Inflation Via Ben Bernanke And The Fed.

[VedantaTrader]

The debate between inflation and deflation has been raging now for a few years. The debate on this forum has also led to two different camps of thought. Some on this forum believe we are having deflation and others believe we are going down the inflation route.

I have found that most of people on this Northern Ireland section to be right on the pulse of what has been happening here in Northern Ireland and a head of the curve. I think the people on this forum should take comfort in knowing that they are probably better informed than the large majority of people in Northern Ireland, regarding the housing situation. I think we are ahead of the game in our understanding the situation. The people here are better informed than the local banks analysts, the developers, the Estate agents and the majority of the public. The above aforementioned in my experience are pretty oblivious and clueless to the graveness of the situation. Most see it as a blip that will last months not years, and don’t seem to fully grasp the global macro influences that will profoundly effect all of us.

Here in Northern Ireland, I believe that it is important to know whether or not we are heading for inflation or a deflation. Many of us own gold and perhaps our unsure if we have made the right decision and are worried about our exposure to sterling. I think it is critical to know how to position ourselves over the next decade or so, in order that we can come out the other side on a strong financial footing. This does not only apply to people who want to invest money, but to every single person who receives a wage…

For instance we all get a salary in sterling, and this money will be placed in our bank account. There is a feeling of security of having our money in our bank account, yet if we experience high inflation then keeping money in the bank is as risky as buying a house in 2007. In knowing what type of economic environment we are in, we can then drip feed our weekly/monthly salary into suitable investments and diversified assets on a regular basis which will enable our money to maintain its purchasing power.

In order to place our savings in the right assets, it is critical to understand this deflation/inflation debate, as it will influence what allocation of our savings we will put into certain assets.

I am most certainly in the inflation camp. And I want to outline the reasons why I see this as inflation and not a deflation. It is my opinion. The inflationist could be wrong…However, I am confident in my own decisions and it has become clear to me over the last few weeks the path the world is going down. The pieces of the jigsaw are falling into place. Perhaps some people think what has the dollar and the US got to do with Northern Ireland, my father included. However, what happens in the US will have a profound effect on us in this little corner of the globe. I did say to some of my friends and my family that it is crazy to think that the bursting of the NASDAQ bubble in 2000 led to the housing bubble in Northern Ireland 7 years later. I receive incredulous looks for this statement yet it is true, however, that is for another thread.

My stance is quite thorough and it will take quite a lot of space to put across my point of view. So for that reason, I am going to split it into a few different parts,ona different thread which I hope will clarify where I’m coming from…

Part one is going to take a look at the main player in the central banks, the FED, namely Ben Bernanke.

Part One: Our path to Inflation via Ben Bernanke and the FED.

Ben Bernanke and his colleagues at the FED have written numerous research papers detailing the actions they could take and consider during times of risk to the financial stability of the US and world economy. I have read through most of them and for me they extol many reoccurring themes throughout. By dissecting Bernanke’s and the FED governors papers we acquire certain clues, regarding the type of monetary policies the FED could carry out during times of a pending recession or a systematic risk to the financial system.

Bernanke has spent his whole intellectual career studying the effects and causes of deflation. His PhD thesis was on the subject of The Great Depression and the causes of the resulting deflation.

The other bulk of his work is on the Japanese deflation following the bust in 1990. He strongly believes that deflation can be prevented with a “determined” government, and any deep recessions can be bypassed.

I have come to the conclusion that Bernanke’s policies are inflationary in the extreme. After his study on the Japanese deflation he comes to the conclusion that the Japanese government and central bank didn’t provide aggressive enough stimulus packages to stimulate aggregate demand within the domestic economy. He believes the BOJ ran out of ammunition when they cut the interest rate to Zero. Bernanke thinks the FED faced with a similar situation could use more “unconventional methods” to stimulate spending within an economy.

His obsession with preventing deflation is unrelenting. Bernanke believes that consumer spending and positive inflation are the back bone of growth in an economy, and any fall in aggregate demand that could lead to a recession should be fought with aggressive monetary policy and unconventional measures…In a 2002 paper entitled “Deflation: Making sure it doesn’t happen here”, he writes,

I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

By Bernanke’s own definition, Deflation is “a general decline in prices”, and it is caused by,

Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.

In other words it is a fall in consumer spending. It is when people decide to hoard cash and keep it in their bank accounts, until “prices stop falling” Deflation of course feeds in itself. The more people reduce spending the more prices fall, then people hold off longer, and prices keep falling.

Bernanke talks about the problem when interest rate policy as he calls it heads to the “zero bound level” In a severe deflation he states this could very well happen and the Fed would have no problem with cutting interest rates to zero if necessary. In a 2003 paper entitled, “An unwelcome fall in inflation” Bernanke writes,

In my view, though recognizing that such an action imposes costs on savers and some financial institutions, we should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy.

However, despite this open admission Bernanke that he would be prepared to cut the rate to zero, it still doesn’t mean that aggregate demand can be stimulated this way. After all, his study of the Japanese deflation led him rightly led him to the conclusion that aggregate demand and domestic spending in Japan were not evoked by keeping the interest rate at zero. His whole study was on how a central bank could increase demand in a deflation, even when the interest rate was at zero. The policy tools Bernanke suggests using in this situation are a mixture of fiscal and monetary. In his 2003 paper Bernanke writes,

As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation.

So what are some these more unconventional measures Bernanke refers to when the interest rate falls to zero. He clearly believes that the FED have the right tools to prevent deflation. In his paper “Preventing Deflation, he writes,( I have underlined the telling lines)

As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

So it would seem we have a central banker who has a lot of unconventional monetary policy plans up his sleeve when the interest rate is at zero.

The problem Bernanke saw in Japan was that the central bank could lend money and provide liquidity to the banks, but the banks would not lend the money, and the public would not spend the money, hence causing a further reduction in aggregate demand.

However Bernanke in another two of his papers states how this problem could be overcome to stimulate inflation in bond prices, equities and other assets. Bernanke states that the FED could take virtually any other asset onto its balance sheet in exchange for a loan. The FED could in other words loan money into existence to liquefy the system. In a 2005 paper Bernanke claims,

In the United States, the Federal Reserve currently lends only to depository institutions. But in contrast to the limited type of securities the Federal Reserve can purchase, it can accept as the security for a loan virtually any security that the Federal Reserve Banks themselves deem acceptable. And in fact, the Federal Reserve accepts mortgages covering one- to four-family residences; state and local government securities; and business, consumer, and other notes. These notes can be open market securities such as corporate bonds and commercial paper or can be commercial and industrial loans extended by banks, for example.

Strangely enough the FED have stayed true to their word regarding the above statement, as they already taken billions of MBS onto their balance sheet as collateral.

