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Everything posted by LazyDay

  1. Default makes the face value of debt smaller and interest rates higher. The end outcome in unclear, especially if the Greek government plans to continue to borrow at some rate in the near future. From the Greek point of view and the point of view of the current lenders to the Greek government, if the terms of the bailout are better than the alternative market solution the bailout exports (socialises) the problem to a broader class of both lenders and borrowers.
  2. 1) It is unlikely that each family in the USA would get $10,000 if the Fed printed $10,000 times the number of American families. Monetary transmission mechanism would ensure that some families would get $1 mil and ‘000s of others get nothing. 2) Any positive effect would be short lived. Keynesians know that. 3) All that this would create in the long run is the new spiral of asset price inflation, more inequality, and more incentives to lobby for more cash. By printing more money, governments help themselves. Governments should help everybody else by designing better rules for the game.
  3. It is impossible to abolish Boom and Bust in a market economy. If Bust gets abolished the market Booms through moral hazard immediately. If Boom gets abolished, adverse selection eats markets alive and markets collapse through the lack of informed traders and the lack of information.
  4. The QE is buying illiquid assets off the bankers balance sheets and giving them cash (or close substitutes) instead in order to, supposedly, increase liquidity. The proponents of the scheme say that QE is not inflationary, but it is, because otherwise it is useless. How much, you think, the BoE is paying for the illiquid assets? If the BoE buys them off at a price higher than the current market price - this is equivalent to printing new money. If the BoE paid as much as the market would anyway - what would be the use in it for banks? In order for the whole exercise to be inflation-neutral in the long run, the BoE should convince the banks to buy the assets in 2 or 3 years back at BELOW the market price! Do you think this is likely to happen?
  5. I am in very much the same situation. I can echo a lot of what you have mentioned and I am wavering on buying too. My guess is that all the “action†is likely to be after the election. Not only might we expect higher IRs but also “some†inflation. Public finances in the UK are in such a state that anything is possible after the election really.
  6. Looks to me as a typical reaction of the economy to a neo-Keynesian “stimulusâ€: price level and wages (of those lucky who do have a job) are supported and unemployment is rising. Capital is misallocated and has not been allowed to adjust. That means a disaster for economic efficiency and a Japanese-style zombie economy in making in the UK. Cheers!
  7. Land improvement. Multi-storey car parks and all of that.
  8. What you have described here is the concept of asset pricing by the discounted sum of future cash flows. The reason it is not problematic at all is that this concept is of course applied to all assets and is not exclusive to land. It creates no distortion. Internet is full of incomplete “economics†with odd agendas, beware.
  9. This distinction is largely illusory. Commercial property is a factor of production for obvious reasons. Residential property is an indirect factor of production as it is required to house labour, another basic production factor. If IRs are set by the market and not the central planner, unsustainable booms in asset prices are much less likely to happen. That’s the whole point. If the IRs are set too low it is only a matter of time before the market converges on the next big thing, be it Internet stocks or real estate.
  10. IRs below the equilibrium level may possibly be used to ‘nudge’ some fragile businesses, but it is of a limited use. In the long run, setting IRs below the market equilibrium level is a bad thing because it does not create wealth, it creates misallocations of capital which you can imagine is not a good thing. There is no contradiction or contrast. It is easy to see that buying any asset (e.g. land) with a future string of payments attached is an investement in "production capacity". It is simply a jargon. There is a simple choice we have. We can consume now or we can save to consume later. Future demand has to be met by the total savings sooner or later. There is no Perpetuum Mobile, so to speak, in economics.
  11. Cheap money is a good thing unless money is given out by the BofE cheaper than its market equilibrium price. This is the key argument in Austrian business cycle model. When the government (temporarily) sets IRs too low, it creates an appearance that the savings in the economy are more plentiful than they actually are. This fosters overinvestment in production capacity that pays (or should pay) in the future. The payment never happens, however, because future demand is linked to the actual savings and not its imaginary rate. Hence, the inevitable bust or hyperinflation or both.
