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Blanchflower: Inflation Could Revive Britain's Economy

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Guardian: Inflation could revive Britain's economy

David Blanchflower

Tuesday 16 November 2010 21.30 GMT

Blanchflower

The news from the UK housing market is looking increasingly gloomy. Measures of housing activity are down. Prices have started to fall again and it looks like they are going to nosedive. Sorry to be the harbinger of bad news.

The coalition government's austerity package of cuts and tax rises has decimated consumer confidence. It hasn't helped that ministers have talked the economy down, which has scared people. It's no time to buy a house if you think you might lose your job. Wage growth is anaemic across all sectors. Presumably, if large numbers of workers are fired in a town, that would be bad for local house prices. And credit availability is down. Over-exuberance in lending has been replaced by under-exuberance. None of this looks good for house prices.

According to the property website Rightmove, asking prices this week recorded their biggest monthly fall in three years. New sellers cut their prices by 3.2% in November. Nine out of 10 regions in England and Wales experienced falling prices. The Royal Institution of Chartered Surveyors housing market measure for November fell to an 18-month low. A recent survey by the Home Builders Federation found that the number of deposits on new homes and of site visits have dropped sharply.

The Nationwide House Price Index fell in October to the lowest level in eight months, and is 11% below the peak reached in 2007. The Halifax index shows prices are down 17% from 2007.

The house price to earnings ratio, which is the best measure of affordability, using the Halifax data, stands at 4.5, down from a high of 5.8 in July 2007. As wages rise in an area, this tends to push up house prices; banker's bonuses in the City push up prices in surrounding areas. The average of this series was 3.6 from 1983-2002, before the surge in prices. So for house prices to return to their long-term average, they have approximately 20% to fall.

In most recessions homeowners struggle because interest rates rise and this is devastating for those on variable rate/tracker mortgages, whose payments rise. This time interest rates have remained low, but when rates rise that would change fast in the recovery – and then prices would inevitably fall.

Cutting housing benefits, as the coalition government is proposing, could potentially lower rental prices, which in turn could also lower house prices. If house prices were to fall by another 20% that would leave about 4m households in negative equity – and an average of £100,000 a person would not seem a crazy estimate of the average per capita loss. In the US, homeowners are not responsible for such losses and can resort to what is called jingle mail. They put the keys to the house in an envelope and post them to the bank. The federal government has had to step in to rescue the banks with all these bum loans.

In the UK there is no jingle mail, and the mortgage holder is responsible for any loss if they default. To minimise disruption in the short-term, many banks would probably renegotiate loans to interest payments only. But that is not a permanent fix. Homeowners with negative equity would find it difficult to move, so the mobility of the UK's labour force would fall and unemployment would rise. This would give opportunities to workers from the EU accession countries, who are highly mobile.

One possibility would be for the Bank of England to step in and buy mortgage-backed securities to the tune of £400bn (4m loans of £100,000). This is the basis for the idea from Danny Gabay of Fathom Consulting that the government set up a bank to purchase the mortgages of these "zombie households".

But there is a better way – five or six years of 5% inflation does the job nicely. That way we get to inflate our debt away and we don't have to go through all this austerity nonsense. In the long run, interest rates need to rise back to some normal level – say 4% – so that when the next shock comes the Bank of England can cut rates. For now, interest rates have to stay at 1% or lower until at least 2015, which hopefully will create some inflation. And more quantitative easing would help, as that adds more stimulus to the economy – which is positive for house prices.

TodayYesterday's data release of 3.2% for the consumer price index overstates inflation: if VAT increases are stripped out, the rate is 1.4% and it still excludes house prices, which would lower inflation further. Eventually, rates can rise, but not for ages. Inflation good, unemployment bad. Inflation looks like the homeowner's saviour. All the other alternatives look worse.

Cretin.

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When these guys say 'quantitative easing works' they mean it worked in Germany.

They have remit to stop deflation, that is it.

They dont care if a tin of beans costs a weeks wages, they dont care if you starve, they dont care if you freeze or if millions die or if the wealth gap widens further.

All they care about is if they stop deflation, they can give themselves a pat on the back and say 'we did it'. That is all. They dont have emotions or empathy.

In a sane world they would face the firing squad, in our world they are treated like gods by the media and geniuses by the political establishment.

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If house prices were to fall by another 20% that would leave about 4m households in negative equity – and an average of £100,000 a person would not seem a crazy estimate of the average per capita loss.

So, lets assume the scenario that limits the stupidity of his absurb assertions: the average person the esteemed Mr B speaks of is currently on a knife edge and has neither equity nor negative equity.

If a a 20% fall brings about an average £100k negative equity, then surely the logical extension of his ramblings is that the 4million he worries about have a £500k house and mortgage!

Someone give him his medication, i think he's overdue!

