When Qe Produces Inflation >10% Then..

[A.steve]

I fail to grasp why people assume high inflation necessarily implies high interest rates.

Hasn't it always?

Was the nonsequitur intentional?

"House prices have always risen in real terms over" - this doesn't imply that they always will.

I question the causal link between increased inflation (by any particular measure) and increased interest rates. Sure, in the past we've had structures in place that have had that effect, but are these structures still in place... or, the weaker suggestion I actually made... can we be certain that such structure will necessarily remain in place?

I see the link between interest rates and high street inflation as being extremely tenuous. The price of goods and services are affected by far wider concerns than domestic monetary policy - and vice-versa.

[Bloo Loo]

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.

i dont see how we can have massive inflation on assets like houses without either much more lending or wage rises.

imported food and fuel...now thats a different story.

interest rates will rise to try and maintain the value of the currency....its what caused the 15% peak interest rate in GC1...they were supporting the pound in the ERM....

[ccc]

Hasn't it always?

Was the nonsequitur intentional?

"House prices have always risen in real terms over" - this doesn't imply that they always will.

I question the causal link between increased inflation (by any particular measure) and increased interest rates. Sure, in the past we've had structures in place that have had that effect, but are these structures still in place... or, the weaker suggestion I actually made... can we be certain that such structure will necessarily remain in place?

I see the link between interest rates and high street inflation as being extremely tenuous. The price of goods and services are affected by far wider concerns than domestic monetary policy - and vice-versa.

I would agree there is the possibilty that rates may be kept low at the same time as inflation rips. However if wage inflation does not take place then it doesnt help those with debt. It actually makes their situation worse.

I do see what you are saying about assuming things proceed as before. However the cental argument for every discussion on this subject makes a similar assumption. Namely that with general inflation we get general wage inflation. There is a possibility that this may not be the case. If so - those individuals with high leverage would be royally raped up the ass.

Pardon my French.

It all comes down to one question. Do you think we are going to see huge inflation in the UK in the next few years. Not talking 10 or 15% here. More like 50, 100% or more.

If not ? Then sit in cash and forget about it. A certain amount of hedging of course could be a plan. Different currencies. PM's etc.. However they are not the answer to everything and taking this route could leave you down compared to sitting in cash. Nobody knows really. That is the issue.

[ccc]

i dont see how we can have massive inflation on assets like houses without either much more lending or wage rises.

imported food and fuel...now thats a different story.

interest rates will rise to try and maintain the value of the currency....its what caused the 15% peak interest rate in GC1...they were supporting the pound in the ERM....

Broon has already stated in very clear terms that he will not target our currency. This was a few months ago. Of course whether he is telling the truth or not is another matter.

[bomberbrown]

Hasn't it always?

Was the nonsequitur intentional?

"House prices have always risen in real terms over" - this doesn't imply that they always will.

I question the causal link between increased inflation (by any particular measure) and increased interest rates. Sure, in the past we've had structures in place that have had that effect, but are these structures still in place... or, the weaker suggestion I actually made... can we be certain that such structure will necessarily remain in place?

I see the link between interest rates and high street inflation as being extremely tenuous. The price of goods and services are affected by far wider concerns than domestic monetary policy - and vice-versa.

I'm finding it hard to understand this reply, English isn't one of my fortés I'm afraid. Shall I rephrase my question?

What's the likely scenario for double digit inflation and borrowing money at a much relatively lower interest rate? Genuine question. I'm implying that high inflation and high interest rates go hand in hand as you will, like a function of one another.

[bomberbrown]

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

I did say it was a possibility, you even highlighted it.

It could happen here, but I don't think even New Labour want to be remembered as the party that trashed the nations currency. The Tories didn't in the early 90's.

Like I said, I hope I am proved right.

[bomberbrown]

Double post

Edited August 17, 2009 by bomberbrown

[Bloo Loo]

Broon has already stated in very clear terms that he will not target our currency. This was a few months ago. Of course whether he is telling the truth or not is another matter.

well he wont have any choice is petrol quadruples and food import costs do the same....

then theres all the sheds selling fridges and stuff that will go out of business as import costs rise...and cars...

everything that is imported would rise...

this is the situation we are in and have been in since 2007. Debt is eroding peoples spending power, and the risk is, if rates have to rise to ensure we can eat...then that same debt is going to kill any green shoots that lower rates might encourage.

indeed, nothing has really changed in the last 5 years.....debt has not been dealt with at all.

