts to put their rescue packages in place...

...hoorah for us!!??