Think inflation worries are over?

Wookster

tomterm8 wrote: »

If you define deflation as a persistent decrease in the general price level, then there is no requirement that all asset classes should be falling in price. In the same way that for decades computers have been falling in price for years without any sustained period of deflation, house prices can easily fall without any sustained period of deflation. In fact, during the last house bust there was a period of high sustained inflation.

We need to avoid deflation, but we don't need to avoid house price falls. In fact, house price falls are basically a good thing. What we need to avoid is deflation, particularly decreases in average wages.

At last we agree!

I think we've all seen that falling computer prices have not deterred people from buying computers. I think the reason house transactions have all but halted is because what's happening is not deflation but a correction in prices (not to mention financing issues).

Unfortunately earnings are going to decrease - that is the nature of recession - people end up out of work and on benefits. This cannot be avoided.

That all having been said, where is this awful deflation Merv, Crash et. al. are sprouting? I just don't see it.

Rochdale_Pioneers

Wookster wrote: »

At last we agree!

I think we've all seen that falling computer prices have not deterred people from buying computers. I think the reason house transactions have all but halted is because what's happening is not deflation but a correction in prices (not to mention financing issues).

You don't think that the lack of mortgage products on offer has anything to do with it?

Wookster

Rochdale_Pioneers wrote: »

You don't think that the lack of mortgage products on offer has anything to do with it?

(not to mention financing issues)

Not reading my posts again?

MrFonzerelli

Rochdale_Pioneers wrote: »

You don't think that the lack of mortgage products on offer has anything to do with it?

It's supply and demand.
Simples.

tomterm8

Wookster wrote: »

At last we agree!

I think we've all seen that falling computer prices have not deterred people from buying computers. I think the reason house transactions have all but halted is because what's happening is not deflation but a correction in prices (not to mention financing issues).

Unfortunately earnings are going to decrease - that is the nature of recession - people end up out of work and on benefits. This cannot be avoided.

That all having been said, where is this awful deflation Merv, Crash et. al. are sprouting? I just don't see it.

Well, hopefully we can agree on a few more points.

Firstly, computers are generally not purchased on credit and in any case are a fairly small part of most peoples expenditure. They also occured during a period of inflation (remember, we're talking about general price rises, not specific asset classes) and finally, when people bought a computer an expectation of price falls were already included in their purchase decision.

Whereas, most people who bought houses bought them on highly leveraged credit; they bought them when there was (an irrational) expectation amongst banks and purchasers that house prices would always rise; and expectations of inflation were built into their purchase decision.

I would say that what occured before August 2008 was a period of correction in house prices. House prices were reverting to the mean in a normal fashion, because people couldn't afford multiples of 5-7 times average earnings. What occured after August 2008 seems to me to be different. The main factor is the insolvancy of the banking sector.

Most of our money supply is based on credit. The people who think we have a fiat money system are just plane wrong; the fundamental nature of the system is that almost all money is created by banks. As banks become insolvent they are forced to restrict their creation of new loans and new money significantly, and call in loans much faster than normal. This reduces the money supply by a significant margin.

A reduction in monetary supply is the fundamental definition of deflation, but it is not measurable and so people go for proximate measures. A reduction in monetary supply doesn't necessarily cause the general price level to reduce for quite a long time, maybe as many as 6 months to a year. We have seen UK banks dramatically reduce credit to other economies (for example, the Ukraine) while maintaining credit in the UK. These countries are starting to feel deflation in terms of price reductions.

The problem is that just as credit is a virtuous cricle on the way up, it is a vicious circle on the way down. As more and more money is wiped off, the money available to banks reduces, and the money supply contacts. This causes a further reduction in prices.

In previous housing crashes, we have experienced prior to the crash a significant amount of inflation. The disinflationary nature of the fall in housing has not been enough to tip the economy into deflation. But if you accept IMF predictions, the world will experience roughly 0% growth this year. That hasn't been seen since world war II. It is hard to imagine that the disinflationary effect of this recession will be smaller than that of 1982 which was a much shallower recession.

And, if it merely matches the disinflationary effects of 1982, we will be in a more severe deflation than Japan experienced in the late 1990's, because for the last three months prices have been falling. Not rising. And that was before the majority of the predicted fall in GDP has even happened yet, or even fed through the system. The fall in prices has largely been due to oil price falls, not house price falls.

