Sunday, Jan 25, 2009
M0 has gone parabolic! Year-over-year in December 2008, it was up 98.9%!
ZEAL SI: Big Inflation Coming
Late 2008’s stock panic has certainly had a complex and multifaceted impact on popular psychology. Mindsets and outlooks that were scoffed at as recently as 6 months ago have suddenly become fashionable. One of the more intriguing is the meteoric rise to prominence of the deflation thesis.
The growing legions of deflationists see an unstoppable depression-like deflationary spiral approaching like a freight train. They cite some convincing data. The stock markets have been cut in half in just a year. In the past 6 months, some key commodities prices fell farther and faster than they did in the entire Great Depression. House prices are down by double digits across the nation, with no bottom in sight. And credit is a lot harder to come by today ~~~~~ with charts
34 Comments
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1. Chris said...
The legions of people talking about deflation are either government propagandists or useful idiots. Deflation propaganda is being used to scare the masses into accepting the massive printing of new money by the Government in order to devalue the currency and inflate away its debts. As long as they can inflate away their debts and prop up property and other assets they don't care about trashing the currency and peoples savings and importing inflation. It's a scam.
2. drewster said...
M0 is dwarfed by all other measures, in particular M3 and M4. Expanding the base money supply won't have an effect if credit doesn't start growing again. While the banks are insolvent they can't lend; and while the people are unconfident about the future they won't borrow. Looking at Japan, twenty years after their credit bubble burst the people still have too little confidence to borrow. Inflation might happen one day but not in 2009.
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5. troy said...
elsewhere today techieman said
"So we live in a Marry Poppins film (cant bring myself to say movie) after all. oh well dum didl idil didl dum didl i..."
troy said..".techieman ~~~ Mary Poppins meets Alice in Wonderland"
detachment and helplessness are commonplace and have been thriving for many years
it is already too late for many ~~~ the speed and inertia is beyond the braking system's ability to prevent a disaster even if those who have nodded off wake up and open their eyes.
6. Chris said...
The government having based almost the entire UK economy around perpetually inflating house prices and people borrowing against them cannot politically allow them to fall too much (negative equity) or economically even since the debts on falling assets would strangle the economy for years. Therefore I expect them to print so much new money that the UK will see massive inflation (possibly hyperinflation) artificially inflating all assets again. Deflation propagandists are softening up and have already softened up the people to believe that this is the right thing to do! If they don't do it we get an actual Depression as everything corrects naturally but if they do do it we risk a Hyperinflationary Depression, currency collapse and anarchy. Knowing their love for the housing market and their desire to inflate away their massive debts I think it's obvious which route they are going for.
7. drewster said...
Will,
You could try putting in a cheeky low offer and see how many sellers bite!
Alternatively head down to an auction - that's where the distressed sellers can be found, and where blue-painted doors and freshly-baked bread have no effect the price.
8. japanese uncle said...
Unless the wealthy few are prepared to generously (this is a contradiction in terms as they are wealthy simply because they are not generous) redistribute money to the less privileged many, inflation will not occur as the overwhelming majority of the society will be unable to spend or invest (not speculate) on real economy. Apart from the more informed/agile individuals, the society as a whole is in 1.5 trillion debt, while 99% of the banks including the nationalized ones will be desperate in repairing their dilapidated balance sheets by calling loans, who otherwise will have to close down due to the minimum capital requirement by the conventions including BIS rule, and the now far more skeptical general public. Given jobless rate nearing 20% circa 2012, 95% of the population will be penny-pinchers exerting formidable downward force to prices of goods as well as services.
Meantime look at the commodity markets, their prices are now imploding.
9. J. Wilson said...
Everyone is in denial.
The banks are still trading debt products that no one wants.. so have to put them into stock (swap with gov for treasuries).
Manufacturers are making stuff that no one wants to buy, so putting them into finished goods stock (turning their cash into un sellable stock). They are running out of money.
