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Mikhail Liebenstein

Recovery Or Inflationary Mechanism

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Anyone who has been reading the Gilt thread or the Bond Market Collapse thread will know that the big discussions remains deflation or inflation and when inflation will occur.

There are various schools of thought and arguments including:

a} Deflation, too much debt has turned bad and this exceeds the efforts of QE and BTW the velocity of circulation in the Quantity theory of money equation has dropped so ( PT = MV ), so both prices or transactions will fall.

b} Whilst the jobs market remains bad, there can't be inflation as there is a total lack of confidence which won't return until employment is stable and people get pay rises.

c} The Central Banks are printing like crazy and Government spending remains untamed so this is stoking up inflation for the future, even if it is stagflation.

d} Ultra low interest rates make house prices really affordable, yadah yadah yadah.

However, as someone who is very much interested in the truth, I wanted to open a discussion on recognising where an eventual recovery will start and what it will look like.

The first given is pretty clear, in order for a recovery to occur the banks need to start lending again. Right now most of the new funding has just gone straight back into bond (hence the current bull bond market).

Now my first point and this is very much based on the Chicago view is that Inflation is a monetary phenomenon, is that the present economy unfortunately relies too heavily on house prices as the main mechanism for transmitting cash/credit into the the economy. People borrow huge sums, which are then paid to someone else and although they may also buy a house, at some point someone is dropping out of the market and so the credit will get injected as cash into the economy. The worry about this mechanism is that is relies on houses recovering, ie another boom that few people here want and which certainly would not result in a sustaibable productive economy.

The second possible route is that somehow people get a bit more entrepreneurial and start taking out loans to create businesses or invest in businesses This is actually better as the money is more quickly spent on capital good and wages etc that will also get spent. This could provide a genuine economic led recovery. For this boom to happen,I'd also expect some real stock market action, making it easier for existing firms to borrow to invest. So this might see a sharp and sustained stockmarket rally.

As a third point, though this isn't a method to kick start things, I really do believe we need to see wages rise before we can sustain an economic recovery. Consumer spending and internal demand are important aspects for all economies. For this to happen we need both more jobs and wage increases. This can only happen sustainably if the boom occurs through the second mechanism described. If the boom is housing led (and this is the big worry), it will just result in another collapse, as the debt levels were unsustainable before and haven't been cleared - yet more borrowing will not fix this and ultimately will lead to a "W" shaped recession or worse a set of declining saw tooth patterns.

What are people's thoughts on this?

Edited by mikelivingstone

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Well, your point ( b ) can be squashed, otherwise Zimbabwe wouldn't have an unemployment problem, would it...

Edit - daft software turned my b into a smilie

Edited by bkkandrew

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Well, your point ( b ) can be squashed, otherwise Zimbabwe wouldn't have an unemployment problem, would it...

Edit - daft software turned my b into a smilie

b} wasn't my argument , it was one of the possible points of view. That said, however much we like to joke, the uk and US economies are not as band a Zimbabwe. A recovery will occur and the two most likely mechanisms are what I have highlighted lower down, one be unsustainable and the other being sustainable.

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As a third point, though this isn't a method to kick start things, I really do believe we need to see wages rise before we can sustain an economic recovery.

How will increasing already bloated British wages stimulate an economic recovery? Britain is wholly uncompetitive when it comes to the making of tangible things, as in manufacturing and exports.

Buying and selling houses to ourselves on the back of fanciful money creation via the deregulated snake pit of London has passed.

The last ten years of 'prosperity' will never again happen within these shores, at least for a generation.

If you want to make money, you are going to have to follow the advice of the market. Leave the country.

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How will increasing already bloated British wages stimulate an economic recovery? Britain is wholly uncompetitive when it comes to the making of tangible things, as in manufacturing and exports.

Buying and selling houses to ourselves on the back of fanciful money creation via the deregulated snake pit of London has passed.

The last ten years of 'prosperity' will never again happen within these shores, at least for a generation.

If you want to make money, you are going to have to follow the advice of the market. Leave the country.

No recovery then!!!!!!!!!!!!!!!!!!