You are talking about whether you see "inflation" or "deflation", but the point is that these things are not dependant on an individual. People have their own inflation rate, but what matters is the economy as a whole. And, over the economy as a whole, prices are falling. There is little reason to expect them to rise until the slowdown ends.

Martinslovechild

mewbie wrote: »

Well they still have freedom of speech. But you also have the freedom not to listen.

I'm not convinced that we still have freedom of speech...

For instance, if I believed that Muslims' or Jews' beliefs were wrong, then I wouldn't be allowed to say this for fear that I'll be arrested under the 'Religious Hatred' bill.

I can't discuss job vacancies as being 'suitable' for a particular type of person in case I fall foul of sexual or racial discrimination.

I can't even advertise a job vacancy with a downloadable Microsoft Word document if that restricts applications from a person who doesn't have Word installed on their machine.

Now I understand that there are levels which a person shouldn't cross, both ethically & morally, but if free speech really is permitted - then why are there so many laws to suffocate it?

tomterm8

We have never had freedom of speech in the UK. And even in the US, freedom of speech only extends to the government - individual companies have the right to restrict speech as much as they like in their own publications.

MrFonzerelli

Martinslovechild wrote: »

I'm not convinced that we still have freedom of speech...

For instance, if I believed that Muslims' or Jews' beliefs were wrong, then I wouldn't be allowed to say this for fear that I'll be arrested under the 'Religious Hatred' bill.

I can't discuss job vacancies as being 'suitable' for a particular type of person in case I fall foul of sexual or racial discrimination.

I can't even advertise a job vacancy with a downloadable Microsoft Word document if that restricts applications from a person who doesn't have Word installed on their machine.

Now I understand that there are levels which a person shouldn't cross, both ethically & morally, but if free speech really is permitted - then why are there so many laws to suffocate it?

Can we talk about what we can't talk about, or is that not allowed?

People disguised as true liberals will be along to delete the thread.

Wookster

tomterm8 wrote: »

I would say that what occured before August 2008 was a period of correction in house prices. House prices were reverting to the mean in a normal fashion, because people couldn't afford multiples of 5-7 times average earnings. What occured after August 2008 seems to me to be different. The main factor is the insolvancy of the banking sector.

I'm afraid I disagree with this. House prices are still significantly above long term averages. I'm not sure what happened to make you see a difference in the underlying cause of the correction in August 08? I see it as a continuation of the HPC to realign house prices with the cost of finance, demand and the ability to pay. The point now is that there is a very painful de-leveraging (reduction of credit) taking place - people are frantically trying to pay down debts and that means destruction of consumption.

tomterm8 wrote: »

You are talking about whether you see "inflation" or "deflation", but the point is that these things are not dependant on an individual. People have their own inflation rate, but what matters is the economy as a whole. And, over the economy as a whole, prices are falling. There is little reason to expect them to rise until the slowdown ends.

Agreed and I think the discussion on deflation comes down to your view on oil & house prices. Both of which I think are correcting following a period of some speculation.

tomterm8

Wookster wrote: »

I'm afraid I disagree with this. House prices are still significantly above long term averages. I'm not sure what happened to make you see a difference in the underlying cause of the correction in August 08? I see it as a continuation of the HPC to realign house prices with the cost of finance, demand and the ability to pay. The point now is that there is a very painful de-leveraging (reduction of credit) taking place - people are frantically trying to pay down debts and that means destruction of consumption.

I think my point is, that there are two factors at work:
1. A much needed correction in house prices and
2. A vast deleveraging.

Both of which we agree on, yes?

Before August 2008, banks were widely regarded as solvent, and so able to withstand point 2. If banks are insolvent, they only become more so as house prices fall. In that case, there is no reason to suppose that deleveraging will stop when the needed correcton takes place. House prices can deleverage to the point where a normal person can buy them without incurring debts - in Japan, house prices are still deleveraging now, 28 years after the boom, because the banks are insolvent.

Wookster wrote: »

Agreed and I think the discussion on deflation comes down to your view on oil & house prices. Both of which I think are correcting following a period of some speculation.

i think oil is a spent force, it will start to rise again in dollar terms in the near future (although the £ will rise itself and offset it a bit). At the moment, unless you fix the banks, I don't see any reason why house prices couldn't undershoot to the point you could buy them with what is now a deposit. That wouldn't happen with solvent banks, but then deflation can't happen in our economy if banks are solvent.