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Timm

Why I Welcome The Recovereh

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About 3% of the money supply is notes and coins. 97% of day to day transactions use commercial bank money, which is based on debt. Partly due to lax lending, not all of this debt will perform. For every penny of debt that is not paid back, a corresponding amount of money needs to be destroyed. Banks can handle small amounts of this, their shareholders a bit more, the holders of other assets some more. But if the losses are too great, then the banks fall over and everyone finds out their money has gone. This money destruction is the real, red toothed deflationary beast that explains why the authorities are so afraid of it. I think that with the situation end 2008, we were almost at that point.

So, if the losses are there, what to do? In theory, Govt can print to fill the hole, but this is tricky as they are printing the wrong sort of money and printing too much or too little is almost certain. (Many would say printing any is too much, others say it should all be printed, free of debt).

Part of the answer has to be to allow the cash rich to eat more of the losses. But few savers will be happy if they go to the bank and can only withdraw pennies in the pound. If however, they can be enticed into assets that can fall in value as well as rise, then they cannot complain if they lose out. Ideally, when they invest they should also be bailing out an over-leveraged borrower. This is what I see happening in the housing market at the moment. The cash rich are being encouraged to invest their money where it can be lost. At the same time, the banks are ridding themselves of potential bad debts. OK, not every sale is a cash buyer paying off a 100% mortgage, but with average mortgages running at £91,976 last month, it is clear there is a lot of money flowing into this hole.

So, what I see, when I look at the UK housing market every month, with 25% deposits, cash buyers, low mortgage advances, and the steady flow of green shoots propaganda and low interest rates driving money from savings to houses, I just see a few more percentage points that the market can ultimately fall without destroying the whole system.

Make no mistake, house prices will fall. How can they do anything else, when unemployment is rising at record rates, interest rates have nowhere to go but up, there is a pent up dam of supply and rental prices are falling, people are facing higher prices for basic goods and fuel and the days of securitisation funded loose credit are gone? So don't fight the recovery, just see it as the deleveraging process that it is, and welcome the possibility that we might get a HPC without financial armageddon after all.

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I think you have fallen for the spin.

It's not tricky at all to prevent deflation or inflation, if you have the political will to stand up to the vested interests.

It won't happen though, because banks like to make lots of money (literally) providing our means of exchange, and bankers own the politicians.

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I think you have fallen for the spin.

It's not tricky at all to prevent deflation or inflation, if you have the political will to stand up to the vested interests.

It won't happen though, because banks like to make lots of money (literally) providing our means of exchange, and bankers own the politicians.

I agree it is spin, I'm just saying why it is needed.

Deflation is what the system needs, after the massive credit inflation we have experienced. Deflation by deleverage though is less destructive.

If we allow default based deflation, the banks go pop. They don't want that.

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We need a debt for equity swap.

Every saver takes a potential haircut. It's only money they received from the debt binge anyway.

I can say that because I frequent a solvent banking system :P

Edited by Alan B'Stard MP

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We need a debt for equity swap.

Every saver takes a potential haircut. It's only money they received from the debt binge anyway.

I can say that because I frequent a solvent banking system :P

That is not so different, just more visible and less politically sellable.

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That is not so different, just more visible and less politically sellable.

Fairer if the people who have benefited from the binge - get asked to give up their gains. Better than J2P taxpayer.

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Fairer if the people who have benefited from the binge - get asked to give up their gains. Better than J2P taxpayer.

That is what I'm saying is happening. A cash rich buyer bails out an overleveraged borrower, property falls some more. Result: The cash rich buyer has a lower paper worth, the former borrower escapes. Any current owners who don't sell, also have to give up some of their gains of course.

And whether you agree it is deliberate, or is the best solution, it is what is happening.

PS: J2P: Joe two pack? Sounds like deflation...

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Very interesting way of looking at the situation.

Also rather cheering for us cash-rich types who have no intention of buying houses in the near future.

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Part of the answer has to be to allow the cash rich to eat more of the losses

Don't you mean the asset rich? Let asset prices deflate! Of course, then the banks would go bankrupt... better that than risk the currency and then the wrath of of the population [Govt should guarantee deposits not banks].

If they had let a deflation run its course it would have involved something of a restoration and would have also been good for the moral character of the nation. :)

But sadly it seems the politicians had been corrupted by the worse elements.