  12. But Mises did not say that it is fractional reserving that causes the cycle, only artificial manipultion of IRs by Central Banks. Setting up interest rates by other means than supply/demand (e.g. through MPC decisions) is like setting price of corn through a government decree. Central Banks tend to set price of capital too low for various reasons, making the economy buy too much capital (or “cornâ€) which leads to the oversupply of “cakes†at time when general public have not saved enough to buy all these cakes. In Mises explanation fractional reserve is absolutely fine as long as the government does not interfere.
  13. The minority of Hedge funds which did predict the mess and acted on their predictions stand out now. The gain did not come without a lot of pain to them, however. If you are not prepared to bear the possibility of pain, S&P predictions are as good a forecast as it gets.
  14. I would agree on that. S&P are no angels either. However, I would put more trust in the S&P projections and not the Treasury's figures in this case.
  15. http://rassegnastampa.mef.gov.it/mefintern...009052212826069 "The U.K. Treasury forecasts in the budget conveniently showed debt peaking at 79% of gross domestic product, just under the 80% ievei that wouid usualiy trigger a downgrade adding to the suspicion that the forecasts were poiiticaliy infiuenced. S&P doesn't beiieve the Treasury's figures. It expects U.K. borrowing to hit 100% of GDP and remain there for many years, based on a taxpayer final bili for baiiing out the banking sys tem that is roughiy twice the Treasury's iow-baii estimates."
  16. Financial apocalypse is not being caused by the fall in house prices. Rather, the fall in house prices and financial apocalypse are both caused by unsustained lending bubble. Expectations of further falls in prices will deepen the crisis, but trying to support current level of house prices would not be the most productive use of scarce public money in crisis. Opportunity costs are too high.
  17. While I agree that moral hazard problem is absolutely central, you seem to be impying something more sinister here. Moral hazard affects all professionals with asymmetric information such as doctors, second-hand car dealers, lawyers (it also exists among regulators). In some cases we can rely on repuation effect and market competition to control and curb moral hazard. You seem to go further and suggest that perverse incentives in finantial intermediaries were able to subvert competition. Hence, crony capitalism. If so, how would one measure the extent of the problem? Can you come up with a way to empirically prove this statement?
  18. Newly printed money will not do particularly fine job in replacing credit. Credit booms are generally associated with rise in prices of few particular asset classes. In contrast, money printing creates general inflation across the board. And printing money in inevitable for the government which runs the largest deficit, faces falling tax incomes and rising interest rates on its debt obligations. In short, house prices will still be falling in real terms and, in addition, everybody will be paying the “inflation tax” to pay off the debts of the overleveraged. There is noting “social” in inflation. It is deeply non-meritocratic.
  19. Here http://news.bbc.co.uk/1/hi/business/3188470.stm
  20. Not quite. CPI is up to 3.2% in February. The trouble is, the BoE might be given a go-ahead to control and report whichever is the lowest at the moment: CPI vs RPI. In the boom years it was CPI (since 2003), now it seems that they are reverting to RPI. It is certainly a great convenience but playing around with targets and measures makes them look silly and not trustworthy.
  21. Organic cucumbers are about £1.45, used to be £1 or so about a year ago. This is due to weak pound. Still, I buy organic or nothing. A 30% food price inflation is consistent with 3% CPI figure if food is about 10% of your budget and the rest is not inflating that fast. Clothing prices are going down apparently as more of us shop online.
  22. You all will be laughing, but "British consumers are shopping without dropping". U.K. consumer spending "rose again" in Jan by 3.2%, according to WSJ on the back of (still available) credit. Ok, so we have two quarters of negative growth in GDP while consumer spending is actually expanding! What happens when the credit dries up?! No wonder then, that Mr Brown seems to be pushing political lending. Inflation is coming at some stage, I am sure of that. STRs, hedge your bets!
  23. And why should they? It will take the Big Three until February to burn out the $30 bil of US taxpayers' money. There is no rush.
  24. Bankers are not special. They do not produce money from "nothing". Bankers (and other fin intermediaries) produce information. Thats what they "make". Now, as with cars, you can either produce reliable information or unreliable (asymmetric) information.
  25. I am sure that you know your local rent market. Sometimes (in certain price ranges) the quality of the offered houses improves drastically if you agree to pay just marginally more (i.e. 10% more a month). In this case, moving places might help and might actually be very sensible thing to do.
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