Saturday, Mar 21, 2009
A case for deliberately stoking inflation
Market Oracle: FSA to Regulate UK House Prices Lower
Wayalat comments on the FSA's proposed 3X rule then makes the case for deliberate inflation to destroy debt. "the mainstream press ran with a dubious report that UK house prices could fall by another 55%. This in my opinion is not going to happen, not in the soon to become apparent highly inflationary environment of quantitative inflation that many of the worlds economies are moving towards as they seek to print money in the form of monetizing their debt by buying government bonds and thus artificially lowering long interest rates by increasing the amount of currency in circulation by the hundreds of billions if not trillions."
Posted by quiet guy @ 04:09 PM (1901 views) Add Comment
22 Comments
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1. inbreda said...
This is my absolute fear. THe overdue collapse in house prices being replaced by a straight theft of my hard earned money.
The chances of them doing it successfully however - is zero.
Which scares me even more.
2. paul said...
It's been tried in Japan before.
Encouraging fresh debt onto an over-indebted population sounds as if it shouldn't work, and in all probability, won't.
3. cyril said...
@inbreda - deliberate inflation is the only way out. Imagine if you were in charge. You are the party of the hard working home owner. You have done everything possible to persuade middle England to borrow up to the hilt on their mortgage to prop up the economy which is in long term decline. Letting house prices drop now would be political suicide. If the choice was immediate death or postpone it a couple of years what would you do?
4. paul said...
That's well and good cyril, but what if you are living off income from savings?
If inflation goes up interest rates will have to go up too. Admittedly, with Quantitative Inflation they can up inflation without having to touch interest rates but once the healdine rate starts rising, how can they avoid upping IRs?
5. gone-to-colombia said...
This government, this little country, this vast global tsunami. They are not in control, they are the mere bystanders.
6. Dan said...
A regarded National Newspaper should organise a day of protest.
Pick a date, and have a countdown on its front page everyday, until the date arrives.
Then on that date, every saver in the country, who disagrees with QE, bank bailouts, Golden parachutes, should go to their local bank and withdraw all of their money.
That would show them who's boss.
{ There is no difference between some forger, printing money in his basement, and the government doing it.
It has the same effect. De-valuing the money in our pockets. The government are stealing the money from our pockets.
There is 1 debtor in this country for every 7 savers. So why are they punishing savers and pensioners?}
7. uncle tom said...
Misses the fact that house prices are not slumping, as the graph projects, but crashing - so an overshoot is bound to happen.
8. watchingthewheels2 said...
whoops.......wrong comment to wrong article....sorry.
9. paul said...
I think Nadeem Walayat also underestimates the average conusmer's new-found aversion to fresh debt. This crash has scared most property speculators shitless and so the only people likely to return will be first time buyers with savings. And those savings will have been devalued by quantitative inflation, making it even harder for FTBs to reinvigorate the housing market.
So quantitative inflation will be an own-goal for the housing market, because it will slow down the recovery - which I'm quite sure is not what Brown wants with QE.
10. gone-to-colombia said...
Misses the point that this is not just some once every ten year recession but a once in a lifetime full blown depression and crash. By definition such events are outside our experience, all bets are of, but if I had to guess I'd suggest that house prices will crash hard and for a long time. There will be no recovery by 2010 or 2011, I suspect that house price falls will continue for five years or more, and then just bump along the bottom.
The article is written from an outdated paradigm -"The past is a foreign country: they do things differently there."
11. quiet guy said...
I'm going to jump off topic slightly to offer you a joke from Peter Schiff about America paying it's national debt:
just the first 1 minute 15 seconds of this:
http://www.youtube.com/watch?v=2bLe9Sy4q8g&
It's not exactly the same thing as the UK but we have tremendous government debts too. Is Gordon Brown about to give a speech to the country asking for higher taxes and sacrifices? Inflation looks very tempting - in fact it may be our least worst choice at this point.
Savers beware.
12. stillthinking said...
