daedalus

It depends on what you mean by "inflation". Inflation can mean several things, although they are often inter-related: * Inflation in consumer prices (or retail prices) for goods and services (often known as CPI or RPI) * Inflation in labour costs or wages * Inflation in corporate earnings/profits * Inflation in the money supply In the past, when the majority of the economy was domestic, and domestic labour was a substantial part of the variation in the cost of goods and services, then there was a strong link between all of these. Today, when we import a lot of things, especially food, clothing, oil/petrol/gas, the connection is much weaker and the different types of inflation can move to a degree independently. Consumer price inflation does not have any affect of the ease of repaying debt (although it make repaying index-linked debt harder, since index-linked debt is usually linked to RPI) Wage inflation DOES make it easier to repay personal debts, as the increase in income makes it the debt relatively smaller. Corporate earnings inflation DOES make it easier to repay corporate debts, as the increase in income makes it the debt relatively smaller. Inflation in wages and corporate earnings increase the tax receipts and so make it easier for a government to repay its debts by making them relatively smaller. Over much of the past 10y or so we have had deflation in imported goods and inflation in domestic wages and earnings, making all debt easy to repay. So we borrowed and borrowed and borrowed. However now we have a situation where import commodity prices are increasing (inflationary) but wages and earnings are static/falling (deflationary) which has exactly the opposite affect. It looks like inflation from RPI, but the net affect is to make it harder to repay debts.

I generally agree with this sentiment, but the problem is... ... that this leaves you no room to describe the sheer monumental incompetence of supra-national organisations. If government spending is malinvestment, what word is there to describe UN or EU spending? Incompovestment? Supramalinvestment? Kleptovestment? Pessiminvestment? Horrendovestment? Teratovestment?

Oh no! Not the shoe-event-horizon! The ultimate decline of civilisation into a footwear obsessed econopocalypse as foretold by Douglas Adams in the Hitchhiker's Guide...

The sad truth is that in the current environment, even if Jonah Brown doesn't get the job, there is no guarantee that who does get it won't be worse. There is no shortage of crypto-communist socialist bureaucrats or politicians with the credentials and qualifications to get the job, and most of them are even MORE incompetent than Gordon.

Given that I believe Gordon Brown personally called up the chairmen of several banks and INSTRUCTED them to manipulate Libor (to keep it low) I'll be most entertained to see what comes of this. I expect it to go very quiet very soon when the authorities realise how embarrassing a transparent investigation could be...

Actually, I think it is just the ownership holding companies which are in trouble. I think the business is fine. What a relief for all the leaseholders, eh?

The carry trade is long gone - it died a couple of years ago. Indeed there has even been some reverse-carry trade at times recently.

+2

How about we run a national survey on how many people enjoy and support the Red Arrows, and how many enjoy and support S4C (welsh language TV) ... ... and then abolish S4C anyway?

Serve you right for taking the Grauniad seriously! I read it from time to time, and the Observer at the weekend, but only so that I know what the enemy is thinking!

36, working in finance in London, earning £200k+ pa, live with gf in rented flat Owned once, turned out to be a nightmare money-pit (joint-freehold flat in victorian conversion with maintenance problems and shite co-freeholders), lost about £20k Cash in the bank to buy as/when prices become sensible

Repossession in Spain (and most of Southern Europe) is a nightmare. 3-4y of bureaucratic awfulness, with 4+ court appearances; and the judicial system is probably now saturated so it is almost impossible to get time in court; and if you can't get hold of the borrower then the administration and enforcement of the judicial foreclosure process becomes almost impossible. So the utter uselessness of trying to repossess is probably why. A more interesting question is why the hell would anyone make mortgage loans in a country when repossession is almost impossible.

Because they also want all the food, and all the fuel, and really don't care if we starve or freeze to death. That's why.

Actually, I think the Rating Agencies are probably rather good at credit ratings for corporations (apart from estimating fraud risk). They are not even THAT bad at rating sovereigns. But for rating banks and structured finance products their rating methodologies seem to be flawed. The problems they have had with bank ratings, CDO ratings etc. do not necessarily 'infect' the methodologies for corporations or of sovereigns. The approaches are different, the teams are different, and the history of their methodologies are different.

I agree. Default is the only solution. But I believe that the government will only realise that after the testing of the currency to destruction.

