Thursday, May 15, 2008
End of the road for property bulls
Independent: No rate cuts for two years, King hints as inflation heads towards 4 per cent
The Bank of England indicated that there is not likely to be another cut in interest rates for two years, as it forecast that inflation will reach 4 per cent this autumn.
Posted by quiet guy @ 08:25 AM (1292 views) Add Comment
40 Comments
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1. japanese uncle said...
Probably the BoE will be forced to raise, rather than cut the IR, I reckon.
2. hpwatcher said...
Ha, bloody Ha.
3. crash bandicoot said...
Rate cuts have been no help to house prices the last couple of times anyway as the weren't passed on. Anyone but the most blinkered can now see that the emperor had no clothes on and that houses are overvalued. By how much is still open to discussion but at least this shows that the BOE can now avoid the house price distraction and get on with their job.
4. planning4acrash said...
Sh*t, I said that I'd try to avoid posting. But this deserves one. As we all should know by now, general inflation is far higher than stated. It is, always and everywhere, caused by an increase in the supply of money. The Government and Bank of England are in full control of the reported and actual figure because the Government determine the statistical measure and the Bank of England determine the money supply. For more info on this, look at the link to Mises Institute papers that I got put under the Read economic papers on the House Price Crash subject, link that is on the homepage.
Inflation is actually about 20 odd percent at the moment, it is always pretty damn close to M3 growth, what with producer prices up over 13% and oil rising at what appears to be 1% a week. Remember that, during the previous decade, M3 growth has correlated closely to actual RPI inflation plus house price inflation. In otherwords, house price inflation has been a device to allow M3 growth without causing strikes, because people can be fooled into believing that house price inflation is to their benefit. Even though it causes mortgage slavery and makes it harder to move up the rungs in the housing ladder.
Now that house prices are falling, real inflation will be M3 growth, plus a bit. This is precisely why oil could rise to $200/barrel within the year.
Returning the issue of striking? Yes, we all should be on strike. Why? Because inflation is a device to boost the balance sheets of banks and speculators. It causes the economic cycle of boom and bust. Destroys jobs via busts and via encouraging speculation and discouraging thrift and hard work. It destroys savings and pensions, earnings and disposable income. It makes houses unaffordable and reduces social mobility. It encourages greed, encourages mass fluctuations in migration, not for the purpose of discovering new cultures, but for the purpose of seeking money and hedging your position in the cycle, i.e. move from Poland the England when Poland is down, move back when England crashes.
and, it funds social programs, which mostly attempt to solve problems that are caused by inflation. Social housing to mitigate house price booms. Benefits to mitigate against loss of jobs and manufacturing during the economic cycle. Many socialist principles are positive and would be needed at a fraction of their current cost without inflation, but inflation also harms the necessary social projects, by ensuring that they increase in price year, after year, disproportionately, primarily because of all of the money pumped into them, made necessary by the inflation that was initially caused by debt.
Basically, debt being used as a tool against debt, causing yet more debt. It is a classic self-reinforcing system that reaches points of instability (recessions and depressions), from where structural changes are made, but the cycle repeats, slightly altered, but fundamentally the same. (Read Chaos by James Gleick to understand how systems work). Very important, because all things are systems, i.e. wholes made from the sum of their parts. They can be chaotic, as with our fiat monetary and out of control socialist system/military industrial complex. But all systems can also be self-balancing, self-regulating. Which is what I perceive to be the co-creation stuff that S2R refers to.
In the case of money, a 100% gold standard, with no fractional reserve banking is the self-regulating tool that the power structures have successfully fought against since the beginning of the industrial revolution. Gold supply is relative constant, it cannot be manipulated, so inflation does not exist. The USA constitution requires a gold standard, but this was taken from them after the Civil War, where a truce was made in return for allowing European Financiers to be in control of the money supply in return for "independence". That situation still exists. America had its greatest period of economic growth during its Gold Standard period. It had stability, and an economy that boosted the working class and expanded the middle class. If we return to the subject of class, we understand that inflation exists to boost the upper class and the banking elite, and the government and its cronies. It does so, not in isolation, so others have to suffer. The result is, the destruction of the working classes, who no longer are able to do much in the way of wealth generation, for themselves and society, and it destroys the middle classes. It does of course benefit the ruling elite to destroy the middle classes, who, eventually would demand reform whereby we have a libertarian future with power structures taken down and power redistributed to families and individuals. It is one of the reasons why the family is under constant attack.
