Monday, Dec 17, 2007
Wolfgang contemplates (but rejects) the possibilty of an inflationary escape.
FT.com: Hold tight, the central banks have no plan
In an environment in which central banks target a low rate of inflation, the lion’s share of the adjustment will have to come from falling nominal house prices. That was different in the 1970s, when high inflation took care of the real price adjustment...........
......... Let us assume that the housing downturn is going to last eight years. A 2 per cent annual inflation rate – the target of many central banks today – adds up to 17 per cent inflation for the entire period; and a 4 per cent annual rate adds up to 37 per cent. So if UK house prices have to fall 40 per cent in real terms – which is not exaggerated given the extent of the bubble – an annual inflation rate of about 4 per cent would take care of the problem. Nominal houses prices would then not have to fall.
5 Comments
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1. voiceofreason said...
Looks like "Credit Crunch" is just the start.
As house prices fall around the world, then we will see a "Solvency Crisis".
Which is what happens when Credit doesn't get paid back.
Simple really.
2. it_is_going_with_a_bang said...
VOR
U r right. The rescue plan involved providing more money for banks and therefore people to borrow.
Which is strange since I thought the whole reason for the crisis was that alot of people couldn't pay it back....
3. japanese uncle said...
As mentioned earlier, UK is now seen as one the most volatile among the industrialized economies after the bank run for the first time in more than a century. If BoE is stupid enough to allow higher inflation target, GBP will drop like a stone literally into the abyss as ditched by the global investors not least the yen carry traders, driving the inflation utterly beyond control, creating a vicious spiral. At the end of the day, a pint of milk should cost you 10 pounds and GBP will be worth 0.1 Euro. (Higher) inflation target regime should involve highly stablized ecnomy.
4. Cheekie Charlie said...
I'm resigned to £10 a pint of milk. Once you accept it, it doesn't seem that bad.
5. General Melchett said...
There is one small problem with models which say nominal prices dont have to fall:
I will be buying a house in a couple of years time. I will be paying (lets say 40%? less than the nominal value of that house in spring 2007). If the vendor doesnt agree, I will find another vendor who will/has to agree. Simple really. The prcie of a market is not decided by those who cannot sell, it is decided at the edges, by those who must sell.