The other policy the FED could use to overcome the problem of how to stimulate consumer spending, comes from Bernanke’s infamous paper that earned him the title of “Helicopter Ben” To quote the paper Bernanke writes…

In ordinary circumstances, monetary policy exerts its stimulative impact in part through increasing the financial wealth of the public -- such as producing capital gains in bond and equity markets. If, at the zero bound, the Federal Reserve had already taken what actions it could to raise bond and equity prices, it might look to other tools it has to increase the public's wealth. One tool commonly attributed to the Federal Reserve, at least in theory if not by the Federal Reserve Act, is that of conducting "money rains."

Money rains are a clean way to study theoretically the effects of increases in the supply of money. In practice, it seems a bit difficult to envision how the Federal Reserve could literally implement a money rain -- that is give money away either through directly disbursing currency to the public or by disbursing it through the banking system. The political difficulties that are likely to arise from the Federal Reserve determining the distribution of this new wealth would be daunting.

And for me the last two monetary tools are the most frightening and scary…Bernanke writes,

No one would be willing to hold any asset that pays a negative nominal rate, as long as zero-interest money is available as a store of value. The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of "carry tax" on currency and deposits.

It's easy to envision such a system with regard to deposits at the Federal Reserve or transactions deposits at banks; for the most part, the technology to implement such a system is already in place. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent.

The technological difficulty lies mainly in imposing such a tax on currency. In the 1930s, Irving Fisher of Yale University, one of the greatest [sic] American economists,proposed such a system, in which currency had to be periodically 'stamped', for a fee, in order to retain its status as legal tender. The stamp fee could be calibrated to generate any negative nominal interest rate that the central bank desired.

In other words the FED could take money of you in theory by taxing money you have in your bank account. This is absolutely crazy talk. He goes on to say that if the FED couldn’t stimulate demand and consumer spending this way, then the FED could resort to other measures. Amongst these would be cutting taxes and “monetizing the tax cuts”, creating a “consumption tax” and then the direct monetization of goods and services. This is what Bernanke calls the “Goods and Services Solution”. He writes,

The strategy can be implemented, however, by coordination with fiscal policy-makers. The Federal government, for example, could purchase goods and services and finance the purchase with new debt, which the Fed in turn would buy -- in technical terminology, the Fed would 'monetize' the resulting debt.

So there you have it. The FED has already taken a pile of worthless mortgage backed debt onto their balance sheet. They have announced to the world that they are prepared to devalue the USD. In the time the FED cut interest rates from 5.25% last August to 2% the USD has declined steeply, and the price of oil has more than doubled. Another fiscal stimulus cheque is in the pipeline and they have provided an implicit guarantee on the trillions of dollars of debt of Freddie and Fannie. These policies are quite scary. There is always a lag time between pumping this volume of money into the system and the resulting inflation. By next year I think inflation will shift up a gear or two.

That still leaves us with the question, how will that effect us in Northern Ireland, and the UK economy. The US is the largest economy in the world. The USD is the reference currency of the world.

The UK’s biggest trading partner is the US. The UK also has a massive trade with other countries that are the US’s biggest trading partners. The US’s largest trading partners usually follow a similar monetary policy as the US, in order to stop their currencies rising rapidly against the USD and the other trading partner’s currencies of the US. If these countries didn’t follow a similar path then it would affect their trade with the US negatively, as their goods and products would become less competitive with other nations.

I have heard the argument that gold and oil has went up in all currencies including sterling, so therefore it couldn’t be the reason that the price rises in food and energy have been due to USD devaluation. The answer to this is that, other countries have been creating money also, and debasing their own currencies, just not as much as the USD. However, all paper money is losing its value against hard assets, and this is a trend I can continuing in the medium and long term.

It is for this reason, that I think it is wise to begin to drip feed our salary’s into different assets such as food, gold, silver, energy and perhaps other more stable currencies.

Edited August 3, 2008 by VedantaTrader

[RajD]

Great piece of research VT. I've read some but not all of Ben's papers before and was bemused when I realised he had converted his past thoughts into present action - the gvt stimulus cheques, the buying of MBS's , etc. Having read the rest of the stuff you've written it's quite clear that the Fed will do anything to prevent deflation. I agree that many other countries have been debasing their currencies too, but as the world's biggest debtor nation, the US has the greatest motivation for doing so.

Surely the only feasible outcome is the dollar being dumped and losing its reserve currency status? What would that mean for the global economy?

Edited August 3, 2008 by RajD

[VedantaTrader]

Great piece of research VT. I've read some but not all of Ben's papers before and was bemused when I realised he had converted his past thoughts into present action - the gvt stimulus cheques, the buying of MBS's , etc. Having read the rest of the stuff you've written it's quite clear that the Fed will do anything to prevent deflation. I agree that many other countries have been debasing their currencies too, but as the world's biggest debtor nation, the US has the greatest motivation for doing so.

Surely the only feasible outcome is the dollar being dumped and losing its reserve currency status? What would that mean for the global economy?

Thanks RajD. I ll be brief, as my heads quite numb after writing that,lol. maybe we can discuss more in depth after. I think it will initially be very deflationary and painful in the short term for the emerging market economies...but only a positive in the medium and long term. The reason they are experiencing such high inflation is that they are printing money to prop up the USD. I have been doing some more research into how the emerging market economies will cope when they decide to let their currencies appreciate and sell their USD. I think it will be a great positive for China, Brazil, India and other countries. There are very strong signs that domestic demand is growing rapidly in these countries. China surpassed the US recentely as Japans largest trading partner...from Jetro...

"According to a report released today by the Japan External Trade Organization (JETRO), China overtook the US in 2007 as Japan's largest trading partner, with total Japan-China trade (imports and exports combined) reaching US$236.6 billion, up 12% year-on-year over the 2006 figure.

Japan's trade with China in 2007 set a record for ninth straight year, the report revealed. Japan's export growth rate (to China) registered higher for the second straight year, while the rate for imports continued its downward trend. Japan-US trade accounted for 16.1% of Japan's total trade in 2007, down 1.3 points from last year's figure; this contrasts with the figure for Japan-China trade, which grew 0.5 points in 2007 to 17.7%, helping China eclipse the US for the first time ever."

Chinas imports from Brazil are up more than 1000% in the last ten years, prompting the Brazilian trade minister to say... I parphrase, that Brazil use to worry about the effects of a US slowdown, but now they aren't so worried as China have become a hufe trading partner.

When the Yuan increases, it will increase the Chinese purchasing power, and per capita income which will spur domestic demand. Oil will become relatively cheaper for the Chinese for example.

