Sunday, Nov 23, 2008
Wile E Coyote economy: what happens if we believe that asset prices will drop?
Independent: Why buy now if prices are plummeting? How deflation could drag us all down
Even as recently as August, we were being told by the Bank of England that the real economic risk was inflation ... Now, just a few months later, oil has dropped below $50, commodity prices have fallen by 40 per cent and, five weeks before Christmas, British retails stores are slashing their prices by anything from 20 to 40 per cent. UK and US interest rates have been cut sharply and will go even lower, and the Bank and the US Federal Reserve are now predicting inflation may go negative – perhaps as soon as the middle of next year. All talk is of recession, deflation and depression.
Posted by quiet guy @ 09:43 PM (1362 views) Add Comment
25 Comments
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1. last_days_of_disco said...
If the government embarks on a spending program using debt to foreign powers then they need to be removed for treason.
It has to stop. We can't make a bad situation worse, we need to radically change our behaviour and not expect the government to
bail us out. There is no non-painful way to win back our freedom from debt. The longer we put it off, the longer it will be before we get there.
2. gardeniadotnet said...
Thanks qg,
Best article on the effects of deflation I've read, so far.
3. str 2007 said...
LDOD
I saw Gordon Brown on television at lunchtime hinting at the fact that whatever is given away tomorrow is not the end of it, they will do more.
I said a while ago on here that they are dangerous and at the time had about 18 months of being reckless trying to get themselves out of the mess they'd created.
They haven't got 18 months anymore but they haven't half shifted some money since I originally made the comments, they're about to shift another load tomorrow.
How much I wonder could they actually spend over the next year or so leading up to the election and how long would it take to clear down.
Perhaps we'll all be applying for servant jobs to houses owned by Chinamen in Mayfair in a couple of years.
BTW - you put a post on a thread the other day with words to the effect 'haven't heard much from the Gold Bulls for a while'.
About an hour later Gold shot up about 5% and over the last couple of weeks is up against sterling about 20% - just wondered if there was any connection with your post or what you were getting at ?
4. jamonit said...
Can anyone enlighten me as to the theoretical effect of deflation on the price of gold please?
5. str 2007 said...
Re: the article
Good Read
Especially liked this
''Just about the only winners in a deflationary environment are those who hold hard cash – because the purchasing power of the monetary unit (pound, yen, euro or dollar) expands as the price of goods fall.''
OK I know it's not good news, but it's about the first bit of good news I've had about the decisions I've thus far made, given that me taking out a £300k mortgage wasn't going to save the country by itself.
Shelfish of me ? Yes I do accept that, but I took a huge leveraged risk AGAINST the property market and deserve a vast profit just like all those BTLers did when the tables were turned.
At least I pay tax on my unearned income, not use someone elses nett income to put down against my tax bill. (well you know what I mean).
6. str 2007 said...
jamonit
Good question and I don't know the answer, you'd think its value would increase against a particular currency (uncertain time and all that) but if everything else is falling in value then maybe Cash would be King.
Assuming you trusted the banks holding your cash then one may be happy to fore go interest as the goods/house you intended to buy with the cash reduced in price.
In my mind I still don't buy the whole deflationary thing, at least up to a point as once assets reach a sensible level, and I guess I'm talking about the most expensive here - houses - with interest rates at 0% and mortgage rates at say 2%, I personally can't believe people wouldn't buy houses, and then need to furnish them etc etc etc.
The effect on Gold then would be large falls I guess cause who wants some Gold when you could have a house to live in, or rent out to a broke BTLer.
7. jamonit said...
So in this sense, gold should be seen as a commodity and not as a currency...
8. str 2007 said...
Jamonit
Assuming there was a degree of faith in present currencies - yes.
But that would I guess need a concerted effort on all currencies to work together (so they're all in the same boat so to speak). And perhaps some legislation to stop currency speculation, like they did with stopping people shorting particular shares etc.
No doubt someone clever than me will explain while I'm wrong so don't take my word for it.
9. titaniccaptain said...
@Jamonit
"So in this sense, gold should be seen as a commodity and not as a currency..."...............been trying to work that one out for a while mate...........what I will say is if we get hyperinflation and the money printing press on turbo...............then gold will seem more like a currency...........but dont listen to me I change my mind on gold day by day
10. jamonit said...
Managing investment is like trying to choreograph an octopus...
11. str 2007 said...
BTW
See the advert above ''£200k £650 p/m bad credit ok' people shouldn't really be getting into trouble with deals like that about.
12. jamonit said...
Price is breaking north again...up to 539 quid. Anyway...so if punters see policy as inflationary, gold is a safe haven currency, but if they see policy as deflationary, gold is a dangerous commodity. Unless policy isn't coordinated in which case gold might be seen as a safe haven commodity/currency. OK then. I know just what to do...;-)
G'night all.
13. titaniccaptain said...
On the note of deflation...........building labour has gone down alot..........builders are having to become more competitive with their prices to survive.....its a far cry from 2years ago when builders just used to pull a price out of thin air then times it by two and add the cost of a holiday on top whilst shaking their head like a 1970's mechanic.....So if labour is going down and deflation brings down materials then the only thing holding up a house value will be the land value and we know thats going down in price.............where this ends guys I have no idea but I know one thing and that is it would be a foolish man who took his gaze away from the lion that circles us
14. jackas said...
