Tuesday, Jul 21, 2009
Remember policy makes want you to believe in inflation
Zero Hedge: No inflation here
Scroll down and there is an interesting piece on why policy won't work to cause inflation in the short/medium term.
Noticed a lot of angst on site past few days about house price increases.
There is no possibilty of real (as opposed to nominal) increases in house prices over time in the UK. To think it is possible is akin to believing that if you pour the contents of a half pint glass quickly enough you can fill an empty pint glass. The volume isn't there and when it comes to house neither is the income needed to sustain head line prices. There is no interesting discussion to be had here.
Nominal house price increases are possible in the event of souped up inflation, which I guess is why the inflation/deflation debate is so heated. Certainly if you believe inflatation (contd)
10 Comments
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1. bellwether said...
sorry inflation, then you should stop posting here and buy a property and soon. Anything else would be akin to a lack of conviction and a form of impotence.
I don't own because I don't think that even nominal prices will rise, for reasons posted ad nauseam.
Another point I find interesting is that it is often the more conspriacy based posters who believe that inflation is right on the horizon, which is ironic because if there is any conspiracy with Bernanke etc, it is a conspiracy to have people believe that there will be inflation so they might as well start spending and borrowing like never before. Greenspan was the master at stoking this sort of thinking in the public, but the trick has been played once too often. Eventually common sense prevails.
Incidentally if there is inflation you don't buy gold you buy land and property because land and property is a market that is leveraged.
2. flashman said...
bellwether. You definitely win the prize for analogy of the year with the beer froth thing. By tonight I'll have packaged that as my own invention with no royalty payment offered.
I have long been in the deflation camp because if you follow simple economic logic, there can be no other conclusion. However things can turn on a sixpence so I keep my ear to the ground. Recently I have been mulling the possibility of an attack on the Fed by traders. There is an enormous amount of dosh to be made if the authorities can be given a hiding. I think the only reason Bernanke didn't announce more QE the other day is because he though traders might have scuppered him by acting like they thought that his treasury purchases would cause inflation. In a purist sense they don’t believe it but he is looking vulnerable and they smell blood in the water
3. bellwether said...
Cheers Flash, must be inspired by the frustration of reading some of the circular posts on here.
Incidentally I find myself depressed reading your posts because there are never any typos. None. Must be the public school education, get if right and you narrowly miss a buggery!
4. growler said...
I also think the UK debt situation as posted by DEVO a few topics ago is the first of many that will ultimately lead to a sterling crisis. This will cause some considerable CP Inflation. Imports will rise and since we have got ourselves into the position of high propensity to import, we can expect pricing to choke off demand leading to depressed retail sales and a diabolical Christmas trading period.
Bear in mind (forgive the pun) people will need to place orders for Christmas in about a month for it to get here just in time. If Christmas is bad (as it will surely be due to increasing unemployment, more burdensome debt and imported inflation) we will see some more business and personal failures.
Regarding the tax receipts issue; people also fail to see that a fall in tax receipts is because people aren't making the money that they need to pay for houses. Add in my view above, and I fail to understand anyone who believes the "increasing house price" froth as correctly identified by Bellweather !
5. flashman said...
good reason to put some tipppos in thenn
Ref the trader attack thing..being mugged by the bond market is like being mugged by Tyson with his dick in one hand and a machine gun in the other. It always ends badly (It's not as good as yours but it's the best I can do this morning)
My turn on a sixpence comment may have sounded a bit glib so I thought I explain my philosophy on forecasting:
There are an infinite number of variables acting on the economy at any one time. All you can do when putting together a forecast is select a handful of these variables and put them into some kind of formula. Unfortunately, what we therefore start with is an arbitrarily selected, overly small sample of metrics. Serious errors are thus baked in from the start
The second problem is that the selected variables can and will change before the formula ink is dry. The third problem with any forecasting formula is that it has to be arranged in such a way (the brackets) that any change to one of the metrics changes the other metrics in an ever increasing compound spiral. This is why economic events can mutate into an unrecognizable scenario in a short space of time. Hence the turn on a sixpence.
You may remember the national debt ticker in Times Square? It went up before your eyes and was at mind bending levels. National debt entered the American mindset long before it did the same thing to us. The debt was considered huge and insurmountable. Then one year, under Clinton it had turned to a surplus and everyone was left scratching their heads
6. bellwether said...
Thanks Growler. I tend to agree with you on currency crisis, as in the reordering that must eventually happen as a result of this depressesion/rec will see the UK further down the global pecking order. The level of our debt is underestimated and our capacity to work it off overestimated. This is in many ways similar to other nations but only Ireland compares to us when it comes to property bubbles. Our barely deflated housing market is interpreted as strength but will prove to be our weakness. The US which has seen drops of 30% from a lower peak will recover far quicker as a result.
The only issue is timing. All of the underlying issues existed in 2006/7 but notwithstanding the market was selling sterling 2 to the dollar and did so for a sustanined period. At present Sterling is actually pretty strong and might stay strong for sometime, Eventually it will weaken and fall to a more permanent low level against certain currencies.
I'm not sure where sterling will get to before it folds, but if it was to hit $1.75/1.80 I would without hesitation switch all of my savings into usd.
7. bellwether said...
Lovely stuff Flash, especially your charming tyson analogy.
I'm not convinced by the variables argument if the time frame is long enough. The disease may take an unpredictable course but the eventual outcome is never in question. I've no way of supporting this hypothesis but I think there are certain fundementals can't be manipulated or overriden, akin to immutable or close to immutable rules that will prevail. Eventually things have to add up.
8. flashman said...
Your view on fundamentals is at one with those of my favourite economist, Gerard Debreu. He believed that prices and values always got out of whack but eventually struggled back to equilibrium. He called the process tatonnement.
I believe this was true in his day because the world was more static. Just like str1 says, things change so quickly these days and we no longer know the intentions of all the main players. There used to be only a few players but now there are many of them. Does anyone really know what China and Russia are planning? Do we really know how technology will impact us? Do we know for certain that there wont be some dramatic military/terrorist/disease intervention that skews our understanding of the fundamentals? If you catch my drift
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