The US borrowed 70% of the Chinese and Asian peoples savings, and I guess the Uk also. They have worked hard without a chance yet to enjoy the fruits of their labour. I think the Chinese are pretty smart. They are waiting until domestic demand has picked up enough before they will cut the USD peg completely.

Overall, I think it will a net positive for the world. However, nations like the US and Britain, the Eurozone I think will experience alot of difficulties.

You are dead right about it being in the US interest to inflate. Bernanke should look to Argentina as an example and not Japan. The thing he doesn't seem to realise about the Great Depression and Japan was the US was self-sufficient and a net creditor nation in1930. Japan was also the biggest creditor nation in the world. This is a very important point in the inflation/dflation debate.

[getdoon]

VerdantaTrader - firstly really really great post.

I have been doing a lot of reading this weekend myself in the inflation vs deflation debate. Originally I was in the inflation camp, then I could see some merits in the inflation turns to deflation arguments being set out, however in the last few weeks I have come to a firm conclusion Benanke will set the world on inflationary spiral.

Only issue I have is as more $ are printed and US exports become even cheaper will other countries not just print money to try and keep the balance? if everyone else will print money to keep up whats the point in Benanke even going down the hyperinflationary route????? What you think VerdantaTrader

VerdantaTrader whats your background? Your very knowledgeable and I think together a group of people we should discuss and talk about ways of hedging ourselves for this scenario. Especially for those who are on an investing learning curve. I think we have about 9-12 months at the most to be fully hedged for an inflation spiral.

I am a stockmarket futures trader and have been very lucky to have made good money since leaving university a couple of years ago, especially since volatility in markets picked up significantly early last year. I am now in the lucky position of having a sizeable chunk of moneyin the bank, much like many STR'ers. I like many others have been puting the money just in 6%/6.5% instant access accounts even though I know this is not great especially as a higher rate taxpayer. To date I have not been too worried about this money as even earning 4% a year after tax per year is better than losing say 20% a year on property for the next 2 years. (I spend 12 hours a day trading the markets for a trading firm, and like to get away fom the markets in my spare time, as I result I have not to date been maximising the potential for my savings)

I feel obliged to my girlfriend of 6 years to buy her a nice house back where she works in Belfast to live in, before I start risking OUR money in more risky investments (I dont see them as more risky vs property but I am sure my girlfriend would rather appreciate in 2 years having a nice house in Belfast than me having a load of gold,silver and cocoa beans).

However this strategy may backfire as my choice in a few years might be do I spend my savings on a house or do I buy 3 cans of beans and some loo roll !

For people who are scared of swapping there STR fund for gold and silver at this stage put your money in the likes of NS+I Index-linked Savings Certificates. These are TAX FREE. I have maxed out 3 of the 4 issues so far this year (left alone the RPI+0.3% issue along with everyone else, a couple of weeks later was replaced by RPI+0.7% and now when inflaion looks to be a big issue RPI+1% is on offer! ). So has the girlfriend too ;-) . I know the official inflation figures are a joke but they will in some way have to follow inflation in the future! Plus it is linked to RPI which has been higher than CPI to date by approx 2%. The current issue along with current RPI is paying better than any instant saving account will pay and if you are a higher rate tax payer these are a no brainer! IMHO Above that Leeds Building Society have a RPI+2.5% Bond but I I'm not 100% certain there is not a catch somewhere yet so I have not invested.

There seem a lot of accounts around linked to Bank of England base rate and few around linked to inflation. This tells its own story, in whatever way you can get yourself linked to inflation over the next 6 months, I am still on a learning curve myself on this quest , and it is not late to get started, especially with the help of great minds of many who post here!

this is very basic RPI linking I know but a start for people to look at before looking towards assets

I truely think that the posters on here should put this inflation issue at the top of there agenda ABOVE ALL OTHER ISSUES, positioning themselves for a real move in inflation starting next year.

"It is for this reason, that I think it is wise to begin to drip feed our salary’s into different assets such as food, gold, silver, energy and perhaps other more stable currencies."

VerdantaTrader what do you think an inflation spiral mean for NI house prices? What kind of asset do you see it to be? One we should be investing in ?!?!

Glad Gordon Brown sold the gold at circa $250. He has done for Bitain what Benanke is about to do for the world............. Verdanta dont you think that Gold being still so far below the real term 1981 price is still potentially a great buy given the sh*t we are about to encounter, oil too............ i mean surely $2000 an ounce+ plus is very plausable ?

[getdoon]

http://www.ft.com/cms/s/a24ab0be-61a9-11dd....uk%2Findex.php

Assuming this does not take into account an inflationary spiral, how do you think this will affect house prices?

[Belfast Boy]

Thank you VerdantaTrader for spending your time writing the above post.

I'm sorry that I do not have the education, knowledge or experience to be able to contribute to the debate. I have only been learning about this since I sold my house in July 2007. Therefore, I have still have alot more questions than answers.

It is good to understand what America is likely to do with their economy as it will have a direct effect on the people of Northern Ireland. I was telling someone at the weekend about Fanny and Freddie. They thought I was joking. Their reaction was basically, 'well that won't affect us!' People just do not see how everything is linked together. I do not pretend to understand it myself. However, I have come to realise that everything in the world economy has a cause and effect.

I have 2 uncles who have alot more knowledge and experience than me of investing and economics. 1 uncle is largely invested in the stock market. The other uncle (despite my warnings) seems to be mostly invested in commercial property. He continues to recommend this form of investment for at least part of my STR fund. I have told both of them about investing in commodities. Both have told me that commodities are a very risky investment

I often over simply things so that I can understand them. So sorry if the next paragraph is total boll*x

I have read alot of the inflation vs deflation arguments. I think it is important to remain open minded to all possibilities. Before reading and thinking about your post, I was a neither My opinion was that we would see inflation in tangibles (things we need - agriculture, energy, metals) and also see deflation in anything bought with credit (things we want - houses, cars, electronics, white goods). However, now I'm not so sure. I know that American is probably the greatest consummer nation in the world. However, do the 'powers that be' fully understand the law of unintended consequences! I remember reading that, in an effort to stimulate their economy, the Japanese government sent everyone a cheque. Most people saved the money rather than spend it. How is the FED going to get the American people to spend money in these uncertain economic times? How will they ensure all this printed money flows where they want it to go? There is a risk that many parts of the economy will continue to deflate - housing market, stock market, consumer spending. At the same time - all this new money will flow into food, oil, metals causing inflation.

I guess that puts me in the stagflation camp.

Surely the amount of money needed to support the banks, housing market and stock market even at their current levels - will be hyperinflationary? Basically, the banks don't fail, the stock market does not fall, house prices start going up again. At the same time a litre of petrol, loaf of bread, pint of milk will cost how much each... £10, £20, £50? Where/when would the money printing stop?

