Massive bailout for banks: Get ready for inflation.

WestonDave

danm - if you study the pattern of HPI since 1980 you'll see that what has almost entirely driven the super inflation of house prices has been step changes in lending practices. Sure on a small island with frustrating planning processes and too few houses prices are always going to be high, but its the silly increases that have come from changes like 1) considering the second income in a household, 2) increasing LTV's to 125% in some cases and 3) increasing earning multiples to 5+ in some cases. All of these have dumped extra cash into a market already desperately under supplied and have simply fed through into prices. The past few months have reversed those changes and as a result prices are reversing back as well. If the changes reverse again I would indeed expect prices to recover as well but I think it may be a while before lenders offer anything over 95% (until memories fade again!). At the moment people simply can't borrow enough to pay yesterdays house prices so they have to fall to a new equilibrium with current lending levels.

Where the government has stuffed themselves up and now find themselves backed into a corner is that it may well have been great for them to see economic growth fuelled by excessive personal debt, provided no external shocks came into the system. We increasingly exist in a global economy and most of what is happening to us now comes from outside which is why fiddling with our interest rates is pretty much like arranging the deck chairs on the Titanic (which ever way you move them we're going under!).

What no-one banked on was a crisis of confidence in financial markets (leading to the reversal of lending practises as described above) coinciding with continued uncertainty in global fuel markets (due to instability in oil regions including Russia which supplies a lot of gas) and global problems with food harvest. So in one fell swoop we've got credit issues we can't control, fuel prices we can't control and food prices we can't control.

Food basics like wheat and fuel costs (transport, power etc) go a long way to final goods prices for many essentials. We have to buy bread, and we have to have petrol for our cars to get to work. If those go up we have to make cuts elsewhere - probably in non essential services - which funnily enough is where most of our economy's income comes from now. As those industries start to suffer, people lose jobs which means even less to spend on services and so on. Lowering interest rates is really only designed to try to offset rises in essential costs to try to keep the service sector going by keeping us spending - but it just delays the problem, albeit maybe to a time when the economy can cope a bit better (i.e. not everything going wrong at once!). Raising interest rates will put up mortgage costs which on top of rising essentials will really put the bite on consumer spending and kill the service sector.

The root cause of the problem is that we have relied on debt growth to fuel economic growth and at some point we just can't service any more debt so that source of growth stops and we have to suffer until things rebalance. Combine it with a load of global shocks and the impact is frightening.

(I'm probably going to get written off as a HPC merchant but for the record I bought a house 18 months ago (that I hope to live in for a long time) so have no personal interest in talking the market down)

Turnbull2000

It's tragic to think that this government - led by Brown - is willing to make the long-term sacrifice of our pensions, savings, quality of life, disposable income and social equality in order to save face. I've gone from contempt to outright hatred of this lot.

carolan78

Theres lots of where the government are goin wrong replies and how they have gone wrong but can anyone actually see a viable way out of the mess? I am no expert and don't pretend to be which is why I am asking those with more knowledge

WTF?_2

carolan78 wrote: »

Theres lots of where the government are goin wrong replies and how they have gone wrong but can anyone actually see a viable way out of the mess? I am no expert and don't pretend to be which is why I am asking those with more knowledge

Avoid taking on new debt. Whereas I think there will be inflation, I don't think we'll see substantial rises in pay to compensate. Therefore you'll be finding the debt harder to service.

Pay down any existing debt and try to build a good base of savings.

Inflation is bad news for savings but it's still better to have savings than be in debt.

If you have some savings and feel brave, you might want to invest some in gold. Like any investment you can lose out on it as well as gain though.

Look at how you can economise on your lifestyle. You could probably keep a broadly similar standard of living whilst trimming the fat. Should help with the savings and might also help you adjust if you were to lose your income.

Generali

My bet is on deflation FWIW. There is precident in the aftermath of credit led booms for it to end in deflation (eg Japan 1990s, US 19030s).

WTF?_2

Generali wrote: »

My bet is on deflation FWIW. There is precident in the aftermath of credit led booms for it to end in deflation (eg Japan 1990s, US 19030s).

Bernanke seems to think he has the answer though.

And with fiat currency and electronic transfers not only can you 'print' as much cash as you deem necessary, you can also distribute it throughout the system very quickly.

Plus, it's entirely possible to see price deflation in the cost of houses but price inflation with respect to everyday essentials. I think most people would class that as inflation as they were happy enough to ignore massive house price inflation and accept low official inflation figures over the last few years because of cheap essentials.

