Wednesday, Aug 19, 2009
Don't fall for the deflation hype
MoneyWeek: Don't fall for the deflation hype
So deflation's not all bad after all then. The average commuter will see the price of a season ticket fall by around 0.4% next year, after the annual rate of retail price index inflation came in at -1.4% in July. It might not sound like much of a price cut, but it's a damn sight better than the 6% raise most had to pay out this year. But train passengers should enjoy it while it lasts. Because it increasingly looks as though this is about as much of a whiff of 'deflation' as we're going to see in Britain...
Posted by damien @ 12:35 PM (914 views) Add Comment
9 Comments
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1. Chris said...
As I suggested yesterday the 'threat' of deflation has been used as a massive red herring to justify the BoE printing new money. I think it is likely that the new money printed is being exchanged for the bad assets of the banks on the condition that the banks then use this money to buy Government debt. So at the cost of a small bit of printing time and materials the BoE gets some assets which are worth something at least, the banks get rid of some dodgy assets for cash which they can then buy government debt with and earn some interest on, and the goverment manages to sell its debt which would have been tricky now that the foreigners are not quite so keen to buy it. This is monetisation of debt isn't it?
QE amount so far matches very closely the budget deficit at 175 billion. Since the government by its own admission will be 'borrowing' around that sum each year for at least 3 more years that would mean QE will reach 500 billion or more. Or never stop. This has to lead to Sterling being made worthless. I hope I'm wrong but then since the BoE deliberately created the housing bubble why should anyone be surprised if this is what's going on? Why does it seem that the USA and UK who need to sell more government debt are also the ones indulging in the most QE? Coincidence?
2. jackas said...
Lower train fares? The public won't stand for that. Quick, print more money.
3. paul said...
Being told by our esteemed and respected Bank of England that deflation must be averted, but then seeing very welcome reductions in things like LHA rent, train fares, cars and property.
Questions, questions ...
4. Scoobydoo said...
Isn't deflation automatically achieved when there's no credit. I don't get the people who insist there will be inflation when no one has any money. It's not like the Weimar republic at all...those people had money in their hands. So who has all the money huh? If everything becomes hugely inflated, doesn't it negate any buyers since no one has jobs, money or house credit therefore inflation is naturally reversed?
5. Major Des Aster. said...
We are heading straight for inflation, consider this:
3.4 Million families own 80% of UK wealth 13.6 Million families own 20% of UK Wealth.
Rising unemployment does not necessarily mean falling prices. Prices are falling at the moment whilst the world goes through its "Stock Clearance Sale" (phrase I nicked from this website) however, capacity will be cut and prices will stabilize. Unemployment will rise, but it will have a relatively small effect on the buying power of the general economy as the 13.6 Million poor families only have a limited effect on the consumer economy. 20% to be precise. Quite possibly there will be 10 Million families with 20% of the wealth, as 3.6 Million families fall of the radar.
In essence there will be 9-10 Million poor households in work, funded by the spending power of 3 Million or so wealthy households. This is enough to keep the party going.
It has started to happen, Airlines and motor manufactures are clear examples of cutting capacity and raising prices. Rising unemployment will effect businesses in so much as they will produce just enough to sell to the people who can afford it. Factor in QE and prices will soar. Socially,However, it will have a huge effect.
It is the 80-20 law.
Politically, it is possible to redistribute all wealth and give everyone the same amount of money by next Monday. However, by next payday, it would redistribute back to 80-20. Cheer up. You could be one of the new families in the wealthiest 20%
Socially, if events get too bad the 80-20 law kicks in again. 20% of the population create 80% of the trouble.
6. techieman said...
Major - think you need to go back to school mate. The 80/20 (pareto principle) rule is complete rubbish in this context. Airlines and cars? Eh? Is that why BA has made record losses and most of the car manufacuters need support - dont know if you have seen detroit lately? Next you will be telling us that the 20% can carry on merrily going up the property ladder and thereby bidding up prices regardless of any (80%) support at the bottom.
You might as well change the 80/20 to 90/10 or even 95/5. I think the only place this deserves to be is on the Roy Walker blog....Say what you see. to relate that principle to inflation in that way is a complete barstardisation of the principle. ...unless of course you would like to show us some research to back up what you say!
Eventually a cut in capacity will stabilise prices if the demand side stops contracting. It depends which side contracts quicker. If you were right we would never have inflation because the capacity would just equal demand whether demand is determined by the availability of resources or otherwise - its the same with HPs. If you like the supply was behind the curve forcing up prices but then the EFFECTIVE demand fell off a cliff so quickly that supply had no chance to contract quickly enough to maintain prices.
7. techieman said...
.... and you don't even consider the loss of wealth of your 20% or their propensity to want to contract their own demand. If you were right how could GDP fall?
8. Major Des Aster. said...
Have you got a link for "Roy Walker Blog"? I am out of my depth on this site.
9. Major Des Aster. said...
Just popped in for a refresher course at the "Roy Walker School for the Gifted" and what he has to say is this:
British Airways is doing badly because it is a premium product. 20% of the wealthy population that used to inhabit this up-market airline have decided to fly on cheaper airlines to conserve cash. Roy Walker will tell you that 20% of the population will carry on merrily going up the property ladder and thereby bidding up prices regardless of any (80%) support at the bottom.
BECAUSE
The wealthiest 20% are not all stupid. They will start buying property again when prices have fallen to a sensible level. The OTHER 80% will also buy property again when their price bracket drops to a level they can afford. This is where the support at the bottom comes from. It comes from a house price correction.
Inflation will remain low whilst the entire world goes through it massive "stock clearance sale" Everything we over produced during the good times sits in fields and warehouses. It was destined to be sold to a man with a credit card or indeed a household who could simply draw money out of there ever increasing assets to fund purchase.
What happens next?
house prices will drift 40% off peak 2007 prices. This is due to rising unemployment and the inevitable distressed sale that follows. Bottom for house prices will be Mid 2011.
At about this time Inflation begins to rise, due to restricted supply of goods, the rising cost of oil and QE. Interest rates will be held low for as long as possible, but there will be a time when savers take their money out of the banks, in an attempt to put money into assets and commodities which are rising with inflation.
It will be a trickle at first, but when it becomes apparent assets and commodities are rising fast, the cash will flood out of the banks. The BofE will have to raise rates to slow the money flow. As cash from savers accounts leave the banks, It will make the credit crunch worse as this will restrict lending further. Less money in the banks = less money to lend. QE will be used to bridge funding gap, however, this just adds more fuel to the inflation fire.
It is quite likely house will recover there peak prices in a space of 3 years from the bottom of the market, as House prices will track wage inflation. A Mondeo will probably cost £40K
My advice is to get your cash out of the bank and into assets and commodities. In the case of property, you should buy a BTL when the yield is at least 8% ( These types of yields were easily achievable for the average BTL at the end of last recession 93\94). Secondly put your tenant on a maximum 6 months tenancy agreement. You will need to put rent up every 6 months to keep pace with inflation,
To summarize, inflation will take off when house prices have bottomed.