I have very little wealth in Sterling now, as I think it will go down alot in value against the things we need, in the short to medium term. But that is just my opinion. Do your own research.

Edited August 4, 2008 by Belfast Boy

[RajD]

The reason they are experiencing such high inflation is that they are printing money to prop up the USD.

Agreed. Foreign intervention in the currency markets through direct purchases of U.S. Treasuries has prevented the full inflationary impact of US government debt from materializing - enabling the U.S. government to effectively export its inflation. The argument is that a system of pegged currencies is both stable and desirable. Why's that?

I have been doing some more research into how the emerging market economies will cope when they decide to let their currencies appreciate and sell their USD. I think it will be a great positive for China, Brazil, India and other countries. There are very strong signs that domestic demand is growing rapidly in these countries.

Given that Bretton Woods II is more an informal rather than multilateral agreement what's the tipping point?

The US borrowed 70% of the Chinese and Asian peoples savings, and I guess the Uk also. They have worked hard without a chance yet to enjoy the fruits of their labour. I think the Chinese are pretty smart. They are waiting until domestic demand has picked up enough before they will cut the USD peg completely.

Kind of answers my question above. Call me a conspiracist if you like, but I believe that the bailing out of Fannie Mae / freddie Mac was more about bailing out the Chinese and Japanese gvts (who hold about a trillion in agency bonds combined), possibly as part of some covert agreement that they don't renege on Bretton Woods II in return.

You are dead right about it being in the US interest to inflate. Bernanke should look to Argentina as an example and not Japan. The thing he doesn't seem to realise about the Great Depression and Japan was the US was self-sufficient and a net creditor nation in 1930. Japan was also the biggest creditor nation in the world. This is a very important point in the inflation/dflation debate.

Agreed. In both of those instances we had deflation. This time it will be hyperinflation for the US, temporary inflation for other countries too until they de-peg from the dollar. What's your outlook for the UK?

[getdoon]

What's your outlook for the UK?

and the outlook for UK housing? Will it rise due to this inflationalry spiral?!

[RajD]

and the outlook for UK housing? Will it rise due to this inflationalry spiral?!

No. House prices in real terms will still fall. Take the US for example - double digit inflation but house prices still tanking. Banks are less willing/able to lend in a falling market so house prices will have to fall back to levels that are based on what the average person is realistically able to afford (3-4 x income?) rather than what they are able to borrow. Increases in living costs caused by rising inflation, without an equivalent increase in earnings (thanks in part to laughable gvt CPI figures) will further constrain affordability so it would be ludicrous to suggest that house prices will continue to rise in real terms.

[blofield]

DUDE....you have way too much time on your hands!

Great stuff VT

I did say to some of my friends and my family that it is crazy to think that the bursting of the NASDAQ bubble in 2000 led to the housing bubble in Northern Ireland 7 years later

Where i do agree that the .com crash contributed, i think 9/11 and the subsequent military campaigns from the U.S. and also Katrina and Rita played just as much part. Cuz at the end of the day we are talking about central banks keeping interest rates artifically low

My opinion was that we would see inflation in tangibles (things we need - agriculture, energy, metals) and also see deflation in anything bought with credit (things we want - houses, cars, electronics, white goods)

I would tend to lean towards this viewpoint. Although i would call it Bi-flation

[Belfast Boy]

... so it would be ludicrous to suggest that house prices will continue to rise in real terms.

This is where the terms 'nominal' and 'real' house prices falls become very confusing. House prices may rise in 'nominal' terms. A simple example would be - average house price £350,000 - however, the average income would then be £100,000. All houses will seem to have risen in value. Thought the ratio of house price to income would still have fallen to 3.5 times income. In this senario a litre of petrol, bread and milk will be at least £10 each. Though I would like to point out that petrol, bread and millk are all increasing rapidly in cost and wages are not!

[YoungFTB]

VedantaTrader I think you're one of the top 3 posters on this HPC forum, thanks for creating such a great thread!

Here is a good article about inflation in Asia

Asia's Inflationary Winners And Losers - Jul 22, 2008

BANGKOK - As cost-push inflationary pressures course through Asia's oil-importing economies, some countries are better placed than others to meet the rising macroeconomic challenge presented by spiraling global oil prices, which hit a record high of US$147 per barrel this month.

How individual governments respond in the coming months will separate the region's economic winners from losers and likely determine whether the global economy is headed for a hard or soft landing in light of the US's mounting financial and economic troubles.

The region's economies have maintained strong growth momentum in the first half of this year, with several countries near peak economic growth levels. Accommodating monetary policy has played a significant role in many countries' growth, as has an unexpected surge in Japanese and European demand for Asian exports to offset the slump in the US.

That's expected to change in the months ahead, however, as external demand in the US, Europe and Japan is expected to weaken and the loss of export income begins to crimp local economies' growth. Investment bank UBS projected in a report this month that Asia's small open economies will likely see growth cut by half over the next four quarters, while the less externally geared China and India lose one to two percentage points of growth over the same period.

Across Asia, central bankers find themselves on the horns of a crucial policy dilemma in how to calibrate growth and stability. Hiking interest rates would help to re-anchor rising inflationary expectations, which are already coming unhinged in certain countries, but also will dampen domestic-led growth at a time global demand, including in the net-importing US, is expected to tail off.

Central banks in the region have so far been reluctant to appreciate exchange rates to mitigate inflationary risks, due partially to long-held concerns that a stronger currency will undermine export competitiveness via-a-vis their main regional competitors. Nor is it clear offshore interventions in foreign exchange markets are a viable way for regional countries to curb effectively cost-push inflation driven by rising global oil prices.

Investment bank Credit Suisse reckons monetary authorities would have to allow for double-digit currency appreciations to significantly dent local inflation rates.

Nearly all Asian central banks have historically endeavored to maintain their exchange rates - whether fixed or floating - within a steady level of the US dollar to anchor business expectations, particularly for their respective export sectors.

But with the US Federal Reserve now using loose monetary policy to stave off a possible financial collapse, many regional central banks are importing interest rates that are out of step with their own underlying economic conditions. In doing so, they risk pushing inflation higher than rising global oil prices alone would dictate.

The reflex to protect economic growth has so far limited the region's policy response to fight fast-rising inflation. In part that is because many monetary authorities view the recent spike in global oil prices as a one-off supply-side shock, influenced by US-led war and political instability in the Middle East, that will soon stabilize at a lower price level.

That view gained some currency last week when crude oil prices fell 11% before rising over 2% on Friday to close at around US$131 per barrel. Some economists in the region predict oil prices will dip further on slowing demand and stay steady at around $120 heading into 2009.

That is a shot-in-the-dark prediction, considering many of the same analysts thought $100 oil unfathomable just a year ago and with bearish commentators citing "peak oil" arguments still projecting average prices could rise as high as $200 by 2009.

