Is It Just Me?

Martinslovechild

The Bank Of England Monetary Policy Committee (MPC) has one job. It is tasked to maintain inflation (CPI) in a range of +1% to +3%.

CPI currently stands at 3%, having dropped from its peak towards the end of last year. CPI does not include mortgages (although it does include rental yields), which explains why CPI has fallen a lot less than RPI (the 'old' measure of inflation which is generally used as the figure on which to base annual pay increases).

Now - given that CPI has fallen only slightly and Bank Rate has fallen from a peak of 5.75% in July 2007 to today's 0.5% - a drop of 91% in percentage terms - the question has to be asked - are the MPC fulfilling their one role of keeping inflation in the target range or are they being leaned on by the government?

The reason I ask this is that savers are clearly receiving the blunt end of the stick at the moment, whilst mortgage borrowers aren't exactly receiving all of the decreases either.

So, if the Government believes that having virtually nil returns on their savings encourages people to spend their savings, then the likely result is that retailers will survive the downturn.

However, the flipside of the coin is that people see right through this and focus instead on the increasing likelihood that inflation will return with a vengeance due to the massive stimulus packages being injected into financial markets globally, savers may yet see their returns pushed up to levels not seen during the past ten years. They just have to sit tight.

The main concern then is that the wheels will really come off the housing market as mortgages increase to keep pace with ever-rising inflation over the course of the next few years.

Who knows how it will actually pan out... But what I do know is that it's extremely unlikely simply to return to how it was before the current crisis. Change is on its way and it's likely to negatively affect both savers & borrowers whilst banks ramp up their capital reserves.

Personally, I don't believe that this will be over any time soon. I'm talking years rather than months and that's simply due to demographics. Large numbers of people have started to retire and this will likely continue over the course of the next 10-15 years. Think this doesn't make much difference? It will affect the state pension, employment opportunities, political decisions, house price inflation, medical care, lighter immigration policy (as the demand for skilled immigrants hots up across several 'ageing' countries across Europe to replace baby-boomers entering retirement), stock markets etc etc.

There's no 'magic-wand' solution unfortunately. Think Obama's $1 Trillion stimulus package is the answer? It's the equivalent of me lending £10 to you towards the purchase of a house. Very nice the £10 is, it's not exactly going to do a great deal towards helping you.

I welcome optimism, but the general trend for stock markets currently is down. They know it. Heard lots of financial good news recently in the papers? Bumper profits across the board? Wearing your 'common-sense' hat for a moment, now ask yourself 'How are things going to suddenly improve by April with increasing amounts of job losses, factory & shop closures, repossessions and deflation looming?'.

Answers on a postcard.

Martinslovechild

fatpig wrote: »

There were saying the same thing in the 1930's viz. it'll all be over soon but it wasn't.

Quotes from the Great Depression

September 1929
"There is no cause to worry. The high tide of prosperity will continue." — Andrew W. Mellon, Secretary of the Treasury.

October 14, 1929
"Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board." — New York Times

December 5, 1929
"The Government's business is in sound condition." — Andrew W. Mellon, Secretary of the Treasury

December 28, 1929
"Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression." — Associated Press dispatch.

January 13, 1930
"Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today." - News item.

January 21, 1930
"Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction." - News dispatch from Washington.

January 24, 1930
"Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast." - New York Herald Tribune.

March 8, 1930
"President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days." - Washington Dispatch.

May 1, 1930
"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States - that is, prosperity." - President Hoover

June 29, 1930
"The worst is over without a doubt." - James J. Davis, Secretary of Labor.

August 29, 1930
"American labor may now look to the future with confidence." - James J. Davis, Secretary of Labor.

September 12, 1930
"We have hit bottom and are on the upswing." - James J. Davis, Secretary of Labor.

October 16, 1930
"Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment." - Charles M. Schwab.

October 20, 1930
"President Hoover today designated Robert W. Lamont, Secretary of Commerce, as chairman of the President's special committee on unemployment." - Washington dispatch.

October 21, 1930
"President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter." - Washington Dispatch

November 1930
"I see no reason why 1931 should not be an extremely good year." - Alfred P. Sloan, Jr., General Motors Co.

