Monday, May 24, 2010
Inflation not a debtor's friend these days
Moneyweek: Why inflation won't help today's homeowners
So what is inflation actually doing for today's debtors? Increasing their cost of living (via rising oil prices and food prices) and leaving less money for interest and debt payments. So the higher it goes, the more of a burden the debt becomes – not vice versa. ... Inflation may erode the real value of the debt in theory. But it can't reduce the monthly burden of the debt unless wages are rising too. And they are not.
Posted by wanderinman @ 06:26 PM (2089 views) Add Comment
26 Comments
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1. phdinbubbles said...
Hasn't that been the blindingly obvious situation for quite some time now?
2. paul said...
No, I don't think it has been blindingly obvious - inflation is normally the debtors friend but thinking about it, if wages are not rising it most certainly isn't.
recaptcha: proud humped
3. Ikhlaq said...
I think i follow this. However, what if i person fixed their mortgage at a low rate now, and then invested any spare cash in a commodity that is preserves against wealth (im thinking silver here). If inflation then takes off, wouldnt silver go up in value and hence pay of the mortgage early.
I understand the point being made about cost of living going up i.e. food, utility costs etc.. What are peoples thoughts on here.. Sorry if this seems like a mediocre question.
4. mander said...
Well, well, well we forget that debtors are not necessarily in employment. Mervyn King encoureging inflation is thinking of big debtors. And it is true people owning one property only and being in employment will suffer. Aslo worth mentioning that having the value of one property only inflated during boom years did not work in these people favour either because their children will have to pay for it and not big debtors' children.
5. fallingbuzzard said...
Isn't it crystal clear that housing is going to be put into CPI?
6. paul said...
I don't think the Bank can do that and retain credibility. It simply looks far too much like changing the goalposts. I'm sure they'd like to, but they know the media, public and UK gilt holders wouldn't stand for it.
recaptcha*: another migrates
* I do this silly game - keep refreshing the captcha until it says something ~vaguely~ relevant to the article.
7. maihem said...
@paul That's a great game... after fewer than ten refreshes:
recaptcha = indicted sterns
8. techieman said...
paul @ 2 - aha the scales have fallen from your eyes!
9. paul said...
@techieman - still not sure what you're talking about. I'm never quite sure what you're talking about.
recaptcha: biweekly response
10. sirmungo said...
Once the recovery starts proper (in 3-10 years) then wage inflation will quickly catch up, if we spend the next 5 years on this site waiting for prices to come down then we could still get caught out again. Inflation may simply keep nominal prices stable....is that what we want?
Who of us expected prices to have recovered so quickly?
11. paul said...
"Once the recovery starts proper ... "
What exactly is going to drive the recovery?
recaptcha: lifeline of
12. paul said...
Sorry just to elaborate why you are anticipating a miracle, the credit 'crunch' is now three years in and counting.
So here's a question: have things gotten better or worse since July 2007?
recaptcha: 20 zombie
13. techieman said...
sirmungo - Who of us expected prices to have recovered so quickly?
erm yours truly? But perhaps not for quite so long and quite so far, but then again you wouldnt have thought that they would pump in so much so quickly.
My point has always been that yes, in general inflation erodes the value of debt because wages respond to inflation, but where we are now that "aint neccesarily so". Paul my understanding of your position is that you have always been critical of inflationary responses to the threat of evil deflation. But the point is that the creation of inflationary pressures was to kick start the economy which would then take over and work through of itself.
Then dice have been thrown.... and im afraid there was no double six. What happens next and the governments responses to it are the interesting points. Is it a co-incidence that the markets have turned and all of a sudden realised the emperor is in the all together? I think not!
Soon we will have (IMO) a weak bounce in response to some external event but it wont last. Lets see what the next set of numbers for HPs hold! Is that clear enough?
14. paul said...
I have been critical of the inflationary response. Combined with low interest rates, large debt holders benefit proportionally more than savers receiving punitive interest rates on their capital.
I still don't see the logic of there being any bounce, weak or otherwise coming from anywhere.
govern hassling
15. techieman said...
i agree with that on a micro level, absolutely right. But what else where they going to do???? Im not really interested in the morals of what they do, just what exactly they are LIKELY to do, and what that results in.
i think you misunderstand the bounce - i am talking about a weakish and short lived squeeze (bounce) in the FTSE / S&Ps and liquid markets. This is not where dips get bought but rallies get sold.
As for HPs i think we have PROBABLY turned the corner and will have a steady (non bouncing) downmove. However again i would like to see 2 monthly falls before that is confirmed.
16. Fra Paolo said...
If there is no wage inflation, what does that do to the hyperinflationary expectations of some analysts? Doesn't the money have to enter the economy in terms of setting wages and prices in order for their to be inflation? If it is only setting import prices, you don't get the same 'push', no?