Inflationary dominoes

So are Asia's central banks underestimating the risk of entrenching high inflation rates that will require drastic and growth-debilitating monetary measures to control in the future? It depends on where you look, economists say.

Doomsday comparisons to the run-up to the 1997-98 Asian financial crisis are in the main spurious considering few regional countries are plagued by the same overinvestment, credit bubbles, current account deficits and external debt profiles which characterized the region's previous meltdown. Nor is monetary policy equally loose across the region, as some commentators have suggested.

Countries such as China, India, South Korea and Indonesia fall into the lax monetary policy category, while Malaysia, Taiwan and Thailand have seen only modest money supply growth in recent months, according to Credit Suisse. The bank noted in a recent research report that "there are concrete differences in the conditions under which cost-push inflation is affecting the region and how each central bank should and may respond".

Investors and currency traders are thus taking a more sophisticated country-by-country view than the lump assessment they made during the 1997-98 financial crisis, when investor herd behavior meant capital fled wholesale the region's emerging economies despite significant differences in their underlying economic and financial fundamentals. Analysts are now looking towards individual countries' domestic demand, fiscal flexibility, central bank credibility, sovereign creditworthiness and exchange rate trends in making their risk assessments.

That also means those countries with widely perceived imbalances could take a disproportionate hit than when capital flight and currency selling was more evenly distributed across the region, as it was in the 1997-98 crisis among Thailand, Indonesia, South Korea, Malaysia and the Philippines.

Inflationary expectations are already coming unhinged in a number of regional economies and risk doing so in others without a prompt and firm policy response, economists say. While several Asian countries have the central bank credibility and fiscal flexibility to keep inflation expectations well anchored, including China, Japan and Taiwan, others lack the financial resources and monetary independence to prevent speculators who perceive they have moved too slowly from selling down their currencies.

That raises the risk of more debilitating second-round inflationary effects, including wage-price spirals, which if not contained could result in the sort of hyperinflation witnessed in Latin America in the 1980s. "There will be winners and losers, with some countries getting hit especially hard," said the head of research at one major investment bank in Bangkok, referring to rising regional inflation. "We're all waiting to see how badly this thing shakes out."

Clearly the first inflationary domino to fall was Vietnam, which has experienced double-digit inflation rates for eight consecutive months, hitting an annual rate of 26.8% in June and which, according to some analysts, is expected to rise to over 30% in August. Vietnam now runs the risk of entrenching high inflation rates as labor groups across the country demand higher wages from their factories and employers accede to their demands.

Many have attributed Vietnam's inflationary meltdown to poor regulatory oversight and haphazard economic policies that prioritized fast growth over stability. Excessively loose monetary policy caused Vietnam's money supply growth to more than double since the middle of 2006.

Meanwhile fuel price subsidies which until today accounted for around 5% of gross domestic product (GDP) masked underlying inflationary pressures and built up pricing distortions throughout the economy. On Monday, Vietnamese authorities rolled back fuel subsidies and raised domestic fuel prices by 36%, raising the risk of even faster inflation in the months ahead.

Indonesia and the Philippines, some economists reckon, could be the next inflationary dominoes to tumble. Both countries have witnessed recent surges in inflation, with Indonesian prices climbing 11% in June. They could rise higher if the government, as is expected, removes more fuel price subsidies later this year. Philippine prices spiraled up 11.4% the same month, marking a 14-year high.

Long-term bond yields in both countries have risen over 250 basis points in recent months, underscoring market perceptions both governments have moved too timidly in containing inflation. Both countries lack fiscal maneuverability while respective central banks are viewed skeptically by market watchers as prone to political interference.

Indonesia's monetary policy is widely viewed as exceptionally loose, even with the recent rise in the benchmark rate to 8.75%. Many analysts were thus surprised when Indonesian central bank governor Boediono told reporters this month that inflation would ease to 6.5-7.5% by the end of the year after warning previously it would hit between 11.5% and 12.5%. Philippine monetary authorities similarly have a storied history of fudging statistics and understating risks, economists say.

Thailand and South Korea, both of which have experienced heavy downward selling pressure on their currencies in recent months, represent the second line of potential inflationary dominoes. Both countries are among Asia's heaviest oil importers and are now spending billions of dollars every month to boost their exchange rates in offshore currency markets.

Thailand's economic picture is clouded by the country's tumultuous politics, which some fear has compromised the central bank's ability to tackle inflation more aggressively. Last week it raised interest rates by a mere 25 basis points to 3.5%, a move many viewed as inadequate considering prices rose to a 10-year high of 8.9% in June. UBS has estimated Thailand needs to raise rates by at least 125 basis points to restore market confidence in the central bank's policy direction.

South Korea stands out for its fast-rising debt-to-GDP ratio, which since 2005 stands in stark contrast to the region's post-1997-98 de-leveraging trend. Many economists believe South Korea is on the verge of another credit bubble, driven by short-term external debt, which has taken on a higher risk profile with rising inflationary expectations. Average Korean property prices have risen nearly 70% over the past decade, nearly on par with the 85% surge seen in the US, and way higher than the estimated 30% witnessed in Thailand and Singapore.

On the other side, China, Taiwan, Singapore and Malaysia have all maintained strong current account surpluses, helping them to offset the inflationary risks of potentially higher oil prices in the months ahead. Indeed, the market has bid up each country's currency against the US dollar this year, while the rest of the region's units have to varying degrees fallen, presaging perhaps the winners and the losers in Asia's new and uncertain inflationary age.

http://www.atimes.com/atimes/Asian_Economy/JG22Dk01.html

[getdoon]

http://uk.reuters.com/article/breakingFund...K34730020080602

HSBC emerging markets inflation-linked bond fund

[YoungFTB]

This is a long article but really worth the read because it explains the economic power America has with the dollar being the reserve currency of the world.

Breaking Free From Dollar Hegemony - Jul 30, 2008

The vast expansion of US-led globalized trade since the Cold War ended in 1991 had been fueled by unsustainable serial debt bubbles built on dollar hegemony, which came into existence on a global scale with the emergence of deregulated global financial markets that made cross-border flow of funds routine since the 1990s.

Dollar hegemony is a geopolitically constructed peculiarity through which critical commodities, the most notable being oil, are denominated in fiat dollars, not backed by gold or other species since then president Richard Nixon took the US dollar off gold in 1971. The recycling of petro-dollars into other dollar assets is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. After that, everyone accepts dollars because dollars can buy oil, and every economy needs oil. Dollar hegemony separates the trade value of every currency from direct connection to the productivity of the issuing economy to link it directly to the size of dollar reserves held by the issuing central bank. Dollar hegemony enables the US to own indirectly but essentially the entire global economy by requiring its wealth to be denominated in fiat dollars that the US can print at will with little in the way of monetary penalties.