People are putting their houses up for sale at prices that are far too high to sell.
The gov are pushing interest rates down so that people are not forced to sell (and they dont default).
The gov have devalued the £ to stimulate exports, but there is little overseas demand.
The consumer has stopped consuming in crucial areas.
Jobs are being lost and hours cut.
Pension values are being decimated.
Govs ability to borrow is reaching its limit (foreigners willingness to lend).
This is not an environment that will support inflation.
10. crashpad4me said...
Will. A local EA took a full page ad in North Devon Journal this week commencing, "Dear Prospective Vendors", and providing "FACTUAL evidence to let you know how it REALLY is in North Devon". In summary, vendors accept that market conditions are difficult and are receptive to realistic offers; str's are tired of living in limbo and are starting to buy instead; IR reductions are restoring confidence; investors are returning to bricks and mortar; an unusually high percentage of buyers are selling in more expensive areas and are searching to buy a property in North Devon; there continues to be an active market for second homes and holiday investment purchases in the region; vendors who have been staying put until market conditions improve are thinking again as they realise they may be waiting in vain; and in some areas of the market there is a shortage of instructions, and as a result sales can be achieved relatively quickly and at favourable prices.
Productive or counter productive? I haven't noticed a vast amount round here that is actually sold, but I shall be watching carefully for signs of a tsunami of frenzied buying.
11. jack c said...
@ will (Sunday, January 25, 2009 11:43AM)
The reason why the same old properties remain unsold at the same high prices could well be down to the fact that the vendors are effectively trapped - by this I mean they can't lower the price of the house because they have an existing mortgage which needs to be cleared first. As property prices have declined the LTV (loan to value) will have tightened for all mortgage holders.
Hypothetically if someone bought a shoe box somewhere in say London for £250K approx 2 years ago with a mortgage of £242500 (97% LTV which Halifax would at that time provide) then they are not in a position to discount the price by say 15% in todays market because they'll plunge themselves into negative equity - hence the stand off on prices.
12. plato said...
will @ 11:43.........
Speaking to a retired bank manager yesterday who has invested heavily in property(!!!!!!). The mindset is that you don't lose until you sell. This is almost universal. Those that have to sell don't want to lose. The theory overpowers the practice.
Not defending here - Just pointing out a fact.
Indirect though they appear to be,most comments and articles on HPC are very,very relevant to HPC just a little frustrating in their diversity.
I have often read them and said : "So that is why!"
13. Crunchy said...
Will ..History always repeats itself.
A little differently each time, admittedly.
Faith is better stored in this fact, as it is the record of human nature.
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15. icarus said...
drewster @1 - if M0 is dwarfed by the other measures of money supply is he wrong to say that M0 growth minus real economic growth is one of the most basic measures of inflation? He writes only of %s, not magnitudes, so by how big a factor is M0 dwarfed by the other measures?
16. icarus said...
......if MZM has grown by around 10% while M0 has grown by around 100% during the same period then there has to be a big disconnect between the two.
17. troy said...
1. The supply of money into the economy is the big issue which governs all the issues. The present economic system is debt-based. This means that virtually all money is supplied to the economy as a debt to be repaid, with interest, to the banking system. Governments rely upon the majority of people going into debt to the banking system simply to create enough money to supply the economy. Governments, too, must borrow from the banking system to fund public expenditure. Taxpayers must then pay back the debt and interest repayments.
2. As a consequence of this debt-based economic system, we see the indebtedness of people, families, and countries growing daily. The present debt-based economic system perpetuates debt slavery, and this is ultimately destructive of society, the environment, and the planet
http://www.prosperityuk.com/prosperity/bromsgrove/principles.html
18. Pond321 said...
Yawn, scrolled quickly to the bottom of this 'article' and guess what, they recommend buying silver and gold. Yawn.
Thing is, all these articles talk about printed money being added to the economy, but they do not talk about money being removed from the economy through de-leveraging.
19. stillthinking said...