Unfortunately we don't have a libertarian politician in this country to speak of. But change will of course have to come from America. We can however fight the EU project, which in its present form moves money creation from individual states to the European Central Bank monolith, which has a the power of a Federal Reserve and is no doubt run by the same people. Clearly, a Gold Standard transcends boundaries and could be a global currency, without exchange rates, without differentiation. One where, with stability, we could have free migration, etc. because people would not need to migrate for economic reasons (from the economic cycle), because there wouldn't be one. They would have to migrate as a result of famine, etc. but less of that would occur. Most places with famine are characterised by debt forming the majority of their GDP.
So, we need a libertarian model, founded on reform of money. Some say that it must require land and capital reform, but I doubt that necessary, because a gold standard would move us slowly towards an egalitarian future. However, all renters should have a right to buy, e.g. farmers on Prince Charle's HUGE estates, should be given a right to purchase the land at massive discount, based on the amount they and their ancestors have paid over the years. For those currently operating land and businesses to have a right to buy would avoid the destructive redistribution seen in Zimbabwe. This must be on a backdrop of socialist support of the minority who are economically inactive, the young, the old, the extremely poor, all supported by direct taxation, and not debt. Such a method would cut the tax burden by more than 75%. Needless to say, we must end unnecessary wars if we are ever to get a gold standard, because wars are almost always funded by debt, because the amount of tax that would be required to fund a war would almost always be rejected by the people. Instead, they get thieved the same amount via inflation.
5. paul said...
"though he did hint that he would prefer to see house prices included in the consumer price index"
I bet he did. Timing is everything ...
6. bystander said...
I read somewhere that this morning on the BBC, GB was quoted as saying that he would get us out of this situation by dropping interest rates, is this true?? If so the independence of the BoE is a total and utter farce, and the UK will be forced into the eurozone before Trichet is forced to start dropping rates in the 3rd quarter. Any thoughts???
7. the haunted said...
A few weeks ago Brown said that rates would be cut. I think that Merv will have his strings tugged on this and we will see a cut within the next 3 months. That is unless the BOE comes under increasing attack to maintain or increase IR throuogh the media.
I was really hoping that 'true inflation' would become a huge media topic and blow the CPI figures out of the water. I can't believe that Cameron hasn't hit Brown on this yet.
8. sold 2 rent 1 said...
Gold is battling in the 86-880 range.
We might see one last "take down" either today or tomorrow from the Nice Government Men.
16 May is the turning point in consciousness, as I have been saying for a while now
Inflation is in the system - gold is looking a strong buy now.
Prepare for the Elliott wave 5 blow-off to 1500
9. sold 2 rent 1 said...
Correction...... Gold is battling in the 860-880 range.
10. sold 2 rent 1 said...
the haunted,
"I was really hoping that 'true inflation' would become a huge media topic and blow the CPI figures out of the water. I can't believe that Cameron hasn't hit Brown on this yet."
Is this because the tories were guilty is figure fixing when they were in power.
11. harold said...
No rate cut for 2 years? - This assumes that King and Brown want to save the pound, which is debatable.
12. harold said...
planning4acrash, very good post - you've been doing some reading.
13. Long Time Coming said...
S2R1
Should I put my premium bond into gold and double my money? How do I do it?
14. hpwatcher said...
planning4acrash, very good post - you've been doing some reading.
Yeah, nice one. Interesting stuff........but where next?
15. stillthinking said...
