If you doubted that inflation was on its way...

Snooze

chupov wrote: »

[blah]

Hello Topov. Where is Sockpuppets when you need him? :rolleyes:

Rob

Generali

TBH, I still think there is a serious risk of deflation out there, even in the US. Debt is still being destroyed at an alarming rate.

dopester

StevieJ wrote: »

Where is Dopester when you need him Wookie is on one again.
Dopester, remember the inflation discussions with !!!!!! :rolleyes: last summer when he was insisting that falling sterling would cause immediate inflation even though commodity prices were collapsing. I think he wanted to up interest rates, just like most of the
bears, we would be right in the sticky stuff now if we had done that.

Sure do. Poor !!!!!!. He was in such a panic. "Get ready to buy a house, before they inflate the debt away." He expected the real economy to be fully sacrificed to support house prices. He really sounded like he was on the edge of buying.

The BoE isn't going to jack up interest rates by any significant amount. Rates are low because the deflationary forces, credit-contraction and debt-liquidation are causing values to plummet.

One of the reasons interest rates are so low is that assets such as houses are depreciating in value. If house prices are rising, you are forced to pay a price for your gains.

When they are falling, banks are grateful just for the repayment of principal.

What you gain on the cost of your mortgage you more than lose on the size of your debt, which is inflating relative to your equity and income.

Apart from all the real factors that caused it, it also feeds on itself. For your German cars / German industry, their exports, the financials and service industry here... everything is connected to everything else.

The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation.

As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less.

These behaviours reduce the "velocity" of money, i.e., the speed with which it circulates to make purchases, thus putting downside pressure on prices. These forces reverse the former trend.

dopester

StevieJ wrote: »

Where is Dopester when you need him Wookie is on one again.
Dopester, remember the inflation discussions with !!!!!! :rolleyes: last summer when he was insisting that falling sterling would cause immediate inflation even though commodity prices were collapsing. I think he wanted to up interest rates, just like most of the bears, we would be right in the sticky stuff now if we had done that.

The time for that was in 2001/02/03, to take heat out of the market, and maybe we could have got away without a meltdown.

Although it might not have made too much difference. The structure, the light-touch regulation, the new exotic financial instruments would also have had to be dealt with.

Jacking rates up in 2008/2009 sure would bring about the crash faster, but hurt the economy even more than necessary. Values are already plummeting even with historically low base rates. Massive debt liquidation. Incredible levels of value destruction. Demand destruction. Ability to pay destruction.

Allow the people who can afford to pay off their mortgages at low rates to do so, and keep their homes. All the extremely over-leveraged people who can't even afford to pay at low rates, or their BTLs not having tenants or lower rental values... or just those who choose to sell at lower prices, month-after month, brings down the values of all the other houses.

Mr_Mumble

A little bit of asset deflation and folk seem awfully blase about the run away money supply (M4 is currently at a 20 year high).

The exit strategy from credit/quantitative easing is worrisome and the BoE and fed have admitted as much. If the economy shows signs of real improvement in 2010 who is going to want gilts and treasuries when the risk appetite has returned for equities and corporate debt?

Bernanke's infamous helicopter speech was a discussion about how central banks can avoid deflation. Inflation, imho, is the greater risk simply because central banks can't control long-term rates.

Generali

Mr_Mumble wrote: »

A little bit of asset deflation seems to be making folk awfully blase about the run away money supply (M4 is currently at a 20 year high).

The exit strategy from credit/quantitative easing is worrisome and the BoE and fed have admitted as much. If the economy shows signs of real improvement in 2010 who is going to want gilts and treasuries when the risk appetite has returned for equities and corporate debt?

Bernanke's infamous helicopter speech was a discussion about how central banks can avoid deflation. Inflation, imho, is the greater risk simply because central banks can't control long-term rates.

You may well be right. I think that it's premature to completely rule out deflation.

TBH I don't see how printing money is going to solve the problem. If it 'works' then we're into your scenario of soaring inflation and rapidly rising interest rates due to increasing supply of money but without the additional production being there to prevent prices being bid up. If it fails then we're still stuck in the mire with deflating economie.

dopester

Mr_Mumble wrote: »

A little bit of asset deflation and folk seem awfully blase about the run away money supply (M4 is currently at a 20 year high).

The exit strategy from credit/quantitative easing is worrisome and the BoE and fed have admitted as much. If the economy shows signs of real improvement in 2010 who is going to want gilts and treasuries when the risk appetite has returned for equities and corporate debt?

Bernanke's infamous helicopter speech was a discussion about how central banks can avoid deflation. Inflation, imho, is the greater risk simply because central banks can't control long-term rates.

Please compare all the QE, and the Fed's minimal interference, from the crash in values in the great asset bubble (was estimated at about $290 Trillion).

http://www.guardian.co.uk/business/dan-roberts-on-business-blog/interactive/2009/jan/29/financial-pyramid

StevieJ

Generali wrote: »

TBH, I still think there is a serious risk of deflation out there, even in the US. Debt is still being destroyed at an alarming rate.

Talk of deflation is not a good start to your Mortgage Broking career, Boss to Gen -
'Can we have a word'

Wookster

Generali wrote: »

You may well be right. I think that it's premature to completely rule out deflation.

Really?

Lets get something clear: what exactly is deflating??

AFAIK the only thing dropping in price are houses and some equities.

That is not deflation, it is correction of asset bubbles.

When a significant quantity of the "basket of goods" constituent elements are dropping in price then we can talk of deflation but we aren't there yet.

kennyboy66_2

Wookster wrote: »

Really?

Lets get something clear: what exactly is deflating??

AFAIK the only thing dropping in price are houses and some equities.

That is not deflation, it is correction of asset bubbles.

When a significant quantity of the "basket of goods" constituent elements are dropping in price then we can talk of deflation but we aren't there yet.

Much as I enjoy just sitting back and watching you and Dopester argue at the extremes of inflation and deflation, I would point out that there are plenty of area where there is deflation.

1) Services such as building / plumbing etc
2) Private sector wages in some areas
3) Many business assets - try selling a 3 year old commercial vehicle or trailer.
4) Huge deflation in many commodtities over last 12 months.

Deflation of 0-1.5 % is probably not too serious, once it gets much past say 4% it will be hugely destructive.

Still, I doubt it will happen.

Like in major recessions before, savers are being punished at the moment. In the great Depression it was through bank failures, now it is through negative real interest rates (if we use CPI).