Saturday, Jul 04, 2009
Sugar rush - nice analogy!
Telegraph: QE just acting as a sugar rush for insolvent banks that deserve to fail
At this point, people in my position are supposed to explain that QE isn't "printing money". I'm not going to do that. For the only difference between the UK's current policy and Zimbabwe-style economics is that QE involves the creation of electronic balances rather than actual notes.
Posted by devo @ 10:49 PM (656 views) Add Comment
9 Comments
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1. japanese uncle said...
I seem to have mentioned this some time ago?
Two reposts as follows:
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As I mentioned time and again, hyper-inflation cannot take place in an economy riddled with skyrocketing unemployment (without strong unions), and influx of foreign immigrants though not a few of them may forsake Britain and go home. First of all where will be the money? People have been on a sleepwalking spending spree using the borrowed money often generated through equity release. When the judgment day = payback time arrives after all, whatever big money printed by BoE, will inevitably be sucked into the black halls aka coffers of banks that are calling loans they offered like pushers during the past 10+ years. In the meantime millions of people find dole the only 'real money' they can draw. Unless billions of money will be literally given away for nothing which is not going to happen as everyone knows, money will not come into your pocket, thus not circulated for consumption and investment. Japan's original quantitative easing started circa 2001, only to see the deflation carry on for the seven years that followed, as the money was channeled through FX market into overseas economies by carry trade of one sort or another. Things were the same in that cheaply printed money does not reach the economic entities that actually consume and invest in the daily terms. In the UK unless and until 1.5 trillion personal debt is repaid in full, there will be little money people can spend or invest at their will.
99p/pint will quickly be the norm and won't go away for quite a few years. Graduates salary will come down to 13,000 in a couple of years (if any job at all), and eventually going back to the old familiar four digits level.
Most miserable will be the reality in the financial sector. As the monstrous froth by the name of investment banking sector will be all gone (which is a logical and natural course of event in view of the utter distrust by the public, of any form of ‘investment’ which more or less proved to be none but the art of voluntary self-victimization), UK financial sector will shrink by 50%, likely to shed full million workers on the street ultimately, along with another couple of millions in the sectors totally dependent on financial sector’s fictitious prosperity. Thousands of students studying finance will end up in farms earning minimum wages.
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I wouldn't be surprised to see the jobless rate hitting 20% mark eventually (by 2012), to intensify the workers' struggle for survival involving massive wage cut. Meanwhile inflation will never kick in for the foreseeable future, as no sooner are the monies printed, than they are hoarded in the coffers of banks that call loans aggressively from the households 1.5 trillion in debt, never to be circulated for investment and consumption. By 2012 salary/wages will be 20-25% less than today, and quickly shrinking affordability will cause further price deflation in a bottomless spiral. Upward pressure due to increasing prices of imported goods thanks to GBP depreciation will be absorbed in part by harshly cutting costs including wage and in part by downgrading the quality of goods. I seem to see advert of instant coffee much more often than before.
It is beyond any doubt that somebody who instructed CrashG to take out HP from inflation stats engineered this bubble and its eventual collapse, manipulating central banks and media (Kirsty Allsopp was just another effective clownette). Look how many trillions of wealth was shifted in the name of 'bail-out' around the glove. Anyone with 90 IQ must see this.
Newspapers here argue that depreciating GBP means price inflation of exported goods (not least from China). Wrong, as Chinese exporters will be dictated by the market=importers=ultimately consumers here, not the other way round, under the globally recessionary climate, in which they have no other outlets for their products. US and Europe are sinking and so is Japan where import of the 'made in China' products had already been stagnated thanks to a few quality issues including food contamination scare. Chinese manufacturers will have to reduce costs by squeezing their workers even harder. Ruthless reality of the 'workshop (or sweatshop?) of the world'
2. devo said...
1. japanese uncle said... Unless billions of money will be literally given away for nothing which is not going to happen as everyone knows, money will not come into your pocket, thus not circulated for consumption and investment.
How can you be so sure, japanese uncle?
Remember, no one could contemplate QE until a few weeks before it started.
3. japanese uncle said...
devo
It is an empirical statement.
4. devo said...
japanese uncle
I'm not sure that empiricism is that useful in these unprecedented times.
5. devo said...
Like it or not, I think the Government is going to dramatically increase the re-inflationary policies it has adopted.
And expect only a half-hearted response from the Opposition - they know where this is heading.
6. house said...
japanese uncle
I read your comments with the greatest of interest. I am glad that you confirmed my understanding. It is a case of whether the consumer has any appetite for debt. At present many are concerned of their current job status. I was not so long ago concerned about QE but it would appear that it has a short term benefit.
I can only assume you meant inflation of imported goods (not least from China).
Please continue to provide constructive comments which can be very re-assuring in this uncertain world and hope that past experience can guide us accordingly and prevail.
7. house said...
devo
The government most definitely is going to try re-inflate the economy. The question I ask is what would be the buying power of £1. If it is worth say £0.70 and with realistic interest rate policies hen perhaps it would not be too bad. I know the real value has gone down. This is merely an example. No doubt somebody on this site can provide a table on Net Present Value.It is all about how much value we willing to loose for the common good.
8. techieman said...
JU exactly which is why debt is being paid down and savings rates increasing. Heck i might even buy some Rowes rather than Manuka myself!
Before we talk about hyper - inflation, lets talk about (ok lets not argue) the cycles. Hyperinflation.. inflation.. disinflation.. stagflation (although you can move that position around a bit depending on taste) and deflation.... so 1. where are we 2. Where are we going 3. When (if) are we going to re-e-verse?
My view is we have to destroy the debt first through default or liquidation before we can look at any inflationary pressures feeding through.
Lets see what happens in the next few quarters - as far as im concerned the jury is out as to whether my view will be correct.
9. bellwether said...
JU I tend to agree with you on this. Halligan makes some common sense sounding points but does not address the debt black hole into which the QE is simply disappearing into.
I think the point that is missed is that expansion of the money base via inflating house prices is stunnigly effective and efficient for a while. It is quite simply the best way to expand and give a sense of wealth without debasing the currency. The thing is it has gone now and QE (for all its big figures - figures which are incidentally DESIGNED to make us fear inflation) as compared to credit expansion via property is a pitiful and pathetically weak substitue, a 30lb gibbon put in to fit an 800lb gorilla.