[ccc]

well he wont have any choice is petrol quadruples and food import costs do the same....

then theres all the sheds selling fridges and stuff that will go out of business as import costs rise...and cars...

everything that is imported would rise...

this is the situation we are in and have been in since 2007. Debt is eroding peoples spending power, and the risk is, if rates have to rise to ensure we can eat...then that same debt is going to kill any green shoots that lower rates might encourage.

indeed, nothing has really changed in the last 5 years.....debt has not been dealt with at all.

Totally agree. The quite shocking thing is it has been positively encouraged.

[A.steve]

It all comes down to one question. Do you think we are going to see huge inflation in the UK in the next few years. Not talking 10 or 15% here. More like 50, 100% or more.

If not ? Then sit in cash and forget about it.

Personally, I do not expect to see inflation as high as 50-100% in the UK in my lifetime. It is not precluded for any fundamental reason - I simply think its likelihood is very slim. I am expecting higher inflation within the next 10 to 20 years - maybe 20%, but that is a long way off and would need a trigger that, currently, I can't predict.

I think a new government will bring significant change - and I think government finances are key to our immediate future.

I'm finding it hard to understand this reply, English isn't one of my fortés I'm afraid. Shall I rephrase my question?

Sorry... My point was that there is no causal link that requires high interest rates when inflation rises. House price inflation, for example, was resolutely ignored from the perspective of interest rates over the past decade. There is nothing preventing another inflation measure being resolutely ignored in the future. Your reply "Hasn't it always?" focused on a past correlation, while I was commenting about effects that necessarily follow. Any historic correlation doesn't wash from the perspective of constructing a logical argument...

What's the likely scenario for double digit inflation and borrowing money at a much relatively lower interest rate? Genuine question. I'm implying that high inflation and high interest rates go hand in hand as you will, like a function of one another.

That's something of an unknown. It depends if we have a free-market for debt; it depends if banks are held accountable with respect to solvency; it depends if governments engage in non-conventional "stimulus"; it depends - for any individual state - what constitutes policy with respect to foreign investment and the objectives of foreign investors. In short, there are a LOT of variables... and many of them have changed considerably in recent months.

[Bloo Loo]

snip

Sorry... My point was that there is no causal link that requires high interest rates when inflation rises. snip

I think you are correct as far as central bank rates are concerned.

but for lenders, the capital value losses would need a higher rate than inflation to cover costs.

like today, new loans are 5%+ for mortgages, rising as deposits fall and .....base +8%+ for many businesses...

Inflation negative? nah, the bankers live in the real world....they KNOW how much money is losing value.

[fluffy666]

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.

There's a reason I haven't STR'ed. Well, mostly laziness, but this as well.

[IMHAL]

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.

A/S as ever you are totally beyond me - all I see is what is before me and that is a bunch of people trying to cover up their previous mistakes by printing money - trying to suport asset prices that have increased 300%, bailing out insolvent and failed manufaturers, probably at the expense of some good'uns. Bailing out corrupt and fraudulent banks, again, at the expense of some of the reasonably run building societies.

It is pretty clear that the corrupt classes are holding up the ponzi scam they have perpetrated and here we have intelligent people like you using fancy words in effect defending it -

[A.steve]

I think you are correct as far as central bank rates are concerned.

but for lenders, the capital value losses would need a higher rate than inflation to cover costs.

like today, new loans are 5%+ for mortgages, rising as deposits fall and .....base +8%+ for many businesses...

Inflation negative? nah, the bankers live in the real world....they KNOW how much money is losing value.

I don't think that the reason that retail rates exceed central bank rates is inflation - but, rather, the lack of a lower cost competition. Irrespective of real losses, if the best investments yield a positive nominal return, those with cash to invest will do so... sure, direct investment might be objectively preferred... but this won't be an option for all investors.

[getdoon_weebobby]

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.