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No recovery then!!!!!!!!!!!!!!!!!!

Define recovery. Is it more debt and unsustainable consumption? Or is it people being forced to live within their means?

Which one do you think the market is going to stand behind in the short term? How about the long term?

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b} wasn't my argument , it was one of the possible points of view. That said, however much we like to joke, the uk and US economies are not as band a Zimbabwe. A recovery will occur and the two most likely mechanisms are what I have highlighted lower down, one be unsustainable and the other being sustainable.

Of course, right now the US/UK economies are not anything like Zimbabwe's now. But in order to make a proper comparison, one must look at the state of Zimbabwe's economy prior to the disasterous policies which have brought about their demise. AFAIK, Zimbabwe was a regional economic powerhouse, far more successful that SA and in a different league than all of Sub-Saharan Africa. Wilful contraction of the economy by Mugabe, by seizing the productive sector and effectively ceasing production created the unemployment. Printing money to make up the shortfall created the hyperinflation.

Try as I might, I cannot see how the economic powerhouses of the US and UK cannot avoid the same outcome if they continue to destroy the productive sector (see bail-outs to failure, provided by the productive) and print money to make up the budgetary shortfall.

Can you?

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Define recovery. Is it more debt and unsustainable consumption? Or is it people being forced to live within their means?

Which one do you think the market is going to stand behind in the short term? How about the long term?

Whilst both suggestions are possible, you do miss the third. Suppose I came up with a limit less supply of energy from cold fusion, something like that could stimulate a genuine recovery.

People will be working on smart ideas. The trouble is of course in the UK we are poor at commercialising them and then are unable to keep manufacturing of the viable ones in the UK.

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This is the type of inflation that worries me.

How Zimbabwe lost control of inflation

Zimbabwe’s hyper-Inflation is a result of the monetary authority irresponsibly borrowing money to pay all its expenses and funding quasi-fiscal activities (which are normally left to Central Government). In Neoliberalism, hyperinflation is considered to be the result of a crisis of confidence. The monetary base of the country flees, producing widespread fear that individuals will not be able to convert local currency to some more transportable form, such as gold or an internationally recognised hard currency.

Edited to add: does anyone know anything about this Neoliberalism to which the author refers?

Edited by Methinkshe

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Anyone who has been reading the Gilt thread or the Bond Market Collapse thread will know that the big discussions remains deflation or inflation and when inflation will occur.

There are various schools of thought and arguments including:

a} Deflation, too much debt has turned bad and this exceeds the efforts of QE and BTW the velocity of circulation in the Quantity theory of money equation has dropped so ( PT = MV ), so both prices or transactions will fall.

b} Whilst the jobs market remains bad, there can't be inflation as there is a total lack of confidence which won't return until employment is stable and people get pay rises.

c} The Central Banks are printing like crazy and Government spending remains untamed so this is stoking up inflation for the future, even if it is stagflation.

d} Ultra low interest rates make house prices really affordable, yadah yadah yadah.

a. This is true up to a point, and is the flip side of the huge inflation that was swept under the carpet during the HPI years (where that point is being the gazillion-devalued-pound question).

b. Up to a point, Lord Copper. But unemployment is a threat for far more people than are actually unemployed, and the economic distortions are so huge that individuals are encouraged to spend more rather than less when unemployment looms. So unemployment may be perversely delivering a short-term stimulus to other economic indicators.

c. Yes, the economy is in severe denial.

d. Yes, and this opens the risk that housing simply mops up all the newly-printed money, to do yet more damage to the productive economy until we get a bigger collapse.

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Whilst both suggestions are possible, you do miss the third. Suppose I came up with a limit less supply of energy from cold fusion, something like that could stimulate a genuine recovery.

People will be working on smart ideas. The trouble is of course in the UK we are poor at commercialising them and then are unable to keep manufacturing of the viable ones in the UK.

Hey, that would be cool. But this is Britain, mate. There will NEVER be a free lunch here. Never.

Besides, our meagre 250k graduates every year pales in comparison to the millions pumped out in India and China. We no longer have the high ground for research and development, as that costs money which we do not have.

A utopian society within these borders is not possible, as it would mean parity with the classes.