World trade is now a game in which the US produces fiat dollars of uncertain exchange value and zero intrinsic value, and the rest of the world produces goods and services that fiat dollars can buy at "market prices" quoted in dollars. Such market prices are no longer based on mark-ups over production costs set by socio-economic conditions in the producing countries. They are kept artificially low to compensate for the effect of overcapacity in the global economy created by a combination of overinvestment and weak demand due to low wages in every economy.

Such low market prices in turn push further down already low wages to further cut cost in an unending race to the bottom. The higher the production volume above market demand, the lower the unit market price of a product must go in order to increase sales volume to keep revenue from falling. Lower market prices require lower production costs which in turn push wages lower. Lower wages in turn further reduce demand.

To prevent loss of revenue from falling prices, producers must produce at still higher volume, thus further lowering market prices and wages in a downward spiral. Export economies are forced to compete for market share in the global market by lowering both domestic wages and the exchange rate of their currencies. Lower exchange rates push up the market price of commodities which must be compensated for by even lower wages. The adverse effects of dollar hegemony on wages apply not only to the emerging export economies but also to the importing US economy. Workers all over the world are oppressed victims of dollar hegemony, which turns the labor theory of value up-side-down.

In a global market operating under dollar hegemony, the world's interlinked economies no longer trade to capture Ricardian comparative advantage. The theory of comparative advantage as espoused by British economist David Ricardo (1772-1823) asserts that trade can benefit all participating nations, even those that command no absolute advantage, because such nations can still benefit from specializing in producing products with the lowest opportunity cost, which is measured by how much production of another good needs to be reduced to increase production by one additional unit of that good.

This theory reflected British national opinion at the 19th century when free trade benefited Britain more than its trade partners. However, in today's globalized trade when factors of production such as capital, credit, technology, management, information, branding, distribution and sales are mobile across national borders and can generate profit much greater than manufacturing, the theory of comparative advantage has a hard time holding up against measurable data.

Under dollar hegemony, exporting nations compete in the global market to capture needed dollars to service dollar-denominated foreign capital and debt, to pay for imported energy, raw material and capital goods, to pay intellectual property fees and information technology fees. Moreover, their central banks must accumulate dollar reserves to ward off speculative attacks on the value of their currencies in world currency markets. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. Only the Federal Reserve, the US central bank, is exempt from this pressure to accumulate dollars because it can issue theoretically unlimited additional dollars at will with monetary immunity. The dollar is merely a Federal Reserve note, no more, no less.

Dollar hegemony has created a built-in support for a strong dollar that in turn forces the world's other central banks to acquire and hold more dollar reserves, making the dollar stronger, fueling a massive global debt bubble denominated in dollars as the US becomes the world's largest debtor nation. Yet a strong dollar, while viewed by US authorities as in the US national interest, in reality drives the defacement of all fiat currencies that operate as derivative currencies of the dollar, in turn driving the current commodity-led inflation. When the dollar falls against the euro, it does not mean the euro is rising in purchasing power. It only means the dollar is losing purchasing power faster than the euro. A strong dollar does not always mean high dollar exchange rates. It means only that the dollars will stay firmly anchored as the prime reserve currency for international trade even as it falls in exchange value against other trading currencies.

I've only quoted a part of the first page (4 pages long) The link to the full article is below

http://www.atimes.com/atimes/China_Business/JG30Cb01.html

[YoungFTB]

This article suggests to me that because America is the reserve currency of the world it can effectively do what it likes economically, and all other economies around the world are at its mercy as they have to react and basically follow their actions. i.e. devalue their currency so they don't rise against the dollar.

America is in a unique position and can adapt economically to any situation (As long as it remains the reserve currency of the world)

Liberation from this Holy Dollar Empire of dollar hegemony can only come from sovereign nations withdrawing from the global central banking regime to return to a national banking regime within a world order of sovereign nation states to put monetary policy back in its proper role of supporting national development goals, rather than sacrificing national development to support global dollar hegemony through wage-suppressing export-led growth.

Li Yining, a leading Chinese economist, former president of Guanghua School of Management at Beijing University and member of the Standing Committee of the 11th National Committee of the Chinese People's Political Conference, the country's political advisory body, opined in the Second Meeting of the Standing Committee on July 4, 2008, that China is facing a pressing challenge in preventing inflation from turning into stagflation - the dual evils of high unemployment along with high inflation - if market expectation concludes that Chinese policymakers will fail to insulate the economy from the developing global slowdown that is expected to deepen next year with no prospect of a quick recovery.

It sounds like China (like all other developing countries) is stuck between a rock and a hard place under it's current trade agreements. On one hand they need to address domestic inflation but they can't because they have to keep on devaluing their currency Vs the dollar to remain competitive. Chinese wages can't be increased either because it would again damage their competitiveness so the Chinese people have to accept a decline in living standards as a result as their currency is devalued.

Here is the interesting part at the end of the article

A first step in this redirection of policy focus on domestic development is for China to free itself from dollar hegemony. This can be done by legally requiring payment of all Chinese exports to be denominated in yuan to stop the unproductive role of exporting for dollars that cannot be spent domestically without incurring

heavy monetary penalty. Such a policy affects only Chinese exporters and can be implemented unilaterally by Chinese law as a sovereign nation, without any need for international coordination or foreign or supranational approval.

Importers of Chinese goods around the world will then have to acquire yuan from the Chinese State Administration for Foreign Exchange (SAFE) to pay for imports from China. The yuan exchange rate and Chinese export prices can then be coordinated according to Chinese domestic conditions. Import prices denominated in yuan can then be more rationally linked to Chinese export prices. Foreign trade for China then will benefit the yuan economy rather than the dollar economy. There will be no need for the PBoC to hold dollar reserves.

China's economic growth since 1980 has been driven by export of low-price manufactured goods with a dysfunctionally low wage scale. To correct the imbalance of trade that has been giving China trade surpluses of dubious financial or economic benefit, China needs to raise wages, not to revalue its currency. Raising Chinese wages to the level of other advanced economies will redress the current inoperative terms of international trade that now benefits only the dollar economy to benefit the Chinese yuan economy.

Some analysts have suggested that China's GDP growth would stay at 9% from strong domestic demand. Yet this demand comes mostly from severe income disparity. China's exports to other emerging economies are now bigger than those to the US or the EU. Asia and the Middle East accounted for more than 40% of China's export growth in 2007, North America for less than 10%. But Chinese trade with other emerging economies was at a deficit, with China importing more, such as oil and other commodities, than the oil-exporting small economies could absorb in the way of low-price Chinese goods for their small populations, while poor emerging economies cannot buy more from China because they do not have sufficient dollars. If Chinese exports are denominated in yuan, trade with these poor economies would explode with balance because their exports to China can also be denominated in yuan to pay for imports from China denominated in yuan.

