Monday, Aug 10, 2009
So then why is the BoE repeating their mistakes?
Telegraph: UK risks a Japan-style lost decade, BoE will warn
It's the transmission mechanism again, duh. Japan tried reflating their economy and it didn't work. They even helicoptered money but it was turned out to be pointless. 'Quantitative Easing' was originally a Japanese invention, so why then does the Bank of England continue to use it even though it doesn't work? Also, surely the Bank of England should have looked at the Japanese credit boom in order to avoid a Japanese-style deflation? Are the Bank of England a bit dim? Either way, hold onto cash because deflation here we come!
Posted by paul @ 08:12 AM (2024 views) Add Comment
22 Comments
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1. nomad said...
We are being compared a lot with the Japanese "lost decade" because we are following their cures/mistakes.
Looking at their HPC: http://www.globalpropertyguide.com/Asia/Japan/Price-History
They dropped 20% and that was it - they've been bumping along the bottom ever since. Could this be the pattern here?
2. debtfree said...
Japan had savings and low unemployment which is a key factor for staying in deflationary period.
We have high government debt and personal debt with rising unemployment. Yes, we will see deflation first, but due to the high debts more money will be created and the pound will be massively devalued.
Nobody will want to hold a currency that has such high government debt.
£431m is the amount that the Government Public Sector net debt (PSDN) will grow today (equivalent to £5,000 per second).
£76m is the interest the Government has to pay each day on the UKs net debt of £799bn. This is projected to rise to £118m a day (£43bn) in 2010 – 2011 financial year.
Nearly a third (32%) of the savers said they did not have enough money to cope in an emergency, a similar number to this time last year (31%). In real figures, this equates to over 15 million people (15,381,440).
The Nationwide Savings Index has declined three points to its lowest level since it began reporting in June 2008. This decline is due to consumers’ concerns over how much they are currently saving and how regularly they save. Over a quarter (26%) of consumers save nothing at all with less than half (46%) saving regularly. A significant 60% admit to saving less than they need to, compared to 56% six months ago. Approaching two thirds (60%) of consumers now think saving in general is important.
Callcredit estimate that 21% of the UK population do not have any existing savings at all, compared to 16% in 2008.
Low savings and high debt will crash the pound, it will lose its AAA rating and the last thing you will be wanting to hold is cash !
3. debtfree said...
One more thing to add...
Other countries could bail out japan by purchasing yen and it's products because they were not in the same situation.
Who is going to bail out the UK ?
The western world is suffering in sync and no country can bail us out.
What are we going to export ?
Who will buy the pound with such colossal debts ?
Japan could still export, didn't have high unemployment or debts. BIG difference from UK.
4. 51ck-6-51x said...
df
- please apply to be on the MPC ;p
5. bellwether said...
What makes me most fearful is the failure to address the problems head on.
Even at the smallest of levels there seems to be delusion. As a conusmer driven economy we cheer consumer confidence as if it is remotely relevant, and we refuse to look at CONSUMER CAPACITY to spend and take on debt which is at an all time low, with reduced savings, rising unemployment, reduced salaries, increasing numbers of old people and the inabilty to use our inflated houses as ATM's. We have come to the end of a rparticular road, it is blindingly obvious and the alternative course is one which will involve relative poverty and a diminishment in our standard of living. There is an opportunity to look at this as a challenge but instead we will deny it and draw the whole thing out in as unproductive a manner as possible.
6. nomad said...
I agree wholeheartedly with bellweather @ 5 - especially the opportunity for challenge, invention and innovation.
In comparing us with the Japanese "lost decade" I was drawing attention specifically to their HPC. It looks very much like ours so far and has stuck at -20% while many on this site, me included, are anticipating that ours has another cliff to fall off. Are there substantial differences between the two countries that would impact on house prices?
7. matt_the_hat said...
Please remember gents in nominal terms there really wasn't a house price crash in the late 80's early 90's its only when you look at the REAL prices that you see the mole hill. The government knows most people look at nominal price changes so WE will see a greater than 20% decrease for most of the population the HPC is over!!
8. str 2007 said...
nomad
You're reading the first graph on the article incorrectly.
The graph in annual house price change as a %.
The graph shows prices falling at upto 5% per year (poss ave. of 3%) after the initial change in direction from growth, for about 15 years.
Compounded that is HPC of approaching 40% (assuming 3% per annum over 15 years.
9. stillthinking said...