We will only ever see a dystopian Britain. Same as it ever was.

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Besides, our meagre 250k graduates every year pales in comparison to the millions pumped out in India and China. We no longer have the high ground for research and development, as that costs money which we do not have.

With the greatest of respect, this is the reddest of red herrings.

Over here (Asia), they may churn out 'graduates' by the million, but the quality of these graduates (even by falling Western standards) is laughable. A great many qualifications are bought, or students cannot be failed, due to connections or fear. Many graduates have not got the first idea of the subject they graduated in. They will, no doubt, be from an influential family though. On a wider scale, due to the Asian tradition of 'face', failure is rarely broached and achievement is automatic.

The very best that these legions of 'graduates' over here will be doing is copying innovation from the West, particularly the UK.

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With the greatest of respect, this is the reddest of red herrings.

Over here (Asia), they may churn out 'graduates' by the million, but the quality of these graduates (even by falling Western standards) is laughable. A great many qualifications are bought, or students cannot be failed, due to connections or fear. Many graduates have not got the first idea of the subject they graduated in. They will, no doubt, be from an influential family though. On a wider scale, due to the Asian tradition of 'face', failure is rarely broached and achievement is automatic.

The very best that these legions of 'graduates' over here will be doing is copying innovation from the West, particularly the UK.

Eh? What innovation are you referring to? Financial innovation?

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There are still some outstanding instances of British inventiveness, for example:

http://www.torotrak.com/

Hey, don't get me wrong. Britain has Cambridge and Oxford. But after that, we start to drift off.

Where do you see the knowledge industry in a decade or two? Most of our great universities are on the ropes financially, and are only really selling the top educations to foreign interests.

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Down the ASDA, the Electricals "boutique" has finished de-stocking anything over the £100-ish price-point with one final flurry of £300 flat-screen discounting.

Bog rolls back down to 25p per after reaching an eye-watering 34p in late Winter.

... takes stones the size of Uluru to bet against Wally's treasury dept, in my view...

Where's The One Who Knows* when you need 'im...

* SNACR

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... but addressing the OP, the recovereh will start just as soon as new sources of demand are found.

... which in this instance means that prices have to chase consumers all the way to China (demand substitution is all very well and good, but there's just not too many alternate uses a poorly-made George range of 50p wooden spoons can be put to now are there - without invoking the ghost of TEOTWAWKI's past, that is).

(Economic) rents haven't really started falling with a vengeance yet - but they will (hey, have you seen the labour stats?); once they do, yields will fall, too (destroying today's fiction of anticipating windfalls from the "I can't believe it's not a fundamentally sound PE ratio" dimension); then finally with low enough prices and reasonable yields (both from the POV of future consumption and future production) we can work out what else we can do with the next shipment of single-use organic kitchenwear - and your snifter of recovereh sir, will be served in the drawing-room adjacent.

Edited by ParticleMan

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Hey, don't get me wrong. Britain has Cambridge and Oxford. But after that, we start to drift off.

Where do you see the knowledge industry in a decade or two? Most of our great universities are on the ropes financially, and are only really selling the top educations to foreign interests.

Overall I am extremely pessimistic for the UK over the short and medium term. I just wanted to flag that our inventiveness has not (yet?) been fully crushed.

Assets within some parts of the "knowledge economy", if well protected by patents and copyrights, could become significant sources of income for genuinely innovative UK companies (such as Torotrak).

However, I fear that the totality of such successes will be very limited within the overall world economy.

Specifically, the mass selling of UK education/degrees has a shelf life of something like one decade before we are overwhelmed in this field by more energetic and industrious nations with a greater commitment to rigorous science and engineering based degree subjects.

I tend not to speculate too much since there are, as far as I can see, massive but covert global agendas in play that might well change everything.

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business investment

consumer spending - falling take home pay, rising taxes and unemployment. Also equity in home reduced for some.

public sector spending - spending cuts, no stimulus package

Well the original plan was to raise exports but this is a global recession. The plan will be wait until external demand conditions pickup and then try raise exports and I suppose business investment. Domestic demand not sure if it's coming back.

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