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Chinese and German Inflation and UK Mortgages

Generali
Posts: 36,411 Forumite

Just a thought:
Savings = lending is a truism. All money saved in a bank is lent to that bank by the saver. Similarly, all deposits in the bank are owed to savers.
Nothing controversial there I hope, just basic maths really.
Now think of the same thing on an international scale. Some countries (eg the UK, US, PIIGS) are net borrowers, when you add together companies, people and governments. Others, most notably China and Germany, are net savers.
Effectively the debts of the net borrowers are the assets of the net savers.
Now China is starting to get some problems with inflation. Germany with very high GDP growth and very low interest rates may have the same problem happen. So what happens then?
Well usually the response to rising inflation is to increase real interest rates (ie increase interest rates by more than the rise in inflation).
If German and Chinese interest rates rise, German and Chinese people will be a little more reluctant perhaps to lend to foreigners at lower rates of interest. That might push up market interest rates across the world.
If you're a debtor, sometimes you have to pay the interest rate the lender demands. Given the indebtedness of many countries in overall terms (private and public combined), rises in interest rates they have to pay could be problematical.
Now printing money to pay back your debts only works if you owe money in your own currency. The UK Government owes either everything or pretty much everything in GBP which is good news. I wonder about the private sector. How much credit card debt was securitised and then swapped into Euro interest rates (lower generally than UK ones) for example?
I don't know the answer to any of this BTW, it's just food for thought.
Savings = lending is a truism. All money saved in a bank is lent to that bank by the saver. Similarly, all deposits in the bank are owed to savers.
Nothing controversial there I hope, just basic maths really.
Now think of the same thing on an international scale. Some countries (eg the UK, US, PIIGS) are net borrowers, when you add together companies, people and governments. Others, most notably China and Germany, are net savers.
Effectively the debts of the net borrowers are the assets of the net savers.
Now China is starting to get some problems with inflation. Germany with very high GDP growth and very low interest rates may have the same problem happen. So what happens then?
Well usually the response to rising inflation is to increase real interest rates (ie increase interest rates by more than the rise in inflation).
If German and Chinese interest rates rise, German and Chinese people will be a little more reluctant perhaps to lend to foreigners at lower rates of interest. That might push up market interest rates across the world.
If you're a debtor, sometimes you have to pay the interest rate the lender demands. Given the indebtedness of many countries in overall terms (private and public combined), rises in interest rates they have to pay could be problematical.
Now printing money to pay back your debts only works if you owe money in your own currency. The UK Government owes either everything or pretty much everything in GBP which is good news. I wonder about the private sector. How much credit card debt was securitised and then swapped into Euro interest rates (lower generally than UK ones) for example?
I don't know the answer to any of this BTW, it's just food for thought.
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Comments
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Interesting thoughts.
For Germany, won't the fact that they are part of the single currency mean that in terms of interest rates they are kind of stuck?
And on China, if they aren't selling bonds (I guess they aren't, and if they are not in any significant amount) then I don't know if that will mean a move to lending to China. Even if they do raise rates, won't investors just have to make do with British rates? Restrictions on their currency too should mitigate it.“I could see that, if not actually disgruntled, he was far from being gruntled.” - P.G. Wodehouse0 -
Lifetime tracker, 1.99% over base.
In your Face!0 -
Two thoughts:
Exchange rates - in order for there not to be a profitable arbitrage exchange rates will adjust so that interest rate return olus expected future exchange rate movement gives equal returns in all currencies.
Savings = borrowings. A UK trade deficit requiring external financing and a German trade surplus are surely flip sides of the same coin, surely it is not possible for Germany to run more of a surplus with the UK than Uk consumers are willing to borrow and German savers are willing to lend at the prevailing interest rate?Just a thought:
Savings = lending is a truism. All money saved in a bank is lent to that bank by the saver. Similarly, all deposits in the bank are owed to savers.
Nothing controversial there I hope, just basic maths really.
Now think of the same thing on an international scale. Some countries (eg the UK, US, PIIGS) are net borrowers, when you add together companies, people and governments. Others, most notably China and Germany, are net savers.
Effectively the debts of the net borrowers are the assets of the net savers.
Now China is starting to get some problems with inflation. Germany with very high GDP growth and very low interest rates may have the same problem happen. So what happens then?
Well usually the response to rising inflation is to increase real interest rates (ie increase interest rates by more than the rise in inflation).
If German and Chinese interest rates rise, German and Chinese people will be a little more reluctant perhaps to lend to foreigners at lower rates of interest. That might push up market interest rates across the world.
If you're a debtor, sometimes you have to pay the interest rate the lender demands. Given the indebtedness of many countries in overall terms (private and public combined), rises in interest rates they have to pay could be problematical.
Now printing money to pay back your debts only works if you owe money in your own currency. The UK Government owes either everything or pretty much everything in GBP which is good news. I wonder about the private sector. How much credit card debt was securitised and then swapped into Euro interest rates (lower generally than UK ones) for example?
I don't know the answer to any of this BTW, it's just food for thought.I think....0 -
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PasturesNew wrote: »But still no good if you die tomorrow.
True enough, but being bunkered down, eating beans every day and having no mortgage ain't great in those circumstances either.0 -
but being bunkered down, eating beans every day and having no mortgage ain't great in those circumstances either.
Which is what mbga9pgf realised in the end.'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
Exchange rates - in order for there not to be a profitable arbitrage exchange rates will adjust so that interest rate return olus expected future exchange rate movement gives equal returns in all currencies
I am sure that China will be attempting to engineer a position where their internal rates rise, but external rates don't.
They don't particularly want the currency to appreciate too much too quickly.'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
I wonder about the private sector. How much credit card debt was securitised and then swapped into Euro interest rates (lower generally than UK ones) for example?
How would that even be possible? UK banks can securitize their credit card accounts, but nothing can change the fact that the assets underlying the securities are denominated in GBP. I don't understand how they could have been be "swapped into Euro interest rates" as you put it. The closest thing I can see would be a carry-trade type operation where the buyer of GBP-denominated securities funded their purchases with cheaper Euro-denominated borrowing. This is an inherently risky forex gamble, and anyone who was doing it probably already lost their shirt back in 2008 when GBP interest rates were slashed lower than Euro ones and the pound plummeted.0 -
It's getting harder & harder to keep the government in the manner to which they have become accustomed.0
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