Japanese prices lost well over 50% and even now falling. Largest cities between 60-70% and Tokyo managed 80% loss. Perhaps thats where this 20% figure comes from. It isn't a 20% loss, its 20% of former value.
Personally I think the Japanese got shafted by the West with the Loeuvre Accords, which was when all the central banks ganged up to revalue the yen upwards, because they were too big for their boots. The BoJ responded with a very loose monetary policy, debts got taken out on ponzi valuations and then the debt bubble burst. The original cause though, IMO, was that they faced a global revaluation with the intent of capping their export ability. At the time, and probably even now, individually Japanese people couldn't take out easy debt, same as us up to 1960(?). So it was the corporate sector, and the money then flowed into property and presumably excess capacity.
We are way worse than Japan because UK people,companies and government are all in debt, and our creditors are foreign. Also we start from excess consumption, while the Japanese started from,and maintain, insufficient consumption. Japan has a solution, kickstart domestic consumption, which they haven't managed.
10. nomad said...
@8 str 2007 and 9 stillthinking. Thank you gentlemen, stilllearning :-)
11. mander said...
I advocate to sacrifice 50% of the current house prices as soon as possible. What is the point wainting 5-7 years for this to happen anyway like Japan did. And like any other business volumes are important so instead of selling a house for an asking price of £ 500 000 in 2 years time why not sell 2 houses at £ 250 000 each and in less than one year?
Let's not forget that the banks will not lend you unless you are a saint because they can no longer sell the risk of the loan.
12. stillthinking said...
Japan could afford to drag things out. The UK can't. The last credit card is the government, and they stop spending within a year. Japan took 20 years to borrow 200% of GDP. Which is why Brown is such a scoundrel, because he can't alter the course of events, so we will take the brunt next year, in a worse situation, and the debts currently run up for state spending will have been for nothing. The 'W' recession has an upside down 'v' in the middle, this is the wrong way up. NuLab are currently sluicing money into the economy but they will stop doing so. If they don't, Iceland. If they do, deep recession. So the idea of a ledge on a cliff as you read currently for house prices is very apt.
House prices are going to collapse (properly) in a year. They are artificially held up with social security interest payments, individual savings where possible, LHA, but they cannot sustain a large increase in unemployment, and the tap of money (gov. borrowing) turning off.
The UK is in deep deep sh*t. The whole country needs to restructure.
13. growler said...
The banks want to increase the quality of their book. That means loans to: "stupid saints" as Mander says - stupid since now is not the time to buy, and anything that is a nice long-term safe project. Lot of loans to normal people in normal jobs for normal houses are a long way off. Hence the HP indices at the moment are measuring a very small fraction of the market. The housing market is a pyramid selling market. If new people or reckless banks aren't putting money in - it is predetermined to fail. As it has done in the past, and is doing now.
14. str 2007 said...
stillthinking, growler
My thoughta aswell.
Common sense says to me that can't cancel a debt fuelled recession by simply pumping in some more moeny that will have to be repaid.
It's one thing borrowing for something that will make money - ie as soon as the projects up ad running the moeny flows in.
But with government interest payments pouring out as listed above by debtfree.
In fact now's the time we could do with pumping £100 million a day into the economy instead of pi55ing it away on interest payments against a lax governments spending spree.
15. bellwether said...
Stillthinking really great post at 12 ! The conciet and arrogance is that we actually pretend to worry that we might end up like Japan. If only!
16. Mark Wadsworth said...
What STR2007 comment #8 says! If prices are falling by 5% a year, that means you will be better of renting for the foreseeable future (assuming the rent you pay is < 5% of the value of the kind of house you'd like to buy).
@ debtfree #3 - nobody bailed out Japan by buying Yen, that's the gimmick. AFAIAA, they really started QE round about 2000, and for the next 8 years Yen fell and fell and fell by about 40% in value because of "the carry trade", i.e. people borrow cheaply in Yen and invest in any higher yielding currency.
Whether we will get inflation or deflation is a hotly debated topic, and I haven't made up my mind yet, but what we overlook is that the last bout of hyperinflation in the UK was in the mid-1970s when we still had currency controls (see also Weimar Germany, Zimbabwe). The point about Japan/QE was that they didn't have currency controls (which led to "carry trade").
PS, Of course, like any bubble, the "carry trade" had to *pop* and although I got in about three years too early, I made a handsome profit when Yen suddenly rose back to its original level late last year...