Export for dollars presents for all exporting countries a problem of diminishing returns because of dollar hegemony. For China, it is a problem of crisis proportions. Since global trade is denominated in dollars, China's economy faces a capital shortage despite its new role as the world's biggest creditor nation. China is forced to accept foreign direct investment, which accounts for over 40% of GDP, despite the country's chronic trade surplus and huge foreign exchange reserves of upwards of $1.8 trillion and growing. Weaker export growth could lead to a sharp drop in foreign direct investment because exporters would need to add less capacity.

China's current-account surplus amounted to 11% of GDP in 2007. This means its entire GDP growth was from the export sector, and its economy produced far more than it consumed domestically. This surplus production was shipped overseas for fiat dollars that cannot be spent in the yuan economy while Chinese workers could not afford the very products they produced at low wages. Thus under hegemony, while China has become the world's biggest creditor nation, it suffers from shortage of capital needed by its still undeveloped economy, particularly in the vast interior, and has to depend on foreign capital even in the coastal regions when the export section is located. In recent years, Chinese policy has encouraged higher domestic consumption, yet since 2005, net exports have contributed more than 20% of GDP growth.

If China was to free itself from dollar hegemony then imo America is in deep trouble, I don't think it would take long for other countries to follow suit and the dollars value would drop off a cliff.

I don't know how likely or unlikely the above will happen but considering the inflationary path American has taken surely at some point there will be a breaking point when the developing countries decide enought is enought. Thoughts?

I'm firmly in the inflation camp now, the question I have is what percentage of assets to put into commodities?

I'm thinking 10% in the bank and the other 90% in commodities

Does anyone have any advice on a percentage to put into different commodities to spread the risk?

[headmelter]

Great post VT. I think we have 12 months at most before the chickens come home to roost. I have to admit I was unsure about which camp I was in until recently but find myself being pulled more towards inflation, although I think there is also a reasonable case for 'biflation'.

All said and done I'm currently moving out of sterling and just hope I have enough time and pick the right destination to preserve what I have.

Thanks for taking the time to post your thoughts, if you have any suggestions other than PMs I would be interested to hear them.

[getdoon]

I'm thinking 10% in the bank and the other 90% in commodities

Does anyone have any advice on a percentage to put into different commodities to spread the risk?

I would certainly be on for debating how best to build a portfolio of investments to beat what I see as oncoming inflation spiral.

its all getting scary eh ?!?!

[z man]

I would certainly be on for debating how best to build a portfolio of investments to beat what I see as oncoming inflation spiral.

its all getting scary eh ?!?!

Been thinking that my STR fund needs a better place to live for the next year or so as well so I for one would welcome any investments ideas from those a little more astute than I.... Like what are people investing in and why?

[subby]

if you want a good read then have a hunt about for petrodollar and sadam hussein. Saddam wanted to move the oil to Euro's from the dollar which would have decimated the US and set the ball rolling for others to follow suit and cripple the US.

rumour has it that this was one of the main reasons for Saddam getting invaded

[VedantaTrader]

By the way, I think it is a great idea to dicuss ways we can protect our money in the coming years. Can we get a sub-forum on here? One for the big picture economics and how that fits in with us here? Just to keep it seperate from the NI related house stuff...

VerdantaTrader whats your background? Your very knowledgeable and I think together a group of people we should discuss and talk about ways of hedging ourselves for this scenario. Especially for those who are on an investing learning curve. I think we have about 9-12 months at the most to be fully hedged for an inflation spiral.

Hi GT. I have been into trading for about 4-5 years. Mostly currencies, and lived in South East Asia on and off for the last 5 years or so, mostly Bangkok,aka city of sin and angels,lol. I m trying to get into writing economic research pieces and combine that with a technical trading strategy.

"It is for this reason, that I think it is wise to begin to drip feed our salary’s into different assets such as food, gold, silver, energy and perhaps other more stable currencies."

VerdantaTrader what do you think an inflation spiral mean for NI house prices? What kind of asset do you see it to be? One we should be investing in ?!?!

Certainly not. I think it is probably just about the worst investment for the next decade. Even with inflation, credit bubbles of this size are next impossible to re-inflate. If there is very high inflation, then just maybe house prices might not fall so much, or perhaps could rise very miniscule amounts, but in comparison with other assets, I can’t see the point in real estate in the western world.

Glad Gordon Brown sold the gold at circa $250. He has done for Bitain what Benanke is about to do for the world............. Verdanta dont you think that Gold being still so far below the real term 1981 price is still potentially a great buy given the sh*t we are about to encounter, oil too............ i mean surely $2000 an ounce+ plus is very plausable ?

Gold is a fantastic buy. I mean I m not a gold bug out of trendiness, or any bias to the yellow stuff. For 20 years gold was a terrible investment, and there will be a time again when it won’t be appropriate to buy gold, but to sell gold. Gold is incredibly cheap.

Most people seem to look at just the monetary hedge of using gold as an investment, and forget to study the supply and demand fundamentals. Like peak oil, peak gold exists also. Production for gold peaked out in 2004, and in that time demand has reached records, especially in India and China. Forget even the monetary inflation being bullish for gold, but the supply and demand fundamentals are extremely bullish for gold also. My price target for gold is anywhere between 4000 USD to 10,000USD. I know that it is a big range to target, but I have my reasons for that. We can discuss it in another post.

I'm sorry that I do not have the education, knowledge or experience to be able to contribute to the debate. I have only been learning about this since I sold my house in July 2007. Therefore, I have still have alot more questions than answers

Don’t be too modest BB. You sold your house in 2007. That is great timing. To be honest, its only been in the last 6 months I have started to get interested in the NI housing market, I mean more deeply in the fundamentals. I was more into the globalmacro situation. However, your views and analysis of the situation has certainly helped me get a finger on the pulse of the situation here. You have well ahead of the curve it would seem.

I often over simply things so that I can understand them. So sorry if the next paragraph is total boll*x

I concur with this view also. It will be stagflation. With a lot of stag and a lot of flation. The assets that people used to build “wealth” in the past, like stocks and real estate will suffer badly, as we are not competing on a global market place for them. However, goods that we compete on the global market place will rise dramatically over the next decade or so, ie, energy, food, resources, consumer goods.

How is the FED going to get the American people to spend money in these uncertain economic times? How will they ensure all this printed money flows where they want it to go? There is a risk that many parts of the economy will continue to deflate - housing market, stock market, consumer spending. At the same time - all this new money will flow into food, oil, metals causing inflation.