"When Money Dies" has just been reprinted. A new paperback is about £10. And is well worth reading. Ultimately, the source of hyper-inflation is the desire of an overburdened government to avoid public unrest, rioting, hardship, AND the danger of extremist agitation arising from high rates of unemployment and poverty. The overwhelming need of the wartime German to obtain funds, and of the Weimar government to void hardship, and unemployment led to a policy of full employment, with industry subsidised by the government. The fear of communist insurrection led to the government and industry giving in to all union demands for wages to be increased in line with increase of costs of living. Remember that this was only a few years after the Russian revolution and the formation of the USSR. As the extremists on the left and right rose in power, it became more and more critical for the government to maintain law and order, and hence to pay whatever people required. The physical printing of money because a major logistic challenge. A more interesting comparison to the UK is the Austrian hyperinflation which preceded the Weimar hyperinflation by a couple of years. Th Austro-Hungarian empire was broken up by terms of the resolution of WW1 and the residual Austrian state had all of the bureaucracy, administration and overheads of the empire, but not the wealth or food generative resources (e.g. the agricultural plains of Hungary) hence it was, to all intends and purposes, and unviable state without wholesale econo-social restructuring. Which was never going to be acquiesed to by the leaders or the population in a democracy. Hence the overwhelming public sector burden and the loss of funding from external debt markets, led to the government just printing to cover costs to pay workers. But there was real scarcity of food, and so food prices rode dramatically at a rate in excess of wage increases, leaving people destitute and starving, nonetheless. When it becomes a political necessity for a government to raise public sector wages to avoid national unrest and anarchic political instability, when there becomes a real risk of 'blood on the streets', then inflationary monetisation of the deficit will happen, whatever is said about the 'independence' of a central bank. No central bank is independent in a state of emergency. It will be interesting to see what happens in Greece. I suspect that, at some point, the Greek government will try have to augment the austerity policy based reductions of workers wages (in Euros) with some sort of promissory notes (Deferred Obligations of the Government Scrip - DOGS) and will try and pretend that DOGS are a sort of parallel currency. Over time, DOGS will start to make a greater and greater proportion of wages, and the government runs out of cash. Of course DOGS will plummet in value in Euro terms, and one will eventually see hyperinflation of DOGS, and the de-Euro-isation of the Greek public sector.

The spread betting firms (with whom you might have a spread betting account) will have an account themselves at a broker, so that when you open up a short position on Tesco with a spread bet, they (if it is big enough for them not to run the risk themselves, or internally hedge it against someone else who has taken a long spread bet position) will call up their broker, and instruct the broker to place a short position on the share. When you unwind your short position, they will instruct their broker to unwind their short position. If they can't get their short position unwound (because the the broker can't buy the shares back at that price) they won't let you unwind your short position. They'll tell you that the trade couldn't be executed at that price, and move the price on your screen up instead. So the spread betting position is very similar to direct position but intermediated through the spread betting firm.

Lets decompose EXACTLY what shorting a share involves. What you (or your broker on your behalf) has to do, is to find some investor in Tesco shares who is willing to lend his shares to you for a fee. Lets say a big pension fund has loads of Tesco shares and intend to keep them for at least another year, so is entirely happy to lend them to you for, say, 1% their value, per month. So you BORROW the shares. Why would they do this? Well, under the terms of lending them to you, they still get to collect dividends from you, and they also make an additional 12% per year from the fees they charge you. Hurrah! So now you have your borrowed Tesco shares. You then SELL them in the market, and keep the proceeds, but the pesky terms of the lending contract means you have to provide that cash as security for the loan of the shares. When you want to close out your position, you have to BUY some Tesco shares in the market, and then you can unborrow them from the funds that lent them to you, and free up the original cash you provided as security. SO your return is the original sale price, less the cost of buying the shares back from the market - less the fee. Which is exactly what you wanted. So, when can you unwind your short? Whenever you can buy back the shares from the market. So the market must be open, and their must be people willing to sell the shares to you. There was an odd situation earlier this year, when something like this happened: a hedge fund was shorting VW, but didn't know that Porsche had been buying up lots of shares indirectly through the options market. When Porsche went public that they wanted to buy VW, the hedge fund literally could find enough shares available in the market to close out their short positions. For a short period, while this happened, the share price in VW went ballistic, as the hedge fund tried to to buy up the entire supply of the shares in the market in order to close out the short. Of course then hedge fund lost their shirts, and floating investors who sold on the spike made out like bandits. And Porsche was accused of rigging the market unfairly!

Keep the faith, my brothers. Here are a couple of scenarios: 1. The public sector cuts of the coalition gubamunt are carried through with much wailing and gnashing of teeth. Huge numbers of public sector workers either get less pay or lose their jobs. Benefits are cut too. Increase in people unable to pay mortgages. Increase in home for sale as people try to downsize. Downward pressure on house prices. Increase in bad debts for banks. Gubamunt tries to prevent banks repossessing, but the banks are suffering from capital constraints. Gubamunt realises it can't afford to rebail the banking sector. Banks rush for the door. High number of repossessions. House prices collapse. 2. The public sector cuts of the coalition gubamunt cause such pain in the public sector that the unions cause massive strikes and unrest. Coalition falls apart in the face of the strain. LibDem back-bench MPs side with Labour for a vote of no-confidence. Re-election called. Sterling collapses, gilt yields surge. Labour government elected promising electoral reform (for the LibDems) and a review of all the cuts to public spending. Sterling continues to weaken. Significant inflation from import prices drives unions to demand wage increases. Labour government gives in. Wider imbalance between public and private sector pay. Tax receipts fall. Populatist anti-bank legislation. Public sector finances look shaky. Inflation expectations grow. Interest rates eventually increase sharply to protect Sterling. House prices collapse. I sadly expect the second scenario to be more likely. But neither are good for house prices.

