Monday, Dec 24, 2012

Would this kick start HPC?

Telegraph: Pressure increases for UK interest rate rise in 2013

The Bank of England will defy expectations and raise interest rates next year on the back of a solid recovery and rising inflation, senior economists have warned.
Two highly unlikely scenarios: Raising interest rates and a solid recovery.
One highly likely scenario: Rising inflation.

Posted by mr g @ 12:54 AM (2888 views) Add Comment

6 Comments

1. grumpybob said...

Couldn't agree more; exactly what/where is this "solid recovery" they allude to? Wasn't it only a couple of weeks ago that Osborne was getting stick for the country being more indebted than ever?

Yes, inflation all the way (especially re. fuel prices). There are clearly no bounds whatsoever to the greed of the electric/gas suppliers.

So, maybe a rise in the base IR to combat inflation but not if they can possibly avoid it. I think the effects of even a modest base IR rise (and, more importantly, the signal that would send out) would push too many people over the edge.

Monday, December 24, 2012 01:28AM Report Comment
 

2. stillthinking said...

Zerohedge put forward the opinion that as inflation harms the economy, the real quantity of goods being produced goes down, but the quantity of money chasing them goes up. So that to view inflation as a corollary of increasing production eliminating the slack in the output gap, is a vicious misunderstanding.
The article is still there fairly recent.
My own view, is that the whole thing is starting to centralise around liabilities of the central government. The problem is that without QE, government liabilities cannot be raised from the tax base in the absence of private borrowing, and QE essentially replaces private borrowing so the situation gets ever more desperate.

So credit creation Tom borrows to buy a house from Bill, Tom -100,000 and Bill +100,000. Usually Bill spends and Tom works to go back to 0-0.

When government intercedes with tax, debt repayment is not taxable, but spending is.

So government effectively gets between the flow. So while Tom does all the work, Bill foregoes consumption in place of the government. Now if that were a plain tax all is good. The situation ends at 0-0 and that is the end of it.

Unfortunately in the UK the government has been borrowing, not taxing. So the money taken from Bill is borrowed, not taxed, and the government ends up with a liability. So instead when the 0-0 position nets out, the government is in the situation of still owing Bill 50,000, without any money in the economy to tax i.e. with no revenue raising capability whatsoever. This is the real reason why the principle goal of government is to restart borrowing in the private sector, because borrowing in the private sector is TAXable.

That is the spectator sport that is the UK economy because private borrowing maxed out 5 years ago.......

Monday, December 24, 2012 02:06AM Report Comment
 

3. stillthinking said...

Sorry, I think the conclusion is implied because I think about this a lot. But anyway...

The conclusion is that the reduction in private sector debt inevitably reduces the ability of the government to raise taxes and meet their existing liabilities. To get around this QE may be used to flood the private sector with taxable revenue (this is the Guardian thinking that the government need to spend money into existence), but the QE money can only ever return to the state at the average tax rate of 50%, the remainder facilitates an ever greater reduction in private borrowing! Government finances look worse and worse and worse etc.

Additionally, the UK -had- been inflating the money supply at around 8% over the previous decade and a half, masked by cheap labour in the emerging countries, which is now going into reverse. There seems to be an idea that if the broad money measurement shrinks then relatively prices must also go down. NO unfortunately not, prices can rise even as the UK deflates because the effect now runs in reverse.

-Deflation by the deleveraging private sector,
-Deflation in broad money offset by government QE operations
-Import inflation and price rises
-Attempts to restart private sector borrowing FAIL because of the requirement to support asset values above market clearing to maintain credibility that the UK banking sector is solvent.
-QE which is to enable the state to attempt to meet liabilities, continues and will continue as long as covered by inflation.
-At some point a juggling mistake is made, either UK state goes into bankruptcy, or QE is overdone to the extent that an inflationary crisis causes the deflationary spiral and UK banking insolvency, or everything is balanced and judged just right and the slow decline of the last 5 years continues.

Monday, December 24, 2012 02:30AM Report Comment
 

4. mark wadsworth said...

Yes, those are highly unlikely scenarios.

Don't forget that Home-Owner-Ism is based on, fuelled by and/or propped up by price inflation (= debt erosion, savings erosion, stampeding people onto the 'property ladder', maintaining illusion of ever rising prices as well as giving and ex post justification "well I had to buy land it was the only thing that was going to protect me against inflation") .

So continuing inflation seems the more likely outcome.

Monday, December 24, 2012 09:47AM Report Comment
 

5. montesquieu said...

Anyone else getting a message the Telegraph has put up a paywall ('you have reached your max of 20 articles a month')? When did that happen? Or is it just because I'm trying to view from Germany this week?

Well the Telegraph can go and sod themselves just like The Times did before them.

Unfortunately all that leaves is in terms of newspaper web sites is The Guardian (till it actually goes bust) and the Indi .. plus the Daily Wail of course but that's not really a newspaper any more, more of a gossip sheet about American Z-list nonentities.

Monday, December 24, 2012 02:20PM Report Comment
 

6. libertas said...

This was a puff piece. They got one person to say that by e-mail.

Meanwhile, at the end of the article, where few read, it says that Carney will likely slash interest rates in half to 0.25% and, raise QE by £200bn. All paid directly to Goldman Sach's whom he worked for.

Get ready to be gang raped by Goldman Sach's and batton down the hatches because this is economic warfare.

Thursday, December 27, 2012 10:19AM Report Comment
 

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