Inflation: an undemocratic stealth tax

Graham_Devon

HAMISH_MCTAVISH wrote: »

Utter rubbish.

The credit crunch had precisely nothing to do with UK lending default rates, and everything to do with the global freezing of credit markets thanks to the mis-allocation of risk by the ratings agencies on American toxic debt.

Correct.

That was utter rubbish.

HAMISH_MCTAVISH

ILW wrote: »

Seem to remember that many businesses did pretty well when base rates were 7 or 8%.

In entirely different economic circumstances.

ILW

HAMISH_MCTAVISH wrote: »

In entirely different economic circumstances.

Why would an increase in base rates send vaible businesses to the wall now. It may cull a few basket cases but most would be fine.

I believe inflation is a bigger threat.

michaels

Hello - so if they were only savers and no borrowers where on earth would your inflation beating retursn come from? And what I write is drivel?

So let me ask again - if none of the debts had been repaid who would have lost out, those who had borrowed and were not paying anything back or those who had lent (the savers through their agents the banks) who had saved and lost it all - how hard is this to understand.

I know I am agreeing with Hamish (:eek:) on this one but there seems to be a basic lack of understanding over who benefitted from the bank bailouts.

HAMISH_MCTAVISH

ILW wrote: »

Why would an increase in base rates send vaible businesses to the wall now. It may cull a few basket cases but most would be fine.

Every 1% rise in base rates takes 12 billion pounds a year out of the economy from mortgage holders alone.

A 7% rise in base rates equates to 84 billion pounds a year.

Now add another few tens of billions being added to company costs as a result of increased corporate debt service costs.

Then increase unemployment by another million or more, adding cost to the government's benefits bill and reducing tax revenue, widening the budget deficit.

Throw in a devastated housing market, share prices plunging and removing money from pension funds, and you have a recipe for economic Armageddon.

It takes a truly special kind of lunacy to think our current level of moderate inflation is a bigger threat to society and the future of our country than turning a recession into another Great Depression.

I believe inflation is a bigger threat.

Alrighty then. :cool:

HAMISH_MCTAVISH

michaels wrote: »

if they were only savers and no borrowers where on earth would your inflation beating returns come from?

Quite right.

A fact that the savers seem to miss.

there seems to be a basic lack of understanding over who benefitted from the bank bailouts.

The "bank bailouts" were nothing more than "saver bailouts".

They should be considerably more grateful to us for saving their bacon.

oldvicar

It seems there is a call for years of moderate inflation. Maybe that is the best of a few bad options, with some winners and some losers.

But is there now a serious risk of overshoot, and inflation spiralling uncontrollably? The policies being pursued are throwing so much fuel on the economic fire to keep it simmering that there must be a risk of explosion. Then everyone loses.

Inflation is at a 20-year high. Interest rates have never been held so low for so long, in fact they have never been lower. QE is inventing money at an unprecedented rate. Compare with 1976, when UK went cap in hand to borrow (approx) £5bn from the IMF. That would be (very approx) £50bn in today's terms - totally dwarfed by the scale of QE today.

HAMISH_MCTAVISH

oldvicar wrote: »

It seems there is a call for years of moderate inflation. Maybe that is the best of a few bad options, with some winners and some losers.

Correct.

But is there now a serious risk of overshoot, and inflation spiralling uncontrollably?

No.

Just the opposite in fact now that we have a slowing economy, an undershoot looks more likely by middle of next year.

VAT rises will roll off in Jan, and the commodity price spikes by the end of Q1.

The policies being pursued are throwing so much fuel on the economic fire to keep it simmering that there must be a risk of explosion. Then everyone loses.

Why? What risk?

Can you explain specifically why you think demand destruction in the face of a weakening economy is the right policy course?

Inflation is at a 20-year high.

And about to fall off a cliff from January onwards.

Interest rates have never been held so low for so long, in fact they have never been lower.

True, but rates were lowered to 2%, then held there for almost a decade last time there was a financial crisis this severe.

Rates can stay very low for a very, very long time.

QE is inventing money at an unprecedented rate.

And so far almost none of it is finding it's way into the economy, hence it's not causing inflation.

The imported inflation we are experiencing is not something that raising rates will cure.

Mr_Mumble

I can't help but enjoy michaels and Hamish's replies here but I'll argue with 'em anyway.

michaels wrote: »

I agree 100% - I can't beleive we let the savers get away with 'earning' real returns for taking no risk prior to the credit crunch

The rate for M4 deposits currently averages less than 1.5%, the 'average' saver is currently losing 3% in real terms on an annualised basis.

The typical real return for depositors over the past century has been 1% and, outside the Icelandic banks, that was the kind of rate savers were getting during the noughties.

I agree on the wider point: depositors are coddled and should have to take into account the risk to their money and not just the rate of interest. This is one of the reasons the Icelandic banks were able to attract so much cash from British savers (especially the really dumb councils and local authorities).

However, deposit insurance is mandatory because of worries of a 1930s deflationary episode if depositors just lost their money. The 100,000 Euro (£85,000) limit, instigated after the Icelandic and Irish debacles is admittedly too high. Ireland's blanket guarantee of deposits was the single factor that caused its need for a bail out (since senior creditors rank pari passu with depositors it would have been illegal to make them take a haircut that could have kept the banks afloat without massive state aid).

I can't help but think the £35,000 deposit guarantee for British savers was the correct amount, the only problem being that only 90% of £33,000 was guaranteed (hence the Northern Rock queues). Anyone with more money than this in a bank should have the nous to either keep it with a secure bank or buy 3rd party insurance on the deposits.

HAMISH_MCTAVISH wrote: »

The credit crunch had precisely nothing to do with UK lending default rates, and everything to do with the global freezing of credit markets thanks to the mis-allocation of risk by the ratings agencies on American toxic debt.

Which is why Northern Rock went bust before any American lender...sheesh Hamish, if housing is such a bargain why is British retail banking such a basket case and why isn't there a flurry of bids for the forced Lloyds and RBS branch sales?

oldvicar

Mr_Mumble wrote: »

.... I agree on the wider point: depositors are coddled and should have to take into account the risk to their money and not just the rate of interest. This is one of the reasons the Icelandic banks were able to attract so much cash from British savers (especially the really dumb councils and local authorities).

.... I can't help but think the £35,000 deposit guarantee for British savers was the correct amount, the only problem being that only 90% of £33,000 was guaranteed (hence the Northern Rock queues). Anyone with more money than this in a bank should have the nous to either keep it with a secure bank or buy 3rd party insurance on the deposits.

....

Personally, I think a 90% or perhaps 95% guarantee (irrespective of the overall upper limit) would be better if we want people to take into account the risk to their money and not just the headline rate.

We're stuck with the approx £85K guarantee now, thanks to the EU directive. But I wouldn't want to reduce the limit as well as the 100%, or else all but NS&I and the highest rated banks would have another funding crisis.