Doesn't this mean that people with bad judgement of their 'trusted' nodes credit quality (Type 1 Bad Judgement, BJ-1) will end up going bankrupt as they become on the hook for the all borrowing to their 'trustees'? And then people who have made the decision to 'trust' people with bad judgement will take the strain as the BJ-1 notes fail, resulting in their bankruptcy (Type 2 Bad Judgement) and so on. So in this system, it only makes sense to 'trust' people who I think are at least as wise, sensible and cautious as myself, otherwise I could get completely shafted. Of course many people won't realise this, and will end up having their own lives destroyed by that of people close to them who they 'trusted'. Sounds like a recipe for disaster to me. Bankruptcy and losing your friends and family support network in one east step.

Erm... AFAIK the union of the United Kingdom only worked because the English appear not to mind shovelling vast sums of their money to look after the Welsh, Scottish and Northern Irish. The precise problem with the Eurozone is that the Germans (and Dutch etc.) DO MIND about about giving large amounts of money year after year to southern Europe. In other words, unbalanced single-currency zones only work with political unity and the willingness to provide permanent fiscal transfers to "weaker" regions ("weaker" = lazier/feckless). Which is precisely why many people said that the Euro would fail, right from the start.

Nominal wage increases are quite possible. It's just that they will be eaten by inflation in goods and services. The public sector unions will strike and scream for wage increases, and in the end the government will succumb to "help fight deflation".

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So now we see what the outcome will be for the Eurozone (and probably for the UK in the future)... . Biflation . What is biflation? . Biflation is when money supply is broadly flat, but this is achieved by: i) inflation in prices of labour and goods (i.e. goods and services) ii) deflation in value of real estate and financial assets (and anything else typically bought on borrowed money) . Why will biflation happen? . Eurozone banks are, more or less, bust, and Eurozone countries have essentially run out of money to prop them up. So the Eurozone banks will have to reduce lending dramatically, so that there is much less money available to borrow for buying real estate and financial assets. This will lead to house price declines, real estate declines and stock market losses, which in turn will lead to further bank losses, perpetuating the cycle. . The "state", ECB, EU, etc. will address the problem of sovereign credit weakness resulting from this, and the (misplaced in my view) fear of deflation, but reducing interest rates, and printing money to lend to governments. This will provide governments with more cash to buy goods and services and to pay to employees, and hence the employees will have more cash also for goods and services, which will drive up the cost of goods and services in Euro terms... BUT... The Euro will continue to weaken heavily against other currencies on the back of these weaknesses in interest rates, sovereign debt risk, bank failure risk etc. so that the cost on purchasing goods and services from outside the Eurozone in other currencies will increase (in Euro terms). . So we have: i. Inflation in import prices for goods and services ii. Some inflation in internal good and services iii. Deflation in real estate and financial assets . This is a nightmare combination for savers. Typical savings investments lose value at exactly the same time prices for day-to-day purchases increase. If I was in the Eurozone I'd be heavily into the shiny yellow stuff right now. Or the Swiss France. . What about the UK and sterling? . I don't know. In time, we could be infected by the same biflationary crisis as Europe is now experiencing, but the timing is down to when the bond market gets really spooked about UK sovereign credit risk, and right now, the Eurozone is stage centre for that. I think that we still have Spain, Italy, Portugal and France to go before the UK becomes the centre of attention. . But perhaps, just, perhaps, once biflation has swept the Eurozone and left carnage in its wake, then it will be be turn of the UK, Japan and the US? Or perhaps mild but sustains, biflation will creep up on us and gradually nibble away and savings and wealth in a non-crisis way? But a second wave of house price declines would surely form part of that, and a double dip in UK house prices would surely be a rout rather than a gradual drop. . Don't ask me where is a safe place for your money. Property prices will probably fall. Day-to-day goods and services prices will probably increase. Bank accounts will pay minimal interest and expose you to bank failure risk. Government bonds will drop in value. Maybe it is best to just spend it!

In short: YES If your models say that event X should happen with neglible probability and event X then happens there are two possibilities: i. Your models are wrong ii. Some incredibly unlikely freak of chance occurred In general i. is more likely than ii. so saying that "This was a '12-sigma' event according to our models" is roughly equivalent to saying "Almost certainly our models are crap but we don't understand why, or how to fix them, and can't be bothered to worry about it". In particular almost all models used thoughout finance are based (roughly) on normal distribtions which don't have 'thick-tails' and so are bad correctly assessing the risk of rare events ("black swans") and although this is well known, it is SO much harder to address the actual problem (statistics in a world where standard-deviations don't work properly is HARD) that in general people can't be bothered (or will be shouted out, not paid and then fired if they are bothered).