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When Qe Produces Inflation >10% Then..

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So lets help the poor ol' Bank Of England get ready for the inevitable event.

My starters for 10 are:

- This inflation blip is a one off due to stopping quantative easing - it won't continue according to our fan charts

- Its a temporary inflation hit we had to take as the price to save the banks and the economy from collapsing

- Inflation is a measure of our success that we have won over the forces of deflation (those evil forces again)

- High inflation is preferable to deflation (yawn)

- It was an untested tool but we have learned the lessons (with your money)

- We will now set about normalising this high inflation........... but it will take some time (like forever)

- Wages need to stay steady if we are to combat inflation successfully (that old chestnut)

Any other sad excuses the old lady can use?

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It started in America

It's a global problem

or

10% real inflation, 5% quoted = 5% growth, hurrah we are all saved, green shoots to everybody! <_<

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So lets help the poor ol' Bank Of England get ready for the inevitable event.

My starters for 10 are:

- This inflation blip is a one off due to stopping quantative easing - it won't continue according to our fan charts

- Its a temporary inflation hit we had to take as the price to save the banks and the economy from collapsing

- Inflation is a measure of our success that we have won over the forces of deflation (those evil forces again)

- High inflation is preferable to deflation (yawn)

- It was an untested tool but we have learned the lessons (with your money)

- We will now set about normalising this high inflation........... but it will take some time (like forever)

- Wages need to stay steady if we are to combat inflation successfully (that old chestnut)

Any other sad excuses the old lady can use?

swine flu

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If NuLabour are really lucky this won't happen before the next GE. In that case, they'll blame the tories.

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So lets help the poor ol' Bank Of England get ready for the inevitable event.

My starters for 10 are:

- This inflation blip is a one off due to stopping quantative easing - it won't continue according to our fan charts

- Its a temporary inflation hit we had to take as the price to save the banks and the economy from collapsing

- Inflation is a measure of our success that we have won over the forces of deflation (those evil forces again)

- High inflation is preferable to deflation (yawn)

- It was an untested tool but we have learned the lessons (with your money)

- We will now set about normalising this high inflation........... but it will take some time (like forever)

- Wages need to stay steady if we are to combat inflation successfully (that old chestnut)

Any other sad excuses the old lady can use?

Nobody saw it coming.

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I'm mildly comforted by a comment about interest rates from another poster yesterday.

"Who's going to lend money at 5% when inflation is running at 10%?"

When (not if) inflation kicks off, interest rates are going up or credit will be non-existent. Happy days! <_<

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We`re doing everything we can to help the one remaining hard working family, and the bloke with the part time job at the job centre.

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I expect that infaltion will boost GDP first before it shows up more prevalently as inflation. The GDP deflator will underweight true inflation and will make it look like we are recovering. i.e. it will look great to begin with except people will wonder why they all feel worse and worse off as wages and spending power fails to keep up.

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So lets help the poor ol' Bank Of England get ready for the inevitable event.

I think you'll find that the 'event' you mention is anything but inevitable. QE is odd and it is dangerous - but I don't see inflation (for consumers) being a plausible consequence.

On the contrary, I see the problem being that unless QE is sustained, its overall influence is likely deflationary... because, when the gilts mature, this effectively reverses the process. Furthermore, any stimulus effect is limited to the 'over-valuation' at purchase time (an amount far smaller than the headline figure...) and the positive influence of that will be minimal - and probably entirely eclipsed by emerging capital losses at banks that dwarf the supposed capital gains made on gilts. In fact, if we consider QE as borrowing against future coupons, we see that any 'gain' is, in fact, illusionary... an accounting trick to facilitate large capital losses without forcing insolvency.

The danger, as I see it, is twofold - first, the BoE might make an error of judgement in establishing prices that it will pay - and that cost must be borne by the taxpayer, and - considering the size of the transactions - a small error could result in a big loss. Second, QE undermines market pricing of government debt - the consequences of which are unknown. Perhaps the government will be facilitated to borrow huge sums; perhaps investors (deprived of free market valuation) will steer clear of future issues - and precipitate an unprecedented funding crisis. It is difficult to say, all we really know is that we're in uncharted territory.

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I think you'll find that the 'event' you mention is anything but inevitable. QE is odd and it is dangerous - but I don't see inflation (for consumers) being a plausible consequence.

On the contrary, I see the problem being that unless QE is sustained, its overall influence is likely deflationary... because, when the gilts mature, this effectively reverses the process. Furthermore, any stimulus effect is limited to the 'over-valuation' at purchase time (an amount far smaller than the headline figure...) and the positive influence of that will be minimal - and probably entirely eclipsed by emerging capital losses at banks that dwarf the supposed capital gains made on gilts. In fact, if we consider QE as borrowing against future coupons, we see that any 'gain' is, in fact, illusionary... an accounting trick to facilitate large capital losses without forcing insolvency.

The danger, as I see it, is twofold - first, the BoE might make an error of judgement in establishing prices that it will pay - and that cost must be borne by the taxpayer, and - considering the size of the transactions - a small error could result in a big loss. Second, QE undermines market pricing of government debt - the consequences of which are unknown. Perhaps the government will be facilitated to borrow huge sums; perhaps investors (deprived of free market valuation) will steer clear of future issues - and precipitate an unprecedented funding crisis. It is difficult to say, all we really know is that we're in uncharted territory.

+1

Not a chance of this government or this governor even (of BoE) having to deal with this problem of double digit inflation rates

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I'm mildly comforted by a comment about interest rates from another poster yesterday.

"Who's going to lend money at 5% when inflation is running at 10%?"