Good point. But ignores that money is truly destroyed by defaults. The debtor goes bankrupt and the saver loses their deposit i.e. less money in circulation than before. If the UK government prints enough money to honour domestic and foreign debts then we will certainly have inflation after demand collapse deflation. Also money, as in M3 does go down when people successfully pay down their debts.
Japan notably currently still has a slightly shrinking M0 and also M3, as this article points out we don't. I think this is what Mervyn King means when he says current circumstances force us to move in the opposite direction from long term goals.
If you look at this link, which has the history for Japan (plus some article viewpoint similar),
http://margotbworldnews.com/archives/2008/Nov/Nov14/inflation.html
Then M3 genuinely did collapse, and they genuinely did go into deflation, but they were certainly looking at high growth for a period of time knowing they couldn't stop the collapse when it came.
So, from that, although we have a growing M3 now and indeed money is being sprayed all over the shop, to what extent can this growth continue? That is the key issue. Will M3 collapse -in the future-? And this is what nobody knows because it depends on how fast house prices collapse, the fall in employment, a lot to do with government policy. Also, money held abroad by trading partners, if not spent, then constitutes an unshrinkable portion.
In other words, that M3 is high and growing fast does -not- necessarily mean it will continue to grow in the future. Given that normally growth comes from consumer credit and housing loans, both of which have collapsed in a short space of time, then accordingly over 2009 M3 may also collapse. In which case we enter an unpleasant self-reinforcing deflationary decline.
20. P. Riddy said...
"Inflation might happen one day but not in 2009" - But, with country credit ratings drying up. Iceland, spain and Greece first, next Britain, governments can't sell national debt, so must monetize. I see hyperinflation beginning between March and June, commodities taking off again, until the monitization spigot goes dry, and we revert back to what the market wants to do, deflate. The current inflationary period, and we are in one, could take a year, two years, three at the most, before a deflationary depression sets in, and everything but gold and unleveraged productive capacity is wiped out, imho. I say unleveraged productive capacity, because, in the absence of the servicing of debt, a business can reduce prices as its costs go down. This lack of responsiveness is one of the main reason why debt and free markets are arch rivals.
21. stillthinking said...
The whole point of the government borrowing at the moment, is to essentially take on the losses of defaults so that the banks can continue to lend, it is -not- inflationary in and of itself.
Consider when the UK government sells gilts. Well the bank could borrow to buy those gilts. That would be inflationary because the bank would have to mark down -1 billion on their internal accounts, and wait for the yield (currently very little) and eventually redemption to restore that -1 billion to the starting point of zero. Maybe they would make some small profit. However, apart from the social issue of a 100% reliable government giving free money to the banks, the banks can usually make more money lending elsewhere, as that -1 billion shows up on their accounts and restricts other lending.
So at the moment when the government borrows by selling gilts, they are moving - pre-existing - savings to gilts and spending them. This is not inflationary or deflationary. The net effect is nothing. Work it through and in the end a debt moves from the beneficiary of government largess (government work of some kind or a supplier to a government, some chain) to the government. Not inflationary.
At the moment the government are -not- reinflating the UK money supply, they are desperately trying to get the UK citizen to do it by keeping borrowing facilities alive.
Which leads to the next step, when the government borrows from itself, which is printing money purely because of the fact that they never pay the money back i.e. the BoE prints money to buy the gilts, and in so doing keeps a semblance of order in the accounts. That step hasn't arrived yet, perhaps because they (gov. & BoE ) feel that it is a forbidden step because it isn't credible that they will soak up the money later because taxes are already sky high, so the markets would feel that move is the finish for sterling.
22. stillthinking said...
Sorry, last bit. It does make a lot of sense on the other hand to credibly threaten to print money and thereby induce inflation. Lets face it, if we thought hyper-inflation was around the corner we should immediately rush down to the bank and borrow now, to buy euros.
So, money printing is a forbidden step because immediate run on the pound.