I have a lot of time for Wayalat, but apart from the fact that I don't think the FSA recommendation will go through, I am against it for a number of reasons, principally that I am not sure that it will have the effect of lowering houses to a sustainable level and eliminating the cycle.
Firstly, provided banks can cover their losses, they should be free to lend. This move ignores that our existing troubles come from insufficient regulation of bank capital/reserves. Problematic lending flowed from that, not the other way around.
The regulations as they stand would lock people into renting at a higher price level than a mortgage equivalent. Surely its absurd to suggest that mortgages are restricted below rents?
After an initial shakedown, in view of a rent/mortgage gap the market would freeze, as rental income would exceed any sales proceeds by a considerable margin. Essentially this is denying people the right to buy and forcing them into the more expensive rental option.
If you cast your mind back, one of the cornerstones of Thatcher's right to buy scheme, was not, as widely publicised, to encourage home ownership, rather that at that time council tenants were paying -more- in rent than the equivalent mortgage so over their lifetime would be considerably worse off.
We forget that now, because social housing is considerably underpriced relative to open market property, but that hasn't always been the case.
If prices are to be mandated by government, they can achieve the same effect without dividing UK society along late 19th century property lines, by regulating rents, perhaps in a similar way to the Nederlands with Amsterdam.
Regulate rents, and you regulate unearned income and borrowing, encouraging investment at the same time. Very similar to an immediately redistributed Land Value Tax in effect.
13. Dave Page said...
The only 'hard earned' that anyone should be concerned about is that which was actually earned, rather than the proceeds of selling to rent at the top of the market, like the majority of the degenerates herein
14. quiet guy said...
@Dave Page
As it happens, I've always been a renter and my savings are the result of my employment so I'm going to assume that I'm not a 'degenerate' in your eyes however your statement is intriguing.
If an owner is degenerate for deciding to sell his property in anticipation of a price collapse then he should stay put in his property because ... well why? To share the pain for the collective good?
If you'd like to explain what the virtuous choice is, I'd be interested to hear but I suspect that you're going to have to work hard to gain converts to your view.
That said, we are a broad church.
15. Phil said...
Dan, i with you on that one as well :)-
16. Graham said...
I think this article is fine. It points out the inevitability of inflation, except in my opinion it ignores a couple of key facts.
Firstly, houses are bought with the cash people have left over in their accounts after paying their other bills. For inflation to cause house prices to resume their upward trend, what is needed is wage inflation. This will likely tail price inflation (i.e. cost of living), and so the amount people have left for mortgage payments will lessen, not greaten, in the short term. Whether a lender chooses a wage multiples calculation or a affordability index, the amount you can borrow goes down. Wage inflation may well not meet price inflation at all. As the far east stops being so willing to take our worthless paper in return for real tangible goods we are likely to find ourselves permenantly poorer in real terms as we're forced to live within our means. In my opinion this will exacerbate the crash since the largest falls are likely to be in the next year when wage inflation is likely to be zero for many and negative for others, along with rising unemployment from our broken economy, and most importantly, broken financial sector.
Secondly, house prices have been ramped by two groups of people, BTL's and reckless FTB's willing to borrow any amount. The important factor here is the BTL brigade. Those most disposed to the idea that property is a good investment already have huge leveraged positions. As these investments fail, they stop being able to expand their positions and they will begin to sell. Over a million BTL mortgages are in arrears. Compare that to 35,000 10 years ago. There will be no BTL rush this time. Noone wants to catch a falling knife. Whilst the market is falling, the market will continue to fall, and it will continue until there is enough FTB's that wish to, and can afford to, buy a home to underpin and stabilise the markets. Prices from that point are likely to rise, but with the threat of lending regulation I don't see a return to 2007.
Graham
17. Mike said...
OK so now you guys have me worried, can anyone point me in the direction of some methods to protect the value of my savings from rampant inflation???
18. Daopig said...
I sold years ago. Well before the top of the market. It was a forced sale: Labour exported my skill set to Bangalore. And then claimed there was a skills shortage, while I was attending the job centre.
19. techieman said...
