Moneyweek: 0% interest rates are dangerous...

HammersFan

Generali wrote: »

Hardly anyone has a tracker. Lots of people have taken them out recently but that's not the same thing.

I can't find stats for it but I'd bet that the largest percentage of mortgagees are on the SVR because it's a pain in the [donkey] changing and most people can't be bothered to fill out the paperwork.

So it might be then that lots of people that bougth at the top of the market have a nice cushy tracker now kicking in, or are on a fixed rate anyway. Things not so bad then.

carolt

tradetime wrote: »

Ok, sorry but this could be another long post, and will likely bore most to tears, but I'll give it a go anyway. If you don't like being bored, look away now.

To understand the problem as I have said elsewhere you have to separate price movements from deflation and inflation otherwise most people can't see the problem, after all if things become cheaper that must be good, and if things become more expensive that must be bad.

Price movements are merely a symptom, or a side effect of the two. But prices can and do move up and down in all sorts of assets due to the simple supply / demand equation. Thus it is not the fact that house prices are falling that is the problem as such, nor that commodity prices are falling up to a point. The movement of price in relation to supply / demand brings about natural balance. So if the price movement is due to supply / demand imbalance then there is no need to take any action as the market will naturally find the correct balance.

We live on a planet with finite natural resources and we have an ever expanding population, this creates a constant upward pressure on demand. Since our resources are finite, lets take oil as an example, finding new supply, and getting at that supply adds cost to production, so price will rise over time, the same case can be made for all our natural resources, thus the supply of money and credit must expand and that money must move around (the velocity of money) and so inflation is the normal state, but steady, slow controlled inflation.

Prudent monetary and fiscal policy should be used to control that inflation. One could say it's a bit like riding a bicycle down a steep hill, there is a propensity for it to run away, so you tap on the brakes from time to time as the speed picks up too much. In the same way our central bank will "tap on the brakes", in its simplest form by raising rates, this slows the expansion of money and credit as people are less prone to borrow. This slowdown in supply of money helps force efficiency from producers of goods to reduce or constrain costs as much as possible and at the same time discourages excessive consumption, a current example would be all sorts of people owning more than one house. The important thing here is that the slowing expansion of money and credit was controlled as improvements in producer efficiency can only constrain prices so much.

Deflation on the other hand is not a controlled slowdown it is a contraction or reduction in the supply and velocity of money and credit, this leads to an artificial reduction in demand, it's not that demand is not there, but that there is not enough money to support or pay for the demand. Since demand has fallen there will be downward pressure on prices, when producers can no longer meet this with improvements in efficiency they will eventually reduce supply and in doing so will be forced to lay off workers, as unemployment begins to rise so demand falls further, those unemployed will begin to default on their debts, this leads to a growing fear of defaults and a reduction in lending, a further contraction in the supply and velocity of money and credit (further deflation) For companies with fixed-rate debt, forced price reduction and subsequent cuts in production and revenue makes the debt more problematic. That is, a fall in the price they can charge for their products lowers their revenues and makes it harder for them to make their loan payments, and thus a downward spiral begins, default and fear of default.

Where debt levels are already high and particularly where that debt was taken to support the payment of overpriced assets, such as our housing market this can be disastrous. If the situation is not brought under control quickly then a deflationary crash and an ensuing depression are the most likely outcome. A deflationary crash could be summed up as a sustained, deep general decline in peoples willingness and ability to lend and borrow, while a depression tends to be a deep sustained reduction in production. Since a decline in production reduces a debtors ability to pay and service their debt a depression supports deflation, and since a decline in credit reduces new investment in economic activity deflation support depression, the two are self supporting.

A recession on its own is part of most normal economic cycles, a normal recession acts almost as a natural selection in the economic landscape, it weeds out weak and inefficient companies, the strong survive and the weak disappear. We emerge from recession leaner and stronger. But when the normal cycle is prevented, by allowing excessive money and credit expansion, most probably caused in our case by keeping interest rates too low for too long , and throw in a bit of reckless lending to really inflate some asset bubbles all disguised by a good supply of cheap imported products to give the impression that prices are not rising and thus hiding the effect of the inflation that is going on, then you have a recipe for the soup we find ourselves in today. If we escape the full disaster that could unfold here, then I sincerely hope it will have scared us enough to put the necessary controls in place to prevent the next one, because if we do not it will be unpreventable, that is assuming this one is.

Thanks - stll makes my head spin.

Having got ourselves into this mess, how the hell do you suggest we get ourselves out of it?

tradetime

carolt wrote: »

Thanks - stll makes my head spin.

Having got ourselves into this mess, how the hell do you suggest we get ourselves out of it?