Personally, I'd like to see deflation as I have good savings. I just can't see it happening though, much more likely that Bernanke & Co will overcook it.

Generali

!!!!!!? wrote: »

Bernanke seems to think he has the answer though.

And with fiat currency and electronic transfers not only can you 'print' as much cash as you deem necessary, you can also distribute it throughout the system very quickly.

Plus, it's entirely possible to see price deflation in the cost of houses but price inflation with respect to everyday essentials. I think most people would class that as inflation as they were happy enough to ignore massive house price inflation and accept low official inflation figures over the last few years because of cheap essentials.

Personally, I'd like to see deflation as I have good savings. I just can't see it happening though, much more likely that Bernanke & Co will overcook it.

The thing is, you can only do this if the banks will play ball and at the moment they aren't.

My belief is that we should have had what 'Austrian School' economists would call good deflation over the past few years as the Chinese and Indians entering international labour market and the internet reducing the costs of trading massively increased world productivity. The thing is people are scared of deflation because they think of the 1930s and 'will work for food' rather than the 1870s and rapidly rising living standards so interest rates were held low in 2001 and beyond to stop this happening.

The inflation couldn't show itself in the rise in prices for goods as more highly competitive markets and the benefits of trade held prices down. The increase in the money supply has instead led to a massive asset price bubble, one aspect of which is the UK housing market but if you look around the world, anything that could be even vaguely described as an asset has shot up in price in the past 5 years or so (eg wine, fine art, property of all sorts, shares, debt).

The thing is, the banks were seduced by bubble economics. They've lent ever increasing amounts of money against rising assets which has led to rises in the prices of those assets and thus they will lend more against them.

Now however, they aren't lending and the whole thing is starting to go into reverse. We are now looking at what the Austrian School thought of as bad deflation as all the bad investments that have been made as a result of the previous inflation start to lose money and the distortions created by inflation unwind.

The Central Banks are trying a Keynsian solution to a Monetarist problem (printing money) and it ain't going to work.

Please liberally sprinkle IMOs in the above as you see fit.

HammersFan

!!!!!!? wrote: »

First, we're not talking about slight inflation. We already have more than slight inflation as it is and it's growing without any 'help' from this disastrous idea. This is going to be massively inflationary. Basically, hundreds of millions of pounds worth of shortfalls in the bank's capital caused by irresponsible lending are about to be 'forgiven'.

The end result will be billions of extra pounds of cash in the system, cash that under free market conditions would not have been there. Cash that taxpayers are underwriting, cash that will inflate prices making our savings and salaries worth less.

Just look at the effect that current rises in the price of food and energy are having on people. Now imagine what happens when that effect starts to increase and accelerate. Wants inflation gets a grip, it's a spiral.

And don't expect 1970's style pay increases. With the economy importing a lot more than it exports, including food, there isn't the cash there to pay workers more as businesses are squeezed to constrain costs.

All that price inflation will do, in the absence of wage inflation, is make it less easy to service existing debts as the amount of cash you need to spend on everyday stuff rockets. Times are set to get harder for the general population as everyone in the country holding or earning money pays to bail out the bad decisions of the banks.

In your opinion - there's a lot of predictions here and the complexities are such that it's very possible that lots of this won't happen. Maybe.

HammersFan

!!!!!!? wrote: »

Avoid taking on new debt. Whereas I think there will be inflation, I don't think we'll see substantial rises in pay to compensate. Therefore you'll be finding the debt harder to service.

Pay down any existing debt and try to build a good base of savings.

Inflation is bad news for savings but it's still better to have savings than be in debt.

If you have some savings and feel brave, you might want to invest some in gold. Like any investment you can lose out on it as well as gain though.

.

If houses are at the top of a 'boom', then surely gold is too. What makes you think it will go up, or are you just thinking it won't lose value?

WTF?_2

HammersFan wrote: »

If houses are at the top of a 'boom', then surely gold is too. What makes you think it will go up, or are you just thinking it won't lose value?

It's a good hedge against inflation in any case.

In the best case you can make a lot of money when the markets get jittery and everyone piles into gold, such as was the case a few weeks back. I don't think we're more than about halfway through the current crisis so there's a fair chance we could see another spike IMO.

Of course it can go down too but probably not so fast that you can't minimise your losses by selling it, if you chicken out.

If it goes back to $850 I'll be taking a punt.