Edited by roman holiday

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Don't you mean the asset rich? Lets asset prices deflate. Of course, then the banks would go bankrupt... better that than risk the currency and then the wrath of of the population.

No.

I'm suggesting that the asset rich will experience the losses, and that those with spare capital are being encouraged to aquire these assets, after which it will be them who take the hit.

edit: to bold bit of quote I was replying to.

If they had let a deflation run its course it would have involved something of a restoration and would have also been good for the moral character of the nation. :)

But sadly it seems the politicians had been corrupted by the worse elements.

I don't really disagree, but IMHO it would have been very much more messy.

Edited by Timm

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I agree it is spin, I'm just saying why it is needed.

Deflation is what the system needs, after the massive credit inflation we have experienced. Deflation by deleverage though is less destructive.

If we allow default based deflation, the banks go pop. They don't want that.

Deflation is the natural economic cycle, the economic system are like lungs they cannot expand forever. Perpetual growth is not possible.

The trouble is growth is seen as popular and good so no one wants the economy to deflate especially if you have leverage.

Huge debt in deflation is a killer, ultimately in a boom no one should have anything greater than 1x earnings leverage, maybe even less so if deflation comes it's not a killer.

Again things like this are never factored into the economic models.

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No.

I'm suggesting that the asset rich will experience the losses, and that those with spare capital are being encouraged to aquire these assets, after which it will be them who take the hit.

edit: to bold bit of quote I was replying to.

Oh right, I got it now. But those with cash surely aren't that gullible... are they? I mean they must have a few smarts to have some cash to begin with...... Even so, if the cash rich could be so induced, it will not stave of the deflation but just at best delay it by a quarter of two.

I don't really disagree, but IMHO it would have been very much more messy.

Messy, painful sure! Payback time for a decadent economy. But the misguided attempt to fix asset prices is not only doomed to failure but risks a much messier situation than one if assets had been allowed to have deflated in the first place. The blind gamble to reflate risks the currency, which could buckle under pressure. If the UK is lucky it will get a generation of stagnation, if not.....

Edited by roman holiday

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Deflation is the natural economic cycle, the economic system are like lungs they cannot expand forever. Perpetual growth is not possible.

The trouble is growth is seen as popular and good so no one wants the economy to deflate especially if you have leverage.

Huge debt in deflation is a killer, ultimately in a boom no one should have anything greater than 1x earnings leverage, maybe even less so if deflation comes it's not a killer.

Again things like this are never factored into the economic models.

I agree with everything you say.

What I am trying to get across is that there are two main routes to deflation -

1. A default led deflation, where loans go bad and deposits go pop, often suddenly and violently.

2. A deflation led by a process of deleveraging, which is a more gradual unwinding of past expansion.

Both are generally seen as undesirable (except here and in the Austrian school), but I would argue that whatever your view of the desirability of a deflationary period, the second type is more manageable and less destructive, both on the personal and the systemic level.

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Oh right, I got it now. But those with cash surely aren't that gullible... are they? I mean they must have a few smarts to have some cash to begin with...... Even so, if the cash rich could be so induced, it will not stave of the deflation but just at best delay it by a quarter of two.

But they are doing so. The number of sales is still rising, and it's funded by the cash rich, not 100% loans. And I agree, it does not stop deflation, but not only does it delay it, it makes the results less painfull.

Messy, painful sure! Payback time for a decadent economy. But the misguided attempt to fix asset prices is not only doomed to failure but risks a much messier situation than where assets were allowed to deflate; one where the currency itself could buckle under the pressure. If the UK is lucky it will get a generation of stagnation, if not.....

Yes, exactly.

I think the talking up of prices is not expected to support them permanently, just long enough to suck in some money to cushion the falls. Witness both Rightmove and the dark lord talking about double dip recessions recently.

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I agree with everything you say.

What I am trying to get across is that there are two main routes to deflation -

1. A default led deflation, where loans go bad and deposits go pop, often suddenly and violently.

2. A deflation led by a process of deleveraging, which is a more gradual unwinding of past expansion.

Both are generally seen as undesirable (except here and in the Austrian school), but I would argue that whatever your view of the desirability of a deflationary period, the second type is more manageable and less destructive, both on the personal and the systemic level.

I would agree that 2 is maybe what our central banker friends are aiming for, excluding of course conspiracy theories.

However I'm not sure 2 can be achieved, for me if they where pursuing 2 they needed to ensure repayment of loans happened at a faster rate. This hasn't been done as there is no central bank policy on this matter.