When (not if) inflation kicks off, interest rates are going up or credit will be non-existent. Happy days! <_<

Credit non existent and sky high inflation.

In weimar "germany starved with full barns."

http://www.spiegel.de/international/german...41758-2,00.html

People lived in a strange kind of tension. On the one hand there was the daily fight for survival, for food, and for heating fuel. "If we more-or-less manage to prevent the city of Cologne from collapsing completely, I shall get down on my knees and thank my Maker," the city's mayor, Konrad Adenauer, said.

Bizarrely enough, goods were no longer in short supply. There was simply no stable currency to buy them with. As the later Chancellor Hans Luther noted in 1923, Germany threatened to "starve with full barns."

...................

The stupid ones were those who had nest eggs: the thrifty, holders of government bonds, but primarily the country's pensioners. In other words, those who received money without having to work for it, who lived on their pensions or the interest on their savings. Large sections of the middle classes saw themselves stripped of their assets, losing almost everything they had set aside for years. Banks, savings banks, and insurance companies suffered huge losses and were left with nothing but their paper money. As a result, they had to start the majority of their businesses from scratch in 1924.

By perverse contrast, the winners of the hyperinflation were those with massive debts; first and foremost the state, but also private individuals who had borrowed money to buy houses, construction land or farmland, and whose loans were slashed by the switch to the rentenmark.

Read it and weep.

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snip

By perverse contrast, the winners of the hyperinflation were those with massive debts; first and foremost the state, but also private individuals who had borrowed money to buy houses, construction land or farmland, and whose loans were slashed by the switch to the rentenmark.

Read it and weep.

I think you'll find that those that benefitted were those that were scapegoated and shipped to camps.

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First of all, they'll present a fan chart which presents 80% of possibilities 'going forward'.

This will prove to be inaccurate.

So they'll quickly remind us that forecasting is very difficult during a recession and proceed to churn out another completely misleading fan chart.

Edited by gruffydd

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I fail to see the understanding of many on this site when it comes to high inflation/house prices.

IMO the only reason to buy a house as a hedge is in case of very high/hyper inflation. 50% plus per year etc...

If inflation is at 10% or so ? Only going to put more downwards pressure on housing and your savings may be getting 8% interest or so.

I just don't get all this hedging chat. UNLESS we get a proper Weimar type event. It is possible. However I am not worrying too much about it. If that happens we will all be ******ed.

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So they'll quickly remind us that forecasting is very difficult during a recession and proceed to churn out another completely misleading fan chart.

The fan charts are wonderful - the bit I like most is the colour coding. There are various shades of colour and blank page... the blank page - if you read the key (and about which questions were asked by a member of the press recently-ish) you discover that a 10% chance is attributed to the empty page. This means that the fan charts can never be 'wrong' - only that events thst transpire were assumed less or more likely. It isn't so much a forecast as a working hypothesis.

If inflation is at 10% or so ? Only going to put more downwards pressure on housing and your savings may be getting 8% interest or so.

I fail to grasp why people assume high inflation necessarily implies high interest rates. One doesn't necessarily follow from the other - or vice versa... especially if we pick particular models of inflation and/or interest rates for particular borrowers/savers.

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By perverse contrast, the winners of the hyperinflation were those with massive debts; first and foremost the state, but also private individuals who had borrowed money to buy houses, construction land or farmland, and whose loans were slashed by the switch to the rentenmark.

I thought the ultimate winner was a certain A Hitler.

He did very well out of it.

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I fail to see the understanding of many on this site when it comes to high inflation/house prices.

IMO the only reason to buy a house as a hedge is in case of very high/hyper inflation. 50% plus per year etc...

If inflation is at 10% or so ? Only going to put more downwards pressure on housing and your savings may be getting 8% interest or so.

I just don't get all this hedging chat. UNLESS we get a proper Weimar type event. It is possible. However I am not worrying too much about it. If that happens we will all be ******ed.

Agreed, if I was sitting on a massive STR fund I might feel differently but with my poxy savings (<30k) I'm not going to be rushing out to buy yet. As it's all very well saying the inflation errodes the debt but if you lose your job the bank takes the house and you are back to square one but either in a lot of debt or bankrupt.

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I thought the ultimate winner was a certain A Hitler.

He did very well out of it.

Although I dont think he got to retire quitely to his (mountain top) bungalow and draw his pension.

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I fail to grasp why people assume high inflation necessarily implies high interest rates. One doesn't necessarily follow from the other - or vice versa... especially if we pick particular models of inflation and/or interest rates for particular borrowers/savers.

Hasn't it always?

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Although I dont think he got to retire quitely to his (mountain top) bungalow and draw his pension.

Failed to listen to his own advice about never fighting a war on two fronts.

Unless of course the Argentina rumours where true.

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I don't subscribe to the possibility of hyperinflation. I hope I am proved right.

Hyperinflation has happened before in other countries - why can't it happen here? Surely it is at least a possibility?

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I fail to see the understanding of many on this site when it comes to high inflation/house prices.

IMO the only reason to buy a house as a hedge is in case of very high/hyper inflation. 50% plus per year etc...

If inflation is at 10% or so ? Only going to put more downwards pressure on housing and your savings may be getting 8% interest or so.

I just don't get all this hedging chat. UNLESS we get a proper Weimar type event. It is possible. However I am not worrying too much about it. If that happens we will all be ******ed.

If you're in the house you plan to remain in for many years and have a long term fixed rate then high inflation and consequently interest rates would do you very nicely, you continue to pay a low fixed rate while your savings and wages increase by more, allowing you to pay the mortgage off quicker.

Having ambitions of moving up the housing ladder or no fixed rate mortgage then I agree.

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