Part of King's job is to set expectations, so what advantage would there be to setting an expectation level of 4% ? If 4% is on the way, and he is worried about a wage spiral, a better expectation to set would be that just a spike. However, the expectation is there for a persistent 4%, a deliberate choice.
The US is battling deflation, maybe they won maybe they didn't. If nobody borrows money for a house over the next 4 years, and personal credit facilities are cancelled or withdrawn, then where is the expanded credit to cause future inflation? Is the view that the BoE has won? That the BoE has reflated the economy? If you look at inflation during the downturn blip of 2005/6, inflation was falling sharply. Rates were lowered and inflation came back.
Everybody has got the message that they should save money now and be thrifty, even if they are actually forced to by the banks, so where is this flood of spending that causes the inflation? Are people going to drive more or less? Are they going to buy bigger cars or smaller cars?
Basically, I want to make the point, from which you can conclude what you like, that
-everything that comes from King or the BoE is a cheap method of achieving their monetary objectives.-
As we know that their monetary objectives are 2% inflation, his statement about persistent 4%(3.7% whatever) inflation must be considered by him to achieve that goal. I don't personally see at the moment how that public belief will achieve his 2% target, unless he really wants to hold inflation up after a subsequent below 2% fall.
Any comments on this are welcome because most seem to think we are in for persistent inflation from now.
16. sold 2 rent 1 said...
P4AC,
Good post. Nice to have you back.
M3 is rising at 20pc and has stopped flowing into property but energy and food instead.
But energy and food will be bubbles that will pop too.
So where next when they do? Gold, the final bubble before global enlightenment?
It is important to see that the debt-based monetary system with all its flaws was actually a necessary part of the industrial revolution and world expansion from its Europena base. But over time the drawbacks have built up and the benefits reduced to such a point where change is required.
This is P4AC's chaos theory in action.
This is evolution in action.
17. also sold to rent said...
p4ac, I don't see how inflation (by what measure?) can be at 20% if wage inflation isn't at 20%. If the buying power isn't there how can prices increase? Of course inflation in some things (food, energy) is high at the moment, but there is deflation in other things (flat screen TVs etc). Average price of a large white loaf in 1990, 50p. Average price of a large white loaf in 2001, 50p. Pair of jeans in the 80's, about £20, now about £3. Yes bread's gone up recently to over £1, but largely because of China via oil and meat demand. Not Money supply.
18. sold 2 rent 1 said...
hpwatcher,
"Yeah, nice one. Interesting stuff........but where next?"
A 100% gold standard with no fractional reserve banking could be possible now world populations are stabalizing.
Personally I see a gold standard as just another stepping stone in the evolutionary process; it is necessary at a given time, just as the debt-based banking system was.
19. harold said...
also sold to rent, back to school:
http://mises.org/story/908
20. planning4acrash said...
Also Sold To Rent, read the Mises artical. Also, note that the cash is going direct to bankers who are investing it in commodities. The cash, always and everywhere, is printed by banks and governments. They spend it first, then the inflation trickles through the system over the space of about 2yrs. You are right, wage inflation is low. But general wage inflation is a SYMPTOM, of inflation, not the cause, the cause, always and everywhere is printing of money. The fact that wages are not going up means that our standard of living is being eroded.
Damn it, I'm sounding like a scratched record again. Please people. Inform yourselves. Ask the question, what is money, what is inflation. Don't stop looking and reading until you can answer the question, fully informed. People here discuss houseprices as if informed, yet with no understanding of money or inflation. It is like the blind leading the blind.
21. planning4acrash said...
Also Sold To Rent. It is easy to see inflation at 20%. Oil up from 80 to 120 dollars in a yr, food up 13% ish in the last quarter. I believe, CPI at 3%, RPI at 4%. If commodities are rising at about 15% average, add the actual RPI of 5% ish and you get 20%.
Previously, houseprices took the gap between RPI and money growth. Now that houseprices are reversing, commodities will take the slack between RPI and money growth and compensate for falling house prices.
THIS IS HOW BANKS MAINTAIN THEIR BALANCE SHEETS.