17. sirmungo said...
Paul @ 10 + 11. What exactly is going to drive the recovery? – I did say in 3 to 10 years! And we have always recovered from every previous bubble and depression, let me guess….this time it’s different?
There is a very real "threat" that our opportunity to purchase houses at prices that are significantly lower than they are now (nominally) may not ever happen, because of inflation.
Like you said, the credit crisis has been going for 3 years....... and unless you timed it absolutely right you will not have benefited from “crashed” house prices.
18. techieman said...
sirmungo - time to read the article methinks... this is a post of mine sometime ago:
"1. techieman said...
"workers squeezed in real-terms will demand ever higher wage settlements and employers more willing to cave in to worker demands than in the past also more eager to follow the rest of the business sector in passing on the costs to the consumer "
this implies tight employment conditions and robust underlying company profits / company profit growth. Leaving the public sector to one-side (where the issue is i think more debatable) i doubt very much if employees are in a strong position to look increased "inflation busting" wages, across the whole of the UK. Please explain why you believe, per sector - there are/ will be tight employment conditions in the coming months.
Friday, June 20, 2008 09:14AM"
'nuff said?
19. drewster said...
Personally, I'm sticking to Fred Harrison's model (Bust will follow boom - but when? [2005]). His timeline shows the UK's property bust starting in 2008 and continuing until 2012. All signs are that the economy - especially unemployment - will get worse before it gets better.
The hard part is knowing where to invest in the meantime.
20. techieman said...
context of that: http://www.housepricecrash.co.uk/newsblog/2008/06/blog-wage-price-inflation-spiral-plus-house-price-deflation-equals-stagflation-14439.php
or :
"PERHAPS you can have asset deflation at the same time as (imported) food inflation. But then you will IMO just get a margin squeeze - i dont see any evidence of bumper pay rises following a real or perceived inflation. if thats right (and infact its more than right because of the increase in unemployment) then how are people going to bid up their prices (of their labour)?
If they cant do that then how can you get a wage price (or more accurately price wage) spiral?
Thursday, November 19, 2009 05:21PM "
and in 3 to 10 years is a bit of a wide margin - care to reduce the spread?
21. inbreda said...
BTLers where the renter is paying the interest will benefit fully from inflation.
recaptcha: snivelling BTL shyts (I made that up, it's quicker than refreshing)
22. sirmungo said...
techieman - I've read the article thanks, and now I'm giving my opinion on the subject. Or have I missed the point of blogging?
23. techieman said...
nope - just the point of the article! Or do you think you can have asset price inflation on something that is based on a multiple of wages if the wages cannot inflate? After the bullets have all been fired!
24. sirmungo said...
techieman - you (and Moneyweek, to which I subscribe) continue to make the mistake of trying to look at the inflationary/deflationary debate from a perspective of logic, common sense and fairness. Something the policy makers are unlikely to do, which is unfortunately why house prices have spent that last 6-12 months rebounding.
25. techieman said...
sirmungo this is what i posted in 2007 :
"10. techieman said...
drewster - cant agree with this, if it costs nothing to borrow money then why would anyone want to pay to rent somewhere? I think this is when we will have a dead cat bounce. (see my posts against yours earlier today). I.e. we have a big fall, then a dead cat bounce - i.e. a shallow rise AFTER a large fall and then a further plunge. The DCB could be when rates collapse (again i cant see this being all over quickly though). The mentality i have highlighted will be probably what causes the DCB - thats NOT to say i agree with that being a reason to buy. It then ALL depends on the state of the economy AT THAT TIME. But if rates were to Fall tomorrow to 0% then surely ("A" rated credit risks) would secure any loan! [I realise thats an extreme example and obviously it aint gonna happen but im sure you get the gist].
Thursday, December 13, 2007 04:36PM"
I also posted in November of 08 that the seeds were being sown for the reflation, although admittedly how far that would go and how long could only ever be guesstimates. So no i never subscribed to the view that we wouldn't move back up for "the last 6-12 months".
As i said now not only have "they" run out of bullets but they know they have run out of bullets.
So in your view i say again what are they likely to do to make the economy reflate beyond where we are? Im not saying you are wrong - thats opinion im just saying i cant see where demand is going to come from? Loosening credit markets? I doubt it. So i am just wondering why you think the opposite? BOMAD?
As i have said there is IMO a correlation between the stock market and the other asset markets. Was i expecting the falls from the recent highs? Yes. Have i lost money thinking that those up moves were overdone? yes. Have i made it all back since the top and more? yes.
So IMO the stock market is a leading indicator and on a fundamental basis there are all sorts of reasons to expect falls and to expect the rebound to be over.
26. mark wadsworth said...
After one click I got "the blockage" the next eleven clicks were gibberish so I quit on "chaloner lou"