Edited by Caveat Mortgagor

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But there is a better way – five or six years of 5% inflation does the job nicely. That way we get to inflate our debt away and we don't have to go through all this austerity nonsense. In the long run, interest rates need to rise back to some normal level – say 4% – so that when the next shock comes the Bank of England can cut rates. For now, interest rates have to stay at 1% or lower until at least 2015, which hopefully will create some inflation. And more quantitative easing would help, as that adds more stimulus to the economy – which is positive for house prices.

So we borrow ourselves up to the nuts to buy over-priced property at low IRs now, then come 2015 when base rates shoot up to 4% we just pray that wage inflation has caught up to bail us out of our predicament. Oh, and more QE just to pump things up a bit more.

House prices must stay high at all costs.

What a twunt.

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When these guys say 'quantitative easing works' they mean it worked in Germany.

They have remit to stop deflation, that is it.

They dont care if a tin of beans costs a weeks wages, they dont care if you starve, they dont care if you freeze or if millions die or if the wealth gap widens further.

All they care about is if they stop deflation, they can give themselves a pat on the back and say 'we did it'. That is all. They dont have emotions or empathy.

In a sane world they would face the firing squad, in our world they are treated like gods by the media and geniuses by the political establishment.

It's out of our hands , all you can do is keep buying gold and silver.

Physical , not that paper crap.

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Regardless of your assessment of his intellect - moderate inflation is what is going to happen.

Define moderate and has anyone inflated their way out of trouble in the long term and created a viable sustainable future?

Do you honestly believe the cretins we have at the worlds central banks can keep inflation moderate?

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So we borrow ourselves up to the nuts to buy over-priced property at low IRs now, then come 2015 when base rates shoot up to 4% we just pray that wage inflation has caught up to bail us out of our predicament. Oh, and more QE just to pump things up a bit more.

House prices must stay high at all costs.

What a twunt.

He thinks its the 70s , unfortunately its not, the popn demographics and personal rather than Govt debt levels this time are going to lead to a very different outcome to the 70s, In fact it was the complete failure of polices in answer to the 70s (Go on a 30 year credit binge) that are the reason for these current peak debt levels and ongoing credit collapse.

I find it funny that the guy has some sort of qualification in social studies (i dont think hes an economist) yet he seems to have no understanding of human behaviour in the slightest

Edited by Tamara De Lempicka

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If house prices were to fall by another 20% that would leave about 4m households in negative equity – and an average of £100,000 a person would not seem a crazy estimate of the average per capita loss.

So, lets assume the scenario that limits the stupidity of his absurb assertions: the average person the esteemed Mr B speaks of is currently on a knife edge and has neither equity nor negative equity.

If a a 20% fall brings about an average £100k negative equity, then surely the logical extension of his ramblings is that the 4million he worries about have a £500k house and mortgage!

Someone give him his medication, i think he's overdue!

Per capita... so he's talking more like a cool million.

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He thinks its the 70s , unfortunately its not, the popn demographics and personal rather than Govt debt levels this time are going to lead to a very different outcome to the 70s, In fact it was the complete failure of polices in answer to the 70s (Go on a credit binge) that are the reason for these current peak debt levels and ongoing credit collapse.

I find it funny that the guy has some sort of qualification in social studies (i dont think hes an economist) yet he seems to have no understanding of human behaviour in the slightest

Typical Socialist ;).

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Has he thought this through to it's conclusion?

Goodbye pension, hello renting for most of the population (incl IO switchers), bye bye car, hello ten to a room, houses at £1mn.

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Well has anybody got a better plan?

Forget fair or unfair for a minute and all this moral hazard how do we get out of this mess?

Do you think that all the people that are already up to there necks in debt should borrow more money to drive the economy?

Or do you think that the savers will have to take over that job?

I can see the anger on peoples faces before I press the reply button But I can't see an alternative plan.

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Well has anybody got a better plan?

Forget fair or unfair for a minute and all this moral hazard how do we get out of this mess?

...

I can see the anger on peoples faces before I press the reply button But I can't see an alternative plan.

You are David Blanchflower and I claim my £5 <_<

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Well has anybody got a better plan?

Forget fair or unfair for a minute and all this moral hazard how do we get out of this mess?

Do you think that all the people that are already up to there necks in debt should borrow more money to drive the economy?

Or do you think that the savers will have to take over that job?

I can see the anger on peoples faces before I press the reply button But I can't see an alternative plan.

How about a nice healthy dose of deflation? It will reduce prices to levels that people can afford relative to incomes and wipe out a lot of malinvestment. Remaining capital will be able to earn better returns.

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You are David Blanchflower and I claim my £5 <_<

Just because my wife left me for another women It don't mean I'm David Blanchflower :lol:

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Well has anybody got a better plan?

Forget fair or unfair for a minute and all this moral hazard how do we get out of this mess?

Do you think that all the people that are already up to there necks in debt should borrow more money to drive the economy?

Or do you think that the savers will have to take over that job?