Dave P - controversial!
Your first part is fine if thats your view but whatever way you "earn" cash its hard earned. Say you are in the private sector you hard earned is a reflection of the increases in the economic wealth (whether real or illusory). Otherwise you could just say my hard earned in 1948 was tuppence hapny and it should still be tuppence hapney. Buying a property - of a particular size depends on 2 main criteria - how much hard earned you have and how much you are or are not willing to embrace gearing.
Fine - if you want house prices to remain at a certain level and not be influenced by Credit bubbles then thats a point of view, but assuming that is not what you want then at a tipping point its obvious that people will be stretched beyond what they can afford since the price of the asset (and you can argue the toss about why that is) rises above what is affordable. So people sell or get repossessed or just sell because there is a shift in sentiment.
When rents become cheaper than loan servicing costs all that is left in terms of utility of owning over renting is capital gain and self determination (eg replacing the outdated flooring with wood floors because its your house), although government can try to use policies to swing the balance. When the capital gain argument evaporates whats left? Nothing until there is the required adjustement - be that 10% 20% or whatever. What overshoots on the way up often overshoots on the way down.
Ok so now on to your point : "rather than the proceeds of selling to rent at the top of the market, like the majority of the degenerates herein"
Selling something is a personal choice the profit on the asset aquired is in part down to luck / when you buy in the cycle etc. OR it could be skill- a point where at some stage if you sell too early you will get met with at best shaken heads and at worst villified. In any case its ALL a function (yes even a 6 x salary motgage) of "hard earned".
If people sell to rent or dont sell to rent are you trying to say that the procceds of the sale of their property should result in cash that isn't really cash? Should it be what "property buying and selling cash" - i mean you can only use those proceeds to buy or sell properties and not for anything else? Its personal choice - if people want to buy a bigger and bigger place and then sell it when they retire to release more and more equity - in part because say the place is too big for em fair enough. If people want to stay in their home (because thats how they see it - not as an investment chip) then fair enough.
But if people think the house is overvalued and want to "risk" being able to get back on the "ladder" by selling to rent then thats surely their call. I call such people brave rather than "degenerates". It takes alot to go against herd behaviour.
Are the people that call such people degenerates those same people that believe we live in la la land and everyone in the property MARKET should be insulated by their property never being able to fall so that the next generation have to go on paying ever ridiculous multiples of invcome to get their foot on the ladder? If so i would think that "degenerate" is a pretty weak derogatory name for em - i can think of a few others.
Your hard earned (by that i mean your definition of it) is a consequence of the MARKET demand for your services. Similarly the purchase and sale of any asset in any timeframe is your responsibility (based on what you believe to be the right course) and results in hard earned profit or loss but just based on the gearing of or investment of your hard earned. I dont tell you what to spend your money on - you have ZERO, NONE, NADA, ZILCH, NIL right to tell me how to spend mine.
20. Mr G said...
Wayalat shoots himself in the foot and destroys any credibility in this article by claiming that the average wage is £30K p.a.
It's not many weeks since some group whose name I forget, (there are so many "experts" today), stated average earnings were £25K p.a. and don't any smartass try to tell me there is a difference between average wage and average earnings. At the end of the day, in plain English, we're talking about the amount of money that an individual obtains per annum by whatever means.
21. crunchy said...
How one earns there money in the UK to the masses just does not matter anymore.
It is now all about HOW MUCH YOU ARE WORTH and has been for a long time.
David Page it's survival or bust, let's not get picky here.
22. Mr Rigsby said...
Techieman,
Absolutely spot on Sir, David Page is just talking pure rubbish out of spite.
Odds on he has no, or negative equity left in his house (if he owns one). Good timing or good luck whichever way it happens is beneficial to those with the ba**s to sell their home in late 2007 / early 2008 and even more beneficial if the proceeds are invested wisely. The charts showing house price declines and growth over the last 25 years or so were clearly showing an overdue topple from Autumn 2007.
The trouble is that not many people chose to neither look at this chart or read all the warnings.