22. planning4acrash said...
One more thing. The percieved benefits of having an expensive house were the device used (and spouted in press propoganda) to justify rocketing m3 growth. The device now are exhaggerated claims about resource depletion, (?global warming? (i hope so, because global warming is terrifying)), etc. Oil output is not counted properly people. Saudi measure their oil by the number of tankers that leave. They can make up figures as they go. The Orwellian, not government, but corporate ministry of "information" is at full speed now. Lets hope it hits the end of the line and crashes at the buffers. They only care about printing money for their needs, they will lie and do anything they can to keep the gravy train rolling. BUT, don't let anybody tell you that inflation is good for you. Unless you are the government, or a banker, it is aweful for you, and always unjustifiable.
23. cornishman said...
@ P4aC
Thanks for taking the time to put together your post. Interesting read.
What, I think, is implicit in what you've said, but which may not have been noticed by anyone without a mathematical leaning, is that if HPI becomes negative whilst monetary growth remains positive, then the other prices will increase dramatically.
e.g. if HPI minus 20% and monetary growth plus 20%; that leaves 40% inflation somewhere else...
Have I got that right?
24. cornishman said...
e.g. if HPI=minus20% and monetary growth=plus20%; then that leaves 40% inflation somewhere else...
Have I got that right?
25. malct said...
16. also sold to rent said...
"p4ac, I don't see how inflation (by what measure?) can be at 20% if wage inflation isn't at 20%. If the buying power isn't there how can prices increase?"
Increasingly over recent years households have been avoiding POVERTY by working longer hours and taking on more DEBT
DEBT has been used to mask POVERTY
26. sold 2 rent 1 said...
cornishman,
"e.g. if HPI=minus20% and monetary growth=plus20%; then that leaves 40% inflation somewhere else..."
"Have I got that right?"
Sort of, but you need to compare new lending for mortgages and M3/M4 growth.
HPI is a lagging indicator on new mortgage lending
27. Baroo said...
s2r1 @ 17 "...now world populations are stabalizing."
Which world are you living in?
28. also sold to rent said...
harold, thanks for the mises link. I know in future now to read p4ac's inflation rates as money supply rather than CPI.
p4ac, I hope you invest some of your time into the history of the peak oil debate, you should find it interesting. Start with King Hubbert and go from there, possibly finishing up with www.appgopo.org.uk.
29. shipbuilder said...
Fantastic posts, P4AC!
30. Planning4acrash said...
Cornishman, absolutely right, tho the precise figure is hard to work out, because the inflation/deflation of each sector has to be weighted against others. This is what we see today with oil prices having risen three fold over the past few years, only really once the US housing market began to tank. The impact now will be significant with a global houseprice crash underway.
Remember that commodities such as Gold will form part of the equasion, and gold doesn't matter much to most people, so it will pass relatively unnoticed. This explains why a spike in gold is almost guaranteed. As asked before, and I don't know what the answer to this is, but what when the commodities bubble crashes? And it can crash far faster than houses? Is that the Gold spike? Or will gold crash at the same time as commodities? Will we really see a sustainable technologies boom to replace the commodities boom? This kind of makes sense, but surely, investment in renewables will slump along with slumping commodity prices? From here on in, as always with the future, it becomes a bit sketchy.
BTW, thanks for the compliment Cornishman, but it didn't take me more than 15mins. I am blessed with super fast typing speed!
31. This comment has been removed as it was found to be in breach of our Blog Policies.
32. planning4acrash said...
Also Sold 2 Rent. I've been following peak oil longer than houseprice crash. Be sure that it will happen, but, it is not a cause of inflation. Oil prices could not rise sustainably without a corresponding rise in the money supply. Look at theoildrum.com and discover that there is as much manipulation of oil production info as the BOE provides over money supply/inflation. For sure, peak oil is probably here, but it is being played upon to justify monetary expansion. Another explanation for the plateau in production of late, is that the Saudies, et al. realise that the real global economy has been tanking since 2000. This is their take on the situation, and I'd rather believe them than the Fed.