This was the problem the Japanese had. The banks and the citizens didn’t want to invest. However, this led to the birth of the Japanese carry trade, where Japans deflation was the worlds inflation in the last 8 years. Japan however, is a fantastically efficient exporting nation, and the biggest net creditor at the time and still actually, with China. So Japan could print money, as it was partly offset with the interest repayments and the credit they had lent out to other nations, and the huge exporting machine. Also a lower yen has helped Japans exports flourish.

On the other hand, the US are the biggest debtor nation of all the debtor nations from the past put together. There is absolutely nothing to stop a similar carry trade on the USD. However, the USD has nothing backing it. The only thing backing the USD is rotten tier three assets. Even if the FED wanted to support the USD, no one has told me exactly how it can be done.

Given that Bretton Woods II is more an informal rather than multilateral agreement what's the tipping point?

I think civil unrest due to the pain of inflation, and also USD peg nations will be seeing their USD lose value, which will lead to a capitulation from the USD. The USD has nothing backing it, only faith.

Agreed. In both of those instances we had deflation. This time it will be hyperinflation for the US, temporary inflation for other countries too until they de-peg from the dollar. What's your outlook for the UK?

I think the UK is in a terrible situation also. Very similar to the US. The way the labour markets are composed, the debt levels, house prices, a bloated inefficient public employment sector, high taxes, and even less self-sufficient than the US, huge trade deficits, falling tax revenues at a time when the government is increasing fiscal deficits.

I am particularly worried about Northern Ireland, as our reliance on service sector jobs, public sector jobs and construction could lead to a complete break down of the economy.

[Malthus]

"I am particularly worried about Northern Ireland, as our reliance on service sector jobs, public sector jobs and construction could lead to a complete break down of the economy."

Totally agree on this one , our economy traditionally had much lower peaks and troughs than the UK or Ireland as the public sector was such a large part of the economy .

This time however the "gold rush" of the property boom has imho left us in a position where the trough is going to be deeper than any down turn in living memory .

[VedantaTrader]

This article suggests to me that because America is the reserve currency of the world it can effectively do what it likes economically, and all other economies around the world are at its mercy as they have to react and basically follow their actions. i.e. devalue their currency so they don't rise against the dollar.

America is in a unique position and can adapt economically to any situation (As long as it remains the reserve currency of the world)

It sounds like China (like all other developing countries) is stuck between a rock and a hard place under it's current trade agreements. On one hand they need to address domestic inflation but they can't because they have to keep on devaluing their currency Vs the dollar to remain competitive. Chinese wages can't be increased either because it would again damage their competitiveness so the Chinese people have to accept a decline in living standards as a result as their currency is devalued.

Here is the interesting part at the end of the article

If China was to free itself from dollar hegemony then imo America is in deep trouble, I don't think it would take long for other countries to follow suit and the dollars value would drop off a cliff.

I don't know how likely or unlikely the above will happen but considering the inflationary path American has taken surely at some point there will be a breaking point when the developing countries decide enought is enought. Thoughts?

I'm firmly in the inflation camp now, the question I have is what percentage of assets to put into commodities?

I'm thinking 10% in the bank and the other 90% in commodities

Does anyone have any advice on a percentage to put into different commodities to spread the risk?

Thanks for the articles YoungFTB.

I'm firmly in the inflation camp now, the question I have is what percentage of assets to put into commodities?

I'm thinking 10% in the bank and the other 90% in commodities

I ll get back to you on this one.

[getdoon]

http://www.housepricecrash.co.uk/forum/ind...showtopic=83912

main thread - 9 pages of debate on inflation/deflation and it was only started this evening!!

[Guest vicmac64]

Thank you VerdantaTrader for spending your time writing the above post.

I'm sorry that I do not have the education, knowledge or experience to be able to contribute to the debate. I have only been learning about this since I sold my house in July 2007. Therefore, I have still have alot more questions than answers.

It is good to understand what America is likely to do with their economy as it will have a direct effect on the people of Northern Ireland. I was telling someone at the weekend about Fanny and Freddie. They thought I was joking. Their reaction was basically, 'well that won't affect us!' People just do not see how everything is linked together. I do not pretend to understand it myself. However, I have come to realise that everything in the world economy has a cause and effect.

I have 2 uncles who have alot more knowledge and experience than me of investing and economics. 1 uncle is largely invested in the stock market. The other uncle (despite my warnings) seems to be mostly invested in commercial property. He continues to recommend this form of investment for at least part of my STR fund. I have told both of them about investing in commodities. Both have told me that commodities are a very risky investment

I often over simply things so that I can understand them. So sorry if the next paragraph is total boll*x

I have read alot of the inflation vs deflation arguments. I think it is important to remain open minded to all possibilities. Before reading and thinking about your post, I was a neither My opinion was that we would see inflation in tangibles (things we need - agriculture, energy, metals) and also see deflation in anything bought with credit (things we want - houses, cars, electronics, white goods). However, now I'm not so sure. I know that American is probably the greatest consummer nation in the world. However, do the 'powers that be' fully understand the law of unintended consequences! I remember reading that, in an effort to stimulate their economy, the Japanese government sent everyone a cheque. Most people saved the money rather than spend it. How is the FED going to get the American people to spend money in these uncertain economic times? How will they ensure all this printed money flows where they want it to go? There is a risk that many parts of the economy will continue to deflate - housing market, stock market, consumer spending. At the same time - all this new money will flow into food, oil, metals causing inflation.

I guess that puts me in the stagflation camp.

Surely the amount of money needed to support the banks, housing market and stock market even at their current levels - will be hyperinflationary? Basically, the banks don't fail, the stock market does not fall, house prices start going up again. At the same time a litre of petrol, loaf of bread, pint of milk will cost how much each... £10, £20, £50? Where/when would the money printing stop?

I have very little wealth in Sterling now, as I think it will go down alot in value against the things we need, in the short to medium term. But that is just my opinion. Do your own research.

Hi BB, many a long argument you and i HAVE HAD IN THE WAY DISTANT PAST! But I'm with you on this one - (Not sure at all whether or not it will be deflation or stagflation - or what I am think may happen now just like you - a period of high inflation followed by DEFLATION. NO idea really which way to turn right now. But at least we are really thinking (unlike the vast majority of financial advisors who are most definately not or at least they are thinking commissions first and foremost wich isn't a lot of good to any of us right now...........................

Any way - its good to see your name again my friend. What about my other friend prophetprofit:?

[Belfast Boy]

Any way - its good to see your name again my friend. What about my other friend prophetprofit:?

Welcome back vicmac64. What happened?

I think PP must be away on hols

ps I like a good argument just stop being offensive and I'll stop reporting you