17. japanese uncle said...
I think stillthinking 9&12 hit the point.
Some properties in Japan are now 93% below the peak at 1990.
Be in no doubt the same will happen in UK.
18. stillthinking said...
People borrowed in yen, but they weren't Japanese, and the reason why is because they wanted the currency to buy Japanese goods. The borrowers ultimately made a loss because when they wanted to repay their yen loans all the money had gone to buy tech. goods.
*i.e. demand for yen was continuous externally*.
The yen lenders were only half of a decision, they didn't decide themselves to lend, somebody also wanted to borrow. Reason being to purchase exports, people did not borrow yen for investment purposes, they borrowed to spend, that was the fundamental demand. Without that any choice of the Japanese to lend to a higher yielding currency would have been impossible. For the UK, demand for borrowed sterling has dried up BOTH internally -and- externally.
A big export in the UK is selling our own debt, so we have to suffer this export collapse on top of being net importers. Further, as bank capital is exhausted and LDR>100% whenever we buy something from abroad ultimately the only source of payment is additional approaching generational government debt, which is printed. Hence sterling collapse. The reason we don't see this yet is because of the enormous collapse in global demand and resulting overproduction discounting. Overproduction won't last for ever because its loss making. When this stage finishes, we will see inflation. Our deflation->inflation route is dissimilar to the Japanese experience. Further as far as the yen falling about 40% in value, the important thing is who takes that loss, and it is far from clear that it will be the Japanese, most likely it will be the borrowers. The only obstacle in the path of Japanese wealth rising enormously relative to that of the UK is a UK default on debts.
The inflation/deflation debate is very interesting, I think deflation but a rapid move to inflation within two years myself. Amongst the causes will be effective monetisation for imports, overproduction will slow, possibly demand will pick up somewhere in the world.
19. japanese uncle said...
stillthinking
I agree with you about the inevitability of the collapse of sterling. But it is difficult to envisage inflation when unemployment is soaring beyond control, plus the presence/availability of immigrant workers.
20. stillthinking said...
I can see wage inflation in export orientated industries, dependant on their ability to suck in staff capable of doing what they need. which is the moot point, how quickly can we reposition as an exporter. probably not very quickly. For the rest of the economy when they spend they sink sterling, if foreigners won't take an IOU we basically monetise and devalue. Given that the UK finance has gone into loss, and there are a number of areas in the country modelled on former soviet blok state spending, the exporting capability of the UK is too weak although certainly the best area to be in. generally I see wages overall falling and sterling falling, so wages down prices up, purely because the spending -value- of savings in insolvent banks is dependant on debasement of the currency, which is where the real exchange value must come from. eventually this tips into inflationary pricing of imported goods or goods capable of being exported.
for example, restaurants in london do not act as a productive exchange for imported goods. and we are *dependant* on imports now. we need to be weaned off .
I didn't say sterling will collapse to zero, but certainly it will lose a ton of value, hopefully the 25% is enough. that depends on whether the government borrowing (currently squandered on the state sector) is a sufficient buffer to allow us to reposition., and also whether we are capable of it or not.
sooner or later a 25% drop in the value of any currency will show up as 33% inflation on imports. even more so because the UK is relatively small and can't demand drive prices similar to the US.
Further, surely immigrant workers for export industries is in a way a contradiction in terms. Why bother coming over to this country to export your work to another?
21. Ads J said...
I keep hearing about Japans lost decade.
Firstly it was nearly two decades!!!
Secondly Japan has a totally different culture. Their attitude to saving is totally different to the average Brits. Japan was hit particularly badly by debt deflation because of the save culture (saving instead of spending). However, we like to spend on the IOU. This is proven as despite all of the help (0.5% IR), our debt is not coming down. This cultural difference must affect the UK risk of debt deflation, how deep it could be and how long it will last when compared with Japan.
When comparing economic data like house prices, risks, etc, can some of those economic geniuses at the Torygraph please calculate the flex in the data required to compensate for this cultural difference. Then lets compare. Cos if you don`t, you are not comparing apples with apples.
22. bidin'matime said...
Mark Wadsworth @16 - if house prices are falling at 5% then the question is whether your rent is greater or less than (5% + mortgage interest rate) x house value. If rent is less than this sum, then rent, but if more than, buy. Of course, this assumes steady interest rates and the ability to sell / move back and forth. In the current market, if prices continued a steady 5% fall, only an idiot would buy.