I can see the anger on peoples faces before I press the reply button But I can't see an alternative plan.

yes, default the bad debt, let the risk takers eat air, and let wealth pay off the rest.

Blanchflower is only interested in GDP....clearly he has no idea that government borrowing to keep GDP up is a drain on wealth, but...the figures look good.

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Well has anybody got a better plan?

Forget fair or unfair for a minute and all this moral hazard how do we get out of this mess?

Do you think that all the people that are already up to there necks in debt should borrow more money to drive the economy?

Or do you think that the savers will have to take over that job?

I can see the anger on peoples faces before I press the reply button But I can't see an alternative plan.

There is no solution other than a credit/debt collapse, its not even a suggestion , its what is happening and will continue to happen until the debts have been defaulted to such a level that people start spending at such a level to create velocity, at which point you will get a mega inflationary crack up boom. QE may generate inflation leading to even more defaults but until they start helicoptering and giving the actual money to the indebted his suggestion itnt a plan, it wont work because it wont continue to create neccesary inflation, every inflationary measure adds greater deflationary pressure. As i stated before he thinks its the 70s, its not, there is a fundamental problem that they cannot inflate credit, people dont want it psychologically and banks cant give it, that will remain the case because of natural behaviour until enough default happens.

The solution was to rebalance in the 80s, then in the early noughties (neither opportunity was taken and we just expanded credit over the whole period to hide it) now it is impossible to reboom due to credit saturation amongst the population who are the only ones able to create the neccessary velocity for continued inflation and inverted popn demographics and uncompetitive industry create more deflationary pressure still.

His solution is not an issue because its basically been being done for decades already and now its saturated, what he wants simply cannot happen with the current imbalances as far as i read it

Edited by Tamara De Lempicka

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But there is a better way – five or six years of 5% inflation does the job nicely. That way we get to inflate our debt away and we don't have to go through all this austerity nonsense.

This guy isn't an economist, he's a cowboy. The major stumbling block for the economy is the crippling level of debt, instead of dealing with this unpleasant fact head on via hard work or default instead his answer is to crank up inflation at 5% pa.

Talk about papering over the cracks.

Edited by Chef

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Well has anybody got a better plan?

Forget fair or unfair for a minute and all this moral hazard how do we get out of this mess?

Do you think that all the people that are already up to there necks in debt should borrow more money to drive the economy?

Or do you think that the savers will have to take over that job?

I can see the anger on peoples faces before I press the reply button But I can't see an alternative plan.

You didn't press the 'reply' button as you didn't quote somebody. You pressed 'add reply' and then pressed it again.

p.s - Please excuse the somewhat sarcastic post. However, you're meant to think deeper than that and conclude, that like most economists, I don't have any idea of the answer to your question so I posted something irrelevant but accurate.

Edited by hedgefunded

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yes, default the bad debt, let the risk takers eat air, and let wealth pay off the rest.

Blanchflower is only interested in GDP....clearly he has no idea that government borrowing to keep GDP up is a drain on wealth, but...the figures look good.

If the borrowers default wont that just mean the tax payers having to shovel more money into the bank's to prop them up?

And if Mr Jones and family are evicted from their house and Mr Smith and family are moved in instead Isn't that just like deck chairs and titanic.

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If house prices were to fall by another 20% that would leave about 4m households in negative equity – and an average of £100,000 a person would not seem a crazy estimate of the average per capita loss.

Sounds like he's really worried about his portfolio and his buddies portfolios. MPs, BTLers etc with an average property (portfolio) of £1 million.

So economic policy has to revolve around their interests? Again? Inflation again? The inflation that totally devastated the UK economy a few decades ago. Again? Madness.

And house price inflation has destroyed the UK again.

They talk about how Germans are terrified of inflation through their history. UK people have just as much reason to be fearful.

The average house is about £160,000 so 20% of the avarage house price is about £30,000 per household or a loss of about £15,000 "a person" assuming 2 adults per household and assuming joint ownership.

Based on 20% negative equity of a 100% mortgage.

So really his £100,000 estimate is incredible and even crazy and certainly very very misleading but what do people expect from a former member of the BoE and its Monetary Policy Committee.

Edited by billybong

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This guy isn't an economist, he's a cowboy. The major stumbling block for the economy is the crippling level of debt, instead of dealing with this unpleasant fact head on via hard work or default instead his answer is to crank up inflation at 5% pa.

Talk about papering over the cracks.

You mean he's a decorator surely?

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But there is a better way – five or six years of 5% inflation does the job nicely. That way we get to inflate our debt away and we don't have to go through all this austerity nonsense. In the long run, interest rates need to rise back to some normal level – say 4% – so that when the next shock comes the Bank of England can cut rates. For now, interest rates have to stay at 1% or lower until at least 2015, which hopefully will create some inflation. And more quantitative easing would help, as that adds more stimulus to the economy – which is positive for house prices.

That is just so crooked.

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  • 153 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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