+1

i agree dont get this at all.

first of all we aint going to get double digit inflation (maybe in the very long term we might)

secondly if we do all you do is every week make sure your in the most competitive instant access savings account

houses will be takinga hammering in real and nominal terms

anyway aint going to happen we are heading for a deflationary lost decade or two

the bond markets will call time on QE before they get anywhere close to causing any kind of inflation.

its game over for the system that relied on inflating away debt year by year.

most on here should be loving what is coming our way yet we are so bloody pesimistic we think well get the hyperinflation scenario and all the property owners mortgaged to the hilt will get let off

it aint going to happen.

its debt payback time

Edited August 17, 2009 by getdoon_weebobby

[A.steve]

It is pretty clear that the corrupt classes are holding up the ponzi scam they have perpetrated and here we have intelligent people like you using fancy words in effect defending it -

I'm not defending anything - I'm trying to be objective about the actual situation. I think there's a lot of dishonesty that needs to be admitted - but it is important that the right accusations are levelled at the right people, just as it is important not to lose sight of reality when something unusual happens.

[Fairies Wear Boots]

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.

I agree with that. Inflation at ten or so percent would mean interest rates at those levels. House prices would have to fall 50 percent from here to make them as affordable as they are now.

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.

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.

I think high inflation means high interest rates. If inflation rears it's ugly head, they will have to deal with it or the gilt market will go on strike, our currency will become worthless and we will be in a right old pickle. They will only get away with having a negative real interest rate for so long.

I would agree there is the possibilty that rates may be kept low at the same time as inflation rips. However if wage inflation does not take place then it doesnt help those with debt. It actually makes their situation worse.

I do see what you are saying about assuming things proceed as before. However the cental argument for every discussion on this subject makes a similar assumption. Namely that with general inflation we get general wage inflation. There is a possibility that this may not be the case. If so - those individuals with high leverage would be royally raped up the ass.

Pardon my French.

It all comes down to one question. Do you think we are going to see huge inflation in the UK in the next few years. Not talking 10 or 15% here. More like 50, 100% or more.

If not ? Then sit in cash and forget about it. A certain amount of hedging of course could be a plan. Different currencies. PM's etc.. However they are not the answer to everything and taking this route could leave you down compared to sitting in cash. Nobody knows really. That is the issue.

I agree, can't see us getting much wage inflation. Wages and asset prices will be going down. You think inflation will start to rip while interest rates are kept low? I worry about this.

I did say it was a possibility, you even highlighted it.

It could happen here, but I don't think even New Labour want to be remembered as the party that trashed the nations currency. The Tories didn't in the early 90's.

Like I said, I hope I am proved right.

Yes. If labour does just go printy printy then they will absolutely nuke the economy and we would be Zimbabwe. Hopefully they have an ounce of sense between them. New government in soon anyhow.

[A.steve]

I think high inflation means high interest rates. If inflation rears it's ugly head, they will have to deal with it or the gilt market will go on strike, our currency will become worthless and we will be in a right old pickle. They will only get away with having a negative real interest rate for so long.

You say that assuming "inflation" can be meaningfully measured. It all depends upon definitions and what sort of inflation metric is of concern to the various demographics.

Another issue surrounds this idea of gilt markets "going on strike" - plausible, yes... but (I'd argue) not inevitable. With respect to currencies becoming "worthless" - I'd like to point out that this is a relative matter... if every country worldwide does something similar, there will be no relative change in currency values.

I accept that conventional wisdom is that inflation likely leads to increased interest rates... I only doubt that this is a foregone conclusion... I think there are other possibilities - though, of course, not necessarily preferable ones.

[IMHAL]

You say that assuming "inflation" can be meaningfully measured. It all depends upon definitions and what sort of inflation metric is of concern to the various demographics.

Another issue surrounds this idea of gilt markets "going on strike" - plausible, yes... but (I'd argue) not inevitable. With respect to currencies becoming "worthless" - I'd like to point out that this is a relative matter... if every country worldwide does something similar, there will be no relative change in currency values.

I accept that conventional wisdom is that inflation likely leads to increased interest rates... I only doubt that this is a foregone conclusion... I think there are other possibilities - though, of course, not necessarily preferable ones.

I see where you are coming from - your just saying keep on the look out because there are numerous ways this could play out.

I agree with that but I suspect that they will want to aim at a solution that brings back equilibrium - this in my mind can only happen thro devaluation, inflation then wage inflation - all without raising IR's too much.

[General Melchett]

Yes. If labour does just go printy printy then they will absolutely nuke the economy and we would be Zimbabwe. Hopefully they have an ounce of sense between them. New government in soon anyhow.

How can I break it to you gently?

They already have gone printy printy......