January 20, 1931
"The country is not in good condition." - Calvin Coolidge.

June 9, 1931
"The depression has ended." - Dr. Julius Klein, Assistant Secretary of Commerce.

Note: The Great Depression didn't really end until the late 1930's with the start of the Second World War. Stock Markets bottomed out in July 1932 and didn't return to pre-1929 levels until November 1954. At its peak, one in four Americans was out of work.

thriftybabe

Most things that have been said on MSE have happened. First Northern Rock, Lehman Bros, RBS, BofS. The guys on here seem to have a wealth of knowledge and most of what they are saying is coming true! :eek: I do have to agree with Conrad now that the recession/depression is here it is not (personally) just as bad as the anticipation of it! Don't get me wrong paying off staff and family have had me with knots in my stomach and not been sleeping as well as I should. Now the worst of that is over (next to no staff left!) it is quite nice to see OH at weekends and have more quality time as a family. This will obviously only be ok for as long as we have funds to cover the bills after that then it might get difficult but we are most definitely best prepared as we can be to weather the storm.

StevieJ

No one knows what is going to happen over the next 12 months, that includes the Govt, Bank of England,IMF and dare I say it even the Daily Mail

1984ReturnsForReal_2

Quote:
Originally Posted by 1984ReturnsForReal
Its worse than the media are picturing it.

I agree. As someone who works in the sector there's a lot of talk of not wanting to "scaremonger".....how many banks had to be bailed out before the word "recession" was used (as opposed to the rather jauntier "credit crunch")?

---

The Media have been "told" to shut up also.

Barclays & HSBC CEO statements have been hidden & all that is broadcasted is Government figures a minimum of 2 or 3 months out of date.

Unemployment figured massaged down & exclude people who have been paid over X amount of pounds OR those who have been made redundant recently after years of continuous employment.

Q/Easing is happening now to fund Government deals done prior to December because the money injected into banks didnt even exist (they were bonds).

Its all smoke & mirrors & is far worse than we are being told.

Remember Brown slating the Bank business methods by borrowing/lending on future recovery of debt? He said it was poor business.

Well, he is doing exactly the same thing with Britain but on a much grander scale....

Thrugelmir

thriftybabe wrote: »

Most things that have been said on MSE have happened. First Northern Rock, Lehman Bros, RBS, BofS. The guys on here seem to have a wealth of knowledge and most of what they are saying is coming true! :eek: I do have to agree with Conrad now that the recession/depression is here it is not (personally) just as bad as the anticipation of it! Don't get me wrong paying off staff and family have had me with knots in my stomach and not been sleeping as well as I should. Now the worst of that is over (next to no staff left!) it is quite nice to see OH at weekends and have more quality time as a family. This will obviously only be ok for as long as we have funds to cover the bills after that then it might get difficult but we are most definitely best prepared as we can be to weather the storm.

I think you are optimistic if you believe that the recession is close to the bottom yet.

People's own personal situations ( ie cash in the bank and size of mortgage for example) mean that the effects are different on all of us. To survive we can get by with very little if we are fortunate or have been thrifty. On a local level here the effects of the downturn are only just starting to bite.

bubblesmoney

the recovery is a long way off. reasons being ....

at the peak almost all banks were leveraged in their investments (due to the power of fractional reserve banking). leverage was increased as tier 1 ratios for capital requirements were eroded from 12-14% to 6% and under special exemption rules or sweep in features or swaps of assets the tier 1 ratios were allowed to be further lowered to about 1.5% (tangible common equity), in some cases the reserve ratio was set to ZERO by special exemptions under emergency rules.

lets us take the example of a conservative (by todays standards) 6% tier1 requirement. that gives a leverage of almost 16times. if the reserve ratios were lower then the leverage was higher and leverage was infinite when reserve ratios were zero.

for institutions like AIG that insured products / services without any collateral basically it was a zero investment game. they kept insuring absurd investments and raked in the premiums. the ponzi scheme had to fold with the market tanking. the only way such a ponzi scheme as AIGs uncollateralised insuring could survive was if there were no defaults.