:rotfl: Sorry carolt, I have a reasonable understanding of economics, from the dim mists of time but I am far far away from any expert on the subject, and when I watch various economists discuss the problems we face (proper economists with pedigree) who have forgotten more than I learned, I see them disagree on how to tackle it and what results will come from the measures taken, what more can I add to the discussion .

All I know is that through greed, and wild and reckless excess, we have gotten the whole world to the brink of a major collapse, and I can't help thinking that the price of such a period of excess has to be a period of pain whatever we do, and I do not think we have anywhere near fully paid in pain for that excess yet. Maybe we can defer it, if those tackling it now are making the best decisions, and then we can spread the price out over a long period of time so it's impact is less than taking it all at once, and during that time we take measure to fix things so it doesn't recur, who knows, we are in precarious times.

tradetime

carolt wrote: »

Here's the post I just posted to a very similar query from ISTL on another thread:

Why would I buy when even the head of Barclays says he expects prices to fall by another 15% this year? (as does Citigroup)?

With the houses I'm looking at, that's a saving of around 40K+ plus 25 years worth of interest - not a small sum of money.

Plus interest rates for FTB's are still quite high - the examples you quoted were for existing mortgages only. With interest rates widely expected to fall, it would make absolutely no (financial) sense to buy now. Without a desperate emotional/practical NEED to buy, which I don't have, I just couldn't justify it.

Plus if falls are greater, I'll save even more.


Re the rent - I wouldn't ask for a cut because we already pay under market rates; conversely, I wouldn't agree to a rise either.

To be honest, that just seems a prudent, sensible and logical position to adopt currently. I sold my property in mid 2007 and am in no rush to jump back in at this point in time.
Whilst property for me is not an investment vehicle, but rather shelter and a place to retreat, I still tend to remain somewhat detached, in that I do not "fall in love" with a property, the right location and a suitable layout for my needs and one property is much like another to me. That said, as someone who actively trades in various markets I also cannot divorce myself from the instinct not to buy in a falling market with no sign of a bottom, whilst as already said, I do not view property as an investment vehicle, like it or not I am still investing a considerable amount of money into it, and I see no point in overpaying.

purch

Ok, sorry but this could be another long post, and will likely bore most to tears, but I'll give it a go anyway. If you don't like being bored, look away now

No, that was a very good post IMHO

Inflation/Deflation are far more complex concepts than is often understood, and I think that the eventual outcome of the "measures" being taken by the various Governments around the World are still very much open to question.

swiss69

lady_lucan wrote: »

Er - aren't all trackers pegged at a percentage above base rate? And how ever would you raise the capital to repay the mortgage at the end of the term if you're on an interest only?

Mine isnt ..........

I'll repay with cash I am saving if I can be bothered. If interest rates stay low long term then I might never pay it back. If I can afford the monthly payments with pension income then I really dont see the point...

Might as well enjoy the savings and leave less for the kids!

Generali

tradetime wrote: »

:rotfl: Sorry carolt, I have a reasonable understanding of economics, from the dim mists of time but I am far far away from any expert on the subject, and when I watch various economists discuss the problems we face (proper economists with pedigree) who have forgotten more than I learned, I see them disagree on how to tackle it and what results will come from the measures taken, what more can I add to the discussion .

All I know is that through greed, and wild and reckless excess, we have gotten the whole world to the brink of a major collapse, and I can't help thinking that the price of such a period of excess has to be a period of pain whatever we do, and I do not think we have anywhere near fully paid in pain for that excess yet. Maybe we can defer it, if those tackling it now are making the best decisions, and then we can spread the price out over a long period of time so it's impact is less than taking it all at once, and during that time we take measure to fix things so it doesn't recur, who knows, we are in precarious times.

The way I view it is that consumer debt brings forward consumption from tomorrow to today. That consumers look to be forced or deciding to repay that debt means that past consumption is now being paid for. That will reduce consumption now.

My guesstimate is that repayment of debt will knock at least 7% off UK GDP directly so probably at least to 10% once you take into account the fact that reduced lending to business will lead to lower levels of employment and thus lower consumption too.

mewbie_2

Generali wrote: »

knock at least 7% off UK GDP directly so probably at least to 10%

So if GDP is a measurement of economic wotsits, then very roughly speaking does 10% off mean a 10% chance of losing my job?

Generali

mewbie wrote: »

So if GDP is a measurement of economic wotsits, then very roughly speaking does 10% off mean a 10% chance of losing my job?

No. 10% off GDP would equate to perhaps another 2,000,000 people losing their job from now in the UK so an unemployment rate of 3,500,000-4,000,000 say. I think that's about 7% of workers.

Just to give some context that's considerably higher than the late-80s/90s recession and given that so many more people are claiming sickness benefits than previously the welfare bill will be huge, possibly unaffordable.

Ultimately British people are going to have to get over their dislike of cleaning jobs etc. I was a cleaner in the 90s recession and it's not a bad job once you get used to it.