33. also sold to rent said...
p4ac, fair enough. You know your own mind so I bid thee fair well. Live long and prosper.
34. sold 2 rent 1 said...
Baroo,
"s2r1 @ 17 "...now world populations are stabalizing."
"Which world are you living in?"
The world population is set to peak around 2050.
With peak oil, food, water and debt it might be much sooner
35. planning4acrash said...
One last thing. Having this discussion, I've realised that, as a system, money growth is the driver. The system is almost completely closed. Money leaves the system via bad debt, but far more money is created than destroyed. The money creation is sustainable, it can last forever. BUT, the bubbles that it causes, as it accumulates in bubbles, are the unsustainable, yet inevitable element of the system. It is a never ending baton race. So long as enough money is created to compensate for the bursting of a bubble, ploughed into a new bubble, money growth can continue infinitum. The system as a whole is sustainable so long as the part that feeds it is maintained, and so long as it continues to have something to feed. The financiers do not care what it is that they feed, so long as they have something to feed, to maintain their position and to maintain the populace in a state of debt where they constantly pay interest, which is in affect a tax, that we pay for people who print money from thin air, something that we don't need, which is totally unnecessary. The media spin on the bubble, the get rich when its on the up, the oh dear, didn't see that coming when the bubble breaks, is purely a distraction to ensure that the whole gravy train never goes off the track. What people don't realise is, that the financiers continue to fatten up and maintain their position on the ups and the downs, because they ALWAYS have a hedge against any downturn, the hedge is the new upturn and the passing of the baton from one asset class to another. From which they extract a percentage of its contribution to the economy via interest payments.
The system could never collapse on its own, because always enough money can be created to continue. So long as the people don't strike and play game. That is why they fear wage price spiral. So long as they can maintain the media spin, and the people don't revolt against their slave drivers, the party can continue.
36. planning4acrash said...
This is why usery (The charging of interest for money) is a sin in all of the major faiths. It is expressly forbidden by the Bible, the Koran and Jewish scriptures. It is forbidden by the United States Constitution!!
When will the good people of faith in this world unite to uphold their faith? When will the good people of the USA rise to protect their constitution?!
37. shipbuilder said...
P4AC - is it sustainable? I remember reading an article that claimed that debt is only destroyed when it is paid back, but bad debt stays in the system.
This is the way I understand it -
If a £1K loan is created by a bank, that is an extra £1K in the total volume of money in circulation, which is then transferred to other people when the loan is used to buy goods.
When that loan is then payed back to the bank, the original £1K is taken out of the volume of money in circulation again.
However when a debt cannot be paid back, the money not paid remains in circulation, increasing the volume of money and hence inflation occurs.
Anyone?
Not too sure myself - as you say it needs a bit of work to understand properly.
38. shipbuilder said...
Which is to say that interest is the charge for this 'service'. If i'm right, though, couldn't this service be provided for free by the government?
39. shipbuilder said...
So inflation occurs in a boom when money is created quicker than it is paid back. Deflation happens when people are paying back more than they are borrowing and spending. But it is actually the bad debt that ensures that the total volume of money stays at a higher level?
Again, guessing here - can anyone help?
40. planning4acrash said...
Shipbuilder. I think you are right about bad debts. You are also right that interest is indeed a fee for the service of printing fiat notes. Government can provide the service for free. However, they are worse than corporations, which is why they pass over responsibility for it to central banks, look at Mugabe!!
Deflation in money supply in general, I understand, last happened seriously at the Great Depression. All other recessions since have, so I understand, seen a stabilisation, rather than fall in money supply. Deflation of a particular basket of goods can occur when general inflation is going through the roof. Falling house prices against a backdrop of 20% M3 growth and 4-5% RPI inflation is the current example in hand.
General deflation only needs an end of money printing, because debts are always being paid off. So, there's your answer, I believe. Tho, clearly, you've exposed a gap in my understanding. Needs a bit more thought me thinks.