Thursday, Jul 19, 2007
Something for everyone.
The Times: Enjoy your holiday: interest rates have peaked
Anatole is calling a top in the house market alongside a top in rates. Interesting nexus, and contrary to much thought in the markets.
Posted by stoatgobbler @ 07:52 AM (160 views) Add Comment
13 Comments
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1. sold 2 rent 1 said...
"The average British family is still far better off than it was a year ago because of the increase in its property, pensions and stock market wealth – and this favourable wealth effect will allow most people to keep borrowing to maintain their spending patterns, despite the squeeze on their real incomes."
The problem is you can't keep expanding debt to infinity.
The 60 year expansion of debt is nearng its elastic limit.
The elastic will snap back fast when property and stocks are falling, and unemployment starts rising.
One of Anatole's key arguments of why world inflation is not a problem is because of high sterling.
Sterling is only high because of anticipated higher IRs.
Once IRs peak, sterling will fall and inflation will pick up.
IRs have to remain high.
Borrowing will persist and the equity cushion eroded.
Once people realise that the cushion is no longer a John Lewis extra thick deluxe model, but a Tesco striped value pack, spending will slow sharply and we are in a downward spiral that will be much worse than the 1990s
2. the bald man said...
Keep on borrowing regardless!! No analysis of sub prime, avaialbility of credit, yen carry, analysis of why the pound is trong but just your stocks, pensions and houses are still valuable keep borrowing
3. Davros said...
Excuse me for missing the point, but at some point all this borrowed money has to be paid back from peoples earnings. Now unless earnings miraculously increase at a greater rate than borrowings, there will have to be a bust of equal magnitude at some point in the future. To flog your house for a load of money, some other poor fool has to borrow to pay for it.
How we can keep borrowing regardless without a tide of bankruptcies, I can't see?
4. Stoatgobbler said...
'I believe that banking institutions are more dangerous to our liberties than standing armies.' - Thomas Jefferson
I too think Anatole is taking a pretty blinkered view.
5. Alan said...
It's the last day of term in many places.
Tomorrow, and for the next 2 weeks we will see mass migrations of people changing homes. Removal vans were booked weeks ago for this event, clearly marked in the EA calendar.
Families growing, families dispersing, getting older...etc. My mate is an IFA and some folk are still taking out stupidly big loans. Why? The market stopped going up (in my bit of Essex) 3 months ago .....
6. p. o. o. r said...
It is good to hear others opinions, even if I disagree - If I remember rightly the reports back from the MPC, have been that they are concerned about long term inflation, and saw a drop over the summer months but with a real chance of a surge later in the year.
Now I would have thought that with rising oil prices, Wage demands increasing, current exchange rate fluctuations etc etc then the likelyhood that inflation will rise after the summer months is huge. Can the MPC wait before they increase rates again - I would say yes, but certainly no later than September. I am also guessing, as I have said all along that I expect interest rates to reach 8% during the next 5 years (Albeit we may have an occasional 0.25% drop which will only last a month or two). I would even go as far as saying that 10% or more is not an unrealistic possibility.
However, I am not a financial expert, I have no training on such things. The above is just my opinion. Do I have reason - Yes - I want property prices to become affordable again, so that I can buy somewhere to live and be happy ever after.
7. paul said...
"even if we assume house prices stabilise or modestly decline in the year ahead"
Repeat after Anatole, THERE IS NO SUCH THING AS A SOFT LANDING.
8. chilli said...
Davros - the answer to your question is extremely high inflation, which will decrease the real value of everyone's loans, and pensions too. In effect, they are not spending the appreciation on their houses, they are spending their pensions.
Anatole also argues that he MPC say they don't want to raise interest rates. This is exactly what they should say. If they say they are going to raise interest rates, businesses might attempt to game the system and raise prices in order to pay for higher interest rates. This results in run-away inflation that doesn't respond to interest rate rises.
I also hate the idea that the poor are okay losing real earnings power because their investments are gaining value. What tripe! What about the poor that don't have an investments? Also, if earnings power is going down, does it follow that productivity in the UK is going down? I think so. And what that means is that we are all depending more and more on our existing assets, rather than running a real economy.
9. Davros said...
Well with the MPC determined to keep inflation at 2%, I guess we can forget that argument.
10. denzil said...
I quite like Kaletsky because he at least tries to provide a reasoned argument. However, I don't agree with him. There will be at least one more .25 increase this year if not two. If there is not an increase of at least .25 this year I will eat my dog and post it on youtube. The problem is Kaletsky seems to subscribe to an unsafe view i.e. "Most homeowners in Britain still enjoy a very comfortable cushion of equity in their property values and as long as this is the case they will be perfectly rational to borrow, in moderation, to go on holiday or buy a car or offset a temporary decline in real income." This is completely irrational and borrowing against equity to offset a decline in income is foolhardy and not indicative of a stable economy. My Gran calls it "buying on the never never" which highlights the change in values across the generations.
I'm a great believer in the cyclic behaviour in all areas of life and regarding interest rates they will slowly but surely approach the 7%-8% mark. It may take some time to reach 7% though but as sure as eggs is eggs they will. If rates return to 7-8 percent slowly then rises in real income my stave off a crash if they rise fast then the only way the punter on the street will be spared the pain is high inflation. Letting inflation run amok for a while is a bit of a short-term "get out of jail free" card for Gordon's mis-management and the combined reliance of economic growth on housing equity.
Some may think my comments make me a pessimist, I believe I'm a realist where as Kaletsky in this instance is being a little too optimistic. His argument seems in part to be based on the City expecting a rate rise but the MPC say they do not plan in advance. It fills me with fear to think that the MPC will not have an idea in advance where rates are going and just because they publicly won't admit it does not mean that individually they do not have a good idea.
11. Papabear said...
I've lost all my respect for Kaletsky a few years ago when he was arguing that Japan's stock market was on the verge of a boom and now is the time to invest in it. In reality, it tanked and I lost a couple of grand. It was my decision of course but it would be interesting to look back over time and see how many times pundits such as him got it wrong. This latest article seems another one that's suggesting that we can just continue to borrow forever...
12. shipbuilder said...
The arguements in this article are nonsense - Anatole argues that the City is wrong expecting a rise becuase the strong pound will reduce inflation, making a rise unnecessary (while conveniently ignoring ALL other inflationary pressures), but the pound is strong precisely BECAUSE the City expects IR rises. He then goes on to say that we can't predict a rise because Mervyn says that they don't decide until that month and incredibly goes on to argue that even though a majority voted for rises the last time, the fact that it wasn't unanimous means that they will not vote again for a rise this time. The argument is based on the assumption that the BofE members have access to information that suggests a rise is unnecessary (in fact he suggests that this imaginary information says 5.5% rates), conveniently ignoring the fact that these people have rarely voted for a rise at any time.
In other words, he makes up information to suit the 'don't panic' argument that he obviously wanted to write in the first place
13. Van Hoogstraten said...
Is there any one at the Times who is capable of stringing a logical economic argument together. Kaletsky, David Smith.....they don't seem to get it right very often