the minute there were many defaults, they were bust because of their infinite leveraging due to zero collateral required for insuring these risky securities. it is only a matter of time before the ponzi goes bust. 1trillion stimulus is nothing, when these institutions conjured up 600 trillion plus of securities.

now when the !!!!!! hits the fan 1 trillion stimulus is just p!ssing in the wind as the power of leveraging works both ways, when the going is good you rake in by the truck loads but when the going is bad you go broke many times over. this is very similar to making huge losses if shorting the market doesnt go your way in share options because of leveraging.

thats the securities market gist.

now coming to the residential property market. what we have seen till now is only the subprime crisis and its effects. we are yet to enjoy in full the Alt-A mortgages, option ARM mortgages defaults and also prime mortgage defaults due to job losses. that will futher sink the mortgage lenders ie banks and their share holders (ie tax payers who own many banks now)

in the commercial property market things are just hotting up waiting to go down the drain big time with the economy tanking. thats a bigger pile of poo for the mortgage lenders.

we havent yet got to the credit card defaults. see why their share prices are collapsing.

even companies like GE are having problems. they are having to spend 22% as 1st year costs for a 5y CDS pricing. basically the market is factoring that they will go bust SOON. if not because of the fundamentals it will be because of the risk averse climate influencing the CDS rates. see market ticker blog / forum for details. cant find this yet on bloomberg etc.

no need to mention about GM ford RBS Lloyds BOA Citigroup etc. you know the story

now coming to the the two steps forward 1 step backward and 1 month dilly dallying thats going on by the govts and regulators and what it does to banks see the link on my earlier thread

job losses i think 8.1% in usa latest news. but part time (forced because no jobs) workers are greater than 11%. dont know if this has peaked yet or getting better. some trends indicate maybe peaked but others say dont know.

european banks invested heavily in eastern europe and east asia and their economies and going down the drain literally. latvia GDP shrank more than 20%, similar music in store for taiwan japan and china etc who are main exporters who are getting hit hard and fast because of downturn. china might still survive because of their internal needs that can be serviced instead of exports. but what about countries with tiny population but huge exports like japan, korea and taiwan etc. they are stuffed. guess where european banks are heavily invested in - eastern europe and east asia.

guess which countries GDP to financial institutions turnover is higher - EU zone.

now we come to the real spanner in the worlds the risk of sovereign default on debts. thats a guess, quite a few nations will do it in the coming year or two. in the great depression i think the sovereign default rate almost touched 50% !!!!

see an interesting analysis of the situation by someone who made more than 300% returns in last 3y in stocks and securities when everyone else lost almost 50%. see their analysis of this march 2 2009

sorry if it all looks doom and gloom. i would have posted good news if there was any to post.

probably this news might be the only good news and even that is too short a time frame to be sure of the trend.

thriftybabe

Thrugelmir wrote: »

I think you are optimistic if you believe that the recession is close to the bottom yet.

People's own personal situations ( ie cash in the bank and size of mortgage for example) mean that the effects are different on all of us. To survive we can get by with very little if we are fortunate or have been thrifty. On a local level here the effects of the downturn are only just starting to bite.

Sorry Thrugelmir I dont think the recession is close to bottom yet - not at all. What I am saying the anticipation of this over a year ago was quite daunting. We were running with lots of work, lots of employees/subcontractors and worrying when the work was going to dry up. It now has and we have dealt with the staffing etc as and when needed. I think we have a long way to go - years in fact before things get better. What I am saying is that we are now very deeply affected by this with OH and myself having no work to do shortly therefore we will be unemployed. I also see that "temporararily" our family will have a lot more quality time together with OH not working 7 days a week and the kids will get the benefit as well as myself. Obviously as funds get used up then we will need to really worry but at the moment we are okay.

bo_drinker

I honestly think we are only at the beginning and all that is being done is getting us nowhere ??

pizzagirl

The government said a few months ago that the recession would be over mid 2009. I nearly fell off my stool when I heard that load of nonsense.. :rotfl:No recession has ever lasted only a few months.

After that I have treated all government announcements, predictions and assurances with the contempt they deserve.

This is going to last many years, we're only at the beginning.