And, deflation may truly be coming with a forthcoming collapse in M3.
Or, inflation may be coming should the government manage the unlikely trick of stimulating domestic demand.
Those that have hung their hats on the coming inflationary storm are essentially assuming that there is no collapse in M3 and we don't know that, but it does look a bit like a collapse is coming, hence the deflationists.
23. troy said...
stillthinking ~~~ sorry but the government cannot borrow from itself ~~~ either it borrows from our children or the money lenders.
"round and round the garden like a teddy bear, one step two steps and you fall over your chair"
Creating New Money Reviewed by Alistair McConnachie.
Prosperity, August 2000
by James Robertson
Many people today think that the State creates all the money in circulation. It doesn't. Almost all money in circulation, around 97%, is created by the banking sector "out of nothing" and circulates as electronic and cheque book money -- see Prosperity, April 2000 for the process by which money comes into circulation.
24. stillthinking said...
troy, that aside, my comments were essentially because I don't think that deflation has necessarily been avoided.
25. greytornado said...
I can't help but think that the way this dishonest Government will try and get themselves out of the mess; is to get the Bank of England to print a lot more money. The Government then gives this money to the banks, who in turn lend it back to the Government to finance the Government spending, which now is utterly out of control. It is of course, a giant pyramid scheme of sorts, totally criminal and will will collapse under a wave of hyperinflation. Perhaps my view is over simplistic, but having read up a bit on the Weimar Republic, I can't see that the hyperinflation can be avoided, but that's just my view and interpretation on the way events seem to be heading.
26. stillthinking said...
An analogy I remember is of the drunk cyclist who doesn't know whether he is crashing into the ditch on the left or the ditch on the right.
27. troy said...
stillthinking ~~~ I forgot the quote ~~~
Creating New Money Reviewed by Alistair McConnachie.
Prosperity, August 2000
by James Robertson
"Many people today think that the State creates all the money in circulation. It doesn't. Almost all money in circulation, around 97%, is created by the banking sector "out of nothing" and circulates as electronic and cheque book money -- see Prosperity, April 2000 for the process by which money comes into circulation. "
how about swings and roundabouts?
massive deflation followed by massive inflation!
wear the barstewards out said he! no less
this is not a game unless we are the toys thrown on the floor
28. troy said...
one night many moons ago totally pi$$d I fell off my feet into a ditch
It was on my right
I think, ~~~ it has always been on my right
29. stillthinking said...
Sometimes I do think that. I don't know which will happen. I tend to usually think we end up with high government debt and deflation, which is why I am not so sure about gold. But there is a lot of UK money abroad, which the Japanese didn't have, which will eventually come home.
30. troy said...
stillthinking ~~~ you're at it again ~~~ there is no government debt!
31. troy said...
one last attempt to fan the flames of ? ~~~ something
18. stillthinking said...troy, that aside,
stillthinking ~~~ how dare you caste my opinion aside? nemo's sub will bite your bum!
if you are still thinking (if) then think!
"it's not as simple as falling off either side of a hedge
and even that choice isn't easy." Quote: (malct/William of Cucmber 1688 Torbay)
enough he cried as the dough expanded.
enough? yes we have suffered enough lettuce call in the beetroots and call ourselves poets
for they have not. (1345 TD)
32. stillthinking said...
!?
33. troy said...
stillthinking ~~~ nothing worthwhile comes easy
34. kruador said...
icarus@15: The total supply of notes and coins is around £51bn. Deposits by banks with the Bank of England, called reserve balances, is £43bn. It's the latter figure which is up 80.6%.
The total amount of money loaned by banks as of September was £2.5 trillion. That's more than 27 times the size of M0. If you prefer, M0 is 3.65% of the money lent. That amount loaned doesn't include other financial sources of credit such as SIVs.
Sources:
http://www.bankofengland.co.uk/statistics/fnc/current/index.htm
http://www.bankofengland.co.uk/statistics/abl/2008/sep/index.pdf