I would welcome deflation with open arms.
15. matt_the_hat said...
Deflationary theories are academic - just press the print button and problem solved - ctrl P
16. amjidk said...
"Deflationary theories are academic - just press the print button and problem solved" that will surely mean that the gold price will rise right??
17. Old_traveller said...
"Given the current crisis and the failure to secure house prices as the base asset of the entire Western economy, this is the deflationary cliff edge on which the Western economies are teetering. In the current situation, fiscal stimulus will achieve nothing. Only a policy that secures assets, drives real interest rates down to zero and provides an inflationary floor can succeed in this downturn."
I am worried by the implications of this last paragraph stating that holding houseprices stable at current levels should be one of the main goals of the government... how can that be compatible with reasonable lending, LTV ratios and average house price to wage ratios?????? Unless my employer pumps my wage x 2 that would not make any sense.
18. little professor said...
@matt - Why didn't the printing press work for the Japanese then? Krugman did a pretty good hit piece on the helicopter Ben Bernanke plan to print your way out of deflation, I'll try and find it.
19. last_days_of_disco said...
@str 2007
Gold is going to be volatile, along with everything else. The point I have made repeatedly is this: Deflation has happened. Enormous deflation has happened. Deflation on an unimaginable scale. Its now working its way into the system. Its going to be a bumpy ride with lots of ups and downs. Deflation is primarily a swing away from borrowing to saving in the minds of the herd. Every attempt to "print money" is failing. People have this idea that one can simple "press print" and everything will work. That won't work because you destroy trust in your currency, and then it becomes very quickly worth *zero*, not a nice smooth transition, but an abrupt abandonment. Zim has experienced this. If you look at the big example of when this happened last time, the great depression, the parallels are too clear to ignore. When you think of gold, think housing bubble and look at the terms being bandied about. I am not saying it won't go up again for a while, but in the end it will deflate.
Gold is reasonable as a safe haven as long as you take the right precautions.
Gold is not a wealth generation strategy, its a survival technique and an expensive one at that.
20. str 2007 said...
LDOD
Thanks for that explanation (damn stuffs up again today - missed that bottom)!
But as you say - IMO just to volatile to feel you've done something safe with your money. Certainly wouldn't be a relaxing ride.
Jamonit
Glad you now know just what to do.
What did you decide as a matter of interest.
21. doom&gloom said...
LDOD, totally agree that printing money is not a way out for an economy. It just destroys the currency - so currency value could fall quicker than asset values, but this is no solution - just a compounding of the problem. If investors lose confidence in the currency you have a situation like iceland - bankrupcy.
Personally I don't agree with the conclusion of the article. Author contends that if we could just "secure house prices as the base asset of the entire Western economy" we could avoid deflationary collapse. Falling house prices are just another symptom of over-indebtedness in the system, and 'securing house prices' would not offer any solution at all. "Philosophy Professors", I don't know... The fact is that the system is broke due to the level of accumulated debt, and the ONLY solution is to rein in and start paying down that debt. Unfortunately there comes a point of no-return, where the debt is just not repayable and total collapse becomes inevitable. More debt (for fiscal stimulus or whatever else) will just take us closer to that point of no retun, and the journey back becomes ever harder, then impossible.
22. doom&gloom said...
Once the system is past the point of no-return, the accelaration towards collapse will become exponential. There will be no alternative.
23. last_days_of_disco said...
@str 2007
My strategy is simple for someone who is not super wealthy, they have problems I would love to have (like my brother in law, haha). But back to reality where the rest of us live.
I am pretty confident the UK is going to keep functioning through this crisis. So I am not bothering with gold and silver. I am going with cash. Maybe I am too optimistic, but if the doomsday scenario happens, then having gold and silver will just make you a target and I can't acquire enough of it for it to be of any use to me. People are bleating about control and 1984 but they have never experienced anarchy. I am quite happy with enforced Englishness in a way. Be frikkin polite or we will have you, I am ok with that. And anyway, its not like its the first time England has been that way.
24. fahrenheit451 said...
GBH has just condemned us as the poor man of Europe again. Bereft of good ideas, wandering lost in the sea of debt. Old Labour has come back with a vengeance; it is political suicide to increase unemployment, even if there are "promises" of good time to come.
His next option is (i) to join the Euro and (ii) claim a political victory against the far right, separately.
25. Hal said...
"Gold is reasonable as a safe haven as long as you take the right precautions.
Gold is not a wealth generation strategy, its a survival technique and an expensive one at that."
Got to agree with that. I think we are in a deflationary situation but I don't think that will last too long. Several month at most then into inflation. Either way, owning some hard gold and silver is a good way to survive as a hedge against what's coming. Right now looking at the real time spot for gold it's at $822.60 and silver is at $10.39. Both pretty significant considering where they were last week. I expect gold to hover around that price for couple of days at least. You can track it in real time with http://www.learcapital.com/exactprice
Google Peter Schiff if you've not read his articles on the current financial crisis. He called it a couple of years ago and everyone thought he was a nut then. Not now.