Which for me indicates we'll end up with option 1 whether we like it or not.

There is also the problem that a gradual deleveraging isn't possible because at some point you reach a tipping point which triggers option 1. Japan has probably been stuck in option 2 for 20 years or so and still hasn't reached bottom and could possible be on brink of the tipping point of achieving option 1 even though that wasn't the aim.

Edited by interestrateripoff

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1. A default led deflation, where loans go bad and deposits go pop, often suddenly and violently.

2. A deflation led by a process of deleveraging, which is a more gradual unwinding of past expansion.

or

3. A default led deflation, where loans go bad and banks go pop, but the government guarantees deposits.

Edited by roman holiday

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I would agree that 2 is maybe what our central banker friends are aiming for, excluding of course conspiracy theories.

However I'm not sure 2 can be achieved, for me if they where pursuing 2 they needed to ensure repayment of loans happened at a faster rate. This hasn't been done as there is no central bank policy on this matter.

Which for me indicates we'll end up with option 1 whether we like it or not.

There is also the problem that a gradual deleveraging isn't possible because at some point you reach a tipping point which triggers option 1. Japan has probably been stuck in option 2 for 20 years or so and still hasn't reached bottom and could possible be on brink of the tipping point of achieving option 1 even though that wasn't the aim.

Yes, this is the hole in my theory. There must be some FTBs on 75% mortgages buying from unmortgaged sellers after all...

Am I right in thinking that net mortgage lending (excluding repayments) is still positive, but getting nearer and nearer negative territory? If this goes negative, then we will be seeing exactly what I describe. The funny thing is, the longer this bull trap continues, the greater the likelyhood (and magnitude) will be.

or

3. A default led deflation, where loans go bad and banks go pop, but the government guarantees deposits.

Yes indeed.

Then the hyper-inflationists are right.

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Yes indeed.

Then the hyper-inflationists are right.

I do not see how hyper-inflation follows from the guarantee of only deposits.... which would most probably entail the nationalization of the banks would it not?

Edited by roman holiday

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I do not see how hyper-inflation follows from the guarantee of only deposits.

The guarantee would not cause it, but if all the banks went bust and the government printed enough money to honour all deposits, then there would be about 33x as much currency in the system as before.

Personally, I don't think that will happen.

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The guarantee would not cause it, but if all the banks went bust and the government printed enough money to honour all deposits, then there would be about 33x as much currency in the system as before.

Personally, I don't think that will happen.

Nationalize the banks!

The money does not have to be literally printed. Hyper-inflation is never going to happen when money is scarce in a deflationary environment... though the currency will most probably devalue against stronger ones on the fx market.

I think they might still have to nationalize the banks in the end.

Edited by roman holiday

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Nationalize the banks! I think they might still have to do this in the end.

I would not disagree.

Though I do think state banks would be as bad or worse.

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The money does not have to be literally printed. Hyper-inflation is never going to happen when money is scarce in a deflationary environment... though the currency will most probably devalue against stronger ones on the fx market.

Ahh, you want to swap a promise for a promise. It might work.

Or it might lead to total and utter collapse of the entire country.

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Ahh, you want to swap a promise for a promise. It might work.

Or it might lead to total and utter collapse of the entire country.

I do not see much danger in people losing confidence in the currency. The reality is people are lining up to buy government debt at the moment and continue to trust government [don't ask me why, maybe it is just a deeply engrained habit]. Terrible though it may seem, US treasuries look to be in a bull market though some argue it is a bubble. Of course, it is natural for the currency to strengthen as an economy deflates and deleverages. There could be a "natural" justice unfolding here where decadent economies might possibly end up being "crucified" on a relatively strong currency though it may eventually weaken.

In a deflation there is a flight to the safest and most liquid assets which are [perceived to be] backed by government. I can not see how nationalization of the banks would lead to a collapse.... rather it might be the only thing to prevent it.

Edited by roman holiday

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I do not see much danger in people losing confidence in the currency. The reality is people are lining up to buy government debt at the moment and continue to trust government [don't ask me why, maybe it is just a deeply engrained habit]. In a deflation there is a flight to the safest and most liquid assets which are [perceived to be] backed by government. I can not see how nationalization of the banks would lead to a collapse.... rather it might be the only thing to prevent it.

Fair enough.

I'm not a hyper-inflationist either.

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