Brexit, How Will You Invest Next 5 Years

GSP

bostonerimus wrote: »

The biggest issue for UK residents might be inflation.

Would higher inflation cause interest rates to rise? Thanks

Bravepants

As the goods that consumers demand get scarce, the price increases. Prices come down when companies produce at a higher rate to keep up with demand. Companies produce more when money is cheaper to borrow. So if inflation increases, then interest rates generally drop, but there is a time lag.



Note that as more money is available in the economy (though quantitative easing say) the value of money decreases and prices also go up accordingly. Inflation has been under control recently because money is available and cheap to borrow, and companies can produce more.

short_butt_sweet

Bravepants wrote: »

As the goods that consumers demand get scarce, the price increases. Prices come down when companies produce at a higher rate to keep up with demand.

yes. companies may be able to ramp up production to meet rising demand. perhaps they can take on more workers, run a factory at nearer full capacity, and so on. high inflation will happen when they can't do that fast enough to meet demand. perhaps they need more workers with specific skills than have already been trained, or to build a new factory. either way, they need to invest in order to increase their productive capacity.

Companies produce more when money is cheaper to borrow. So if inflation increases, then interest rates generally drop, but there is a time lag.

IMHO, cheapness of money isn't usually the key factor. yes, too expensive money (high cost of borrowing) can deter companies from investing. but the more essential factor is whether the demand will be there so that they will make a return on their investment. if they don't expect to see that demand, they won't invest, regardless of the cost of money.

Note that as more money is available in the economy (though quantitative easing say) the value of money decreases and prices also go up accordingly.

this quantity theory of money is popular with economists, but IMHO it's pretty useless. sure, you can say that:

demand = (quantity of money) x (rate of flow of money)

and that is true by definition. but the trouble is that the rate at which money flows (is spent) isn't a constant. nor is there an easy way to predict how the rate will change. so this doesn't really get us anyway.

a lot of people thought that QE would lead to high inflation, because QE creates cash, in huge quantities. but this hasn't happened. partly because QE doesn't give cash to people for nothing. QE involves buying government bonds (from whoever was holding them) for cash. so they have more cash, but fewer government bonds. that doesn't make them go out and spend more. if they'd wanted to spend, they could have done that easily anyway, because government bonds are very liquid (easily sold).

Inflation has been under control recently because money is available and cheap to borrow, and companies can produce more.

no, it's been under control because demand has been weak. companies haven't invested much, because they haven't needed to in order to meet demand, because demand has been weak.

and demand has been weak partly because of austerity. taking money away from low and middle income households reduces demand from them (i.e. they can't spend as much). and cutting public services is a direct cut in demand.

though there are also longer term factors. a shift in power from labour to capital has led to greater inequality, which reduces demand because lower income households spend most of their income, but higher income households spend much less of theirs, and use some of the rest to buy up assets. which can increase the cost of living for everybody else (e.g. BTL demand in the housing market making housing less affordable for people trying to buy their own homes), leaving them less to spend on other things (so that's less demand, again).

(note: this ignores external factors affecting inflation, e.g. varying exchange rates. it's long enough already .)

Linton

Bravepants wrote: »

As the goods that consumers demand get scarce, the price increases. Prices come down when companies produce at a higher rate to keep up with demand. Companies produce more when money is cheaper to borrow. So if inflation increases, then interest rates generally drop, but there is a time lag.
....

Governments increase interest rates when inflation is high.

1) It reduces demand
2) High inflation reduces the value of the currency, so governments need to raise rates of interest on their bonds to attract foreign buyers.

Linton

short_butt_sweet wrote: »

.....a shift in power from labour to capital has led to greater inequality, which reduces demand because lower income households spend most of their income, but higher income households spend much less of theirs, and use some of the rest to buy up assets. which can increase the cost of living for everybody else (e.g. BTL demand in the housing market making housing less affordable for people trying to buy their own homes), leaving them less to spend on other things (so that's less demand, again).

Agree 100%. I think this is a significant factor in explaining what has happened over the past 10 years both economically and politically.

GSP

Linton wrote: »

Agree 100%. I think this is a significant factor in explaining what has happened over the past 10 years both economically and politically.

Seems like the "rich getting richer". Homes should be for living in, not making money out of.
With no control, housing is being used as a monetary tool. Landlords with 10, 20, 30 properties have stock meant for those trying to get on the ladder, but they can't with the lack of available housing. Government initiatives have not helped and only appear to have shored up house prices.
Housing needs control and a limit on how many properties can be held.

Malthusian

GSP wrote: »

Homes should be for living in, not making money out of.

Make your mind up. If the house is being lived in, then someone will be making money out of it. If it is rented out, the landlord makes money via rent and house price growth. If it is lived in by the owner, then the owner makes money via imputed rent and house price growth.

Houses will always have money made out of them, same as food, water, healthcare, and anything else of value.

If you don't think houses should have money made out of them then the only way to achieve that is to leave them permanently empty, or bulldoze them.

GSP

Malthusian wrote: »

Make your mind up. If the house is being lived in, then someone will be making money out of it. If it is rented out, the landlord makes money via rent and house price growth. If it is lived in by the owner, then the owner makes money via imputed rent and house price growth.

Houses will always have money made out of them, same as food, water, healthcare, and anything else of value.

If you don't think houses should have money made out of them then the only way to achieve that is to leave them permanently empty, or bulldoze them.

Absolute rubbish!
It's all driven by pure greed and the media's fixation with house prices.
No, you buy a house to live in, full stop.
The people who engage in BTL want to make a quick buck. The word investment and property should not be used in the same sentence.
The housing market is driven by pure greed and the main reason our kids cannot afford a house.
I do hope that Brexit crashes house prices by 50%. It is the biggest correction needed of them all.

keyboardworrier

I'm of the opinion Brexit isn't going to happen, and if it does, it will be done in name only. Nothing fundamental will change IMO, so I am investing as normal.

Thrugelmir

Linton wrote: »

Governments increase interest rates when inflation is high.

1) It reduces demand
2) High inflation reduces the value of the currency, so governments need to raise rates of interest on their bonds to attract foreign buyers.

Central banks now control interest rates more generally than Governments i.e. BoJ, BOE, FED, ECB etc.

Debt Management Office (in the UK) which manages the Governments cashflow. Sells gilts at auction. Investors determine the price paid and therefore the initial yield. Interest rates obviously need to be pitched at an attractive level. To ensure full subscription.