Jump to content
House Price Crash Forum
Sign in to follow this  
easy2012

Cityam : Why We Can't Stop Inflation... And Shouldn't Try

Recommended Posts

http://www.citywire.co.uk/money/why-we-cant-stop-inflation-and-shouldnt-try/

Veteran financial commentator Anthony Hilton explains why.

The problem, as Hilton explains, is that we have the wrong kind of inflation. The oil price for example, isn't influenced by UK interest rates.

There's another reason: our public debt. Governments throughout history have dealt with debt by inflating their way out of it, and when the alternatives entail street riots it's not hard to see why.

Even veteran financial 'expert' doesn't understand that printing money by the G4 (UK/EU/US/BoJ) has anything to do with inflation ...

(though his thinking is inline of the thinking of some of the HPCer who think there is nothing that can be done with cost pushed inflation )

So, according to him, the choices are riot or inflation.

Share this post


Link to post
Share on other sites

Haven't read the Hilton article, and I can't be bothered. He is an equity fund manager, and tightening monetary policy will mean less inflows into his funds, so he will be talking his own book.

Regarding raising interest rates having no effect on cost-push inflation from abroad, this is BS. The UK has higher inflation than the EZ or the US, and this is because our currency has fallen dramatically over the past couple of years. If we raise interest rates ahead of the ECB and the Fed, sterling gets stronger and the effects of imported inflation are mitigated.

Raising rates therefore would dampen inflation.

Share this post


Link to post
Share on other sites

Haven't read the Hilton article, and I can't be bothered. He is an equity fund manager, and tightening monetary policy will mean less inflows into his funds, so he will be talking his own book.

Regarding raising interest rates having no effect on cost-push inflation from abroad, this is BS. The UK has higher inflation than the EZ or the US, and this is because our currency has fallen dramatically over the past couple of years. If we raise interest rates ahead of the ECB and the Fed, sterling gets stronger and the effects of imported inflation are mitigated.

Raising rates therefore would dampen inflation.

Only problem would be the destructive effects on manifacturing resulting from Sterling being overvalued, and mass mortgage default due to lots of people being overleveraged.

What we really need is one currency for inside the M25 and another currency for outside the M25..

Share this post


Link to post
Share on other sites

Even veteran financial 'expert' doesn't understand that printing money by the G4 (UK/EU/US/BoJ) has anything to do with inflation ...

(though his thinking is inline of the thinking of some of the HPCer who think there is nothing that can be done with cost pushed inflation )

So, according to him, the choices are riot or inflation.

or the other possibility, which is that he is right and you are wrong.

gotta admit, it is a possibility.

Share this post


Link to post
Share on other sites

The UK has higher inflation than the EZ or the US, and this is because our currency has fallen dramatically over the past couple of years. If we raise interest rates ahead of the ECB and the Fed, sterling gets stronger and the effects of imported inflation are mitigated.

A weak pound is good for rebalancing the economy however. It discourages imports and makes uk producers more competitive at home and abroad. Sorting out Labour's mess is going to be painful however its done but low interest rates, with tight lending criteria and reduced government spending seems the best way to rebuild the economy in a sustainable manner.

Share this post


Link to post
Share on other sites

or the other possibility, which is that he is right and you are wrong.

gotta admit, it is a possibility.

I've a lot of respect for Hilton actually and like reading his articles. He has been very critical of the City and the banks in particular.

I'll read the article but the interweb is broken this morning. Citywire is having server issue's (and even Facebook is down). Ho Hum! wink.gif

Share this post


Link to post
Share on other sites

Would sterling REALLY increase in value when the underlying economy which supports our currency slides into the abyss?

Are international speculators, sorry, investors, going to be piling into sterling just as unemployment starts to snow ball and as tax revenues wither away to nothing?

The inflationary pressures we're experiencing are entirely due to speculators who've lost their mortgage backed merry go round and are now "playing" with commodities. The government are also stoking inflation nicely with fuel duty and VAT increases, train companies and other regulated industries have also been given the Green light to crank up prices.

In the world of SME's inflation isn't an issue..... sure, you'd love to shove through hefty price rises.... right now the economy is so weak and customers are so price sensitive that price increases are suicidal.

Cranking up domestic interest rates to reduce spending and thus damp down demand only works if there is an excess of demand in the economy... in the UK's case we still have massive over capacity, there are still more suppliers than their are customers. It really is hard to see how raising interest rates is going to achieve anything positive.

Share this post


Link to post
Share on other sites

or the other possibility, which is that he is right and you are wrong.

gotta admit, it is a possibility.

too black and white.

both are related, so neither is completley wrong or right.

However, rising prices are Not INFLATION ...They are functions of a market.

Inflation is where an item becomes much more numerous due to either massive supply or a drop in demand.

we have both with the pound. a massive resupply AND lack of demand from overseas.

Share this post


Link to post
Share on other sites

or the other possibility, which is that he is right and you are wrong.

gotta admit, it is a possibility.

There is no question that inflation can be controlled if wanted - it is always about the price / consequences of doing that and who win/who loose.

I presumed he will agree that if we raise rate to 10% and stop deficit spending and inflation/imported inflation will be quashed (if not outright deflation) - though the price is probably too high. (not advocating 10% rate....)

Edited by easybetman

Share this post


Link to post
Share on other sites

A weak pound is good for rebalancing the economy however. It discourages imports and makes uk producers more competitive at home and abroad. Sorting out Labour's mess is going to be painful however its done but low interest rates, with tight lending criteria and reduced government spending seems the best way to rebuild the economy in a sustainable manner.

Something ain't working then. That's more than 2yrs since the govt devalued Sterling. At one point almost reaching parity with the euro. I believe the trade gap last month was still massive. One of the largest in recent times?

The UK consumer is still buying Chinese tat by the shipload. :ph34r:

Share this post


Link to post
Share on other sites

I've never got my head around this idea of inflating debt away. Why does it work more than once? Presumably if you inflate debt away you've simply defaulted on most of it in a roundabout means - the lender has lost out. Why would you lend money knowing there's a good chance that inflation will go up quicker than the interest?

Share this post


Link to post
Share on other sites

I've never got my head around this idea of inflating debt away. Why does it work more than once? Presumably if you inflate debt away you've simply defaulted on most of it in a roundabout means - the lender has lost out. Why would you lend money knowing there's a good chance that inflation will go up quicker than the interest?

because it doesnt work. specially not for those that constantly need to borrow to meet a shortfall.

Imagine a world with 22 million houses. the price goes up due to bankers leveraging up the sales and transfers of the houses between the owners.

in 10 years what has changed?

the 22 million houses are still there.

the money is worthless though.

Share this post


Link to post
Share on other sites

I've never got my head around this idea of inflating debt away. Why does it work more than once? Presumably if you inflate debt away you've simply defaulted on most of it in a roundabout means - the lender has lost out. Why would you lend money knowing there's a good chance that inflation will go up quicker than the interest?

Because your bonus depends on how much you lend, not on how much gets paid back?

Share this post


Link to post
Share on other sites

Only problem would be the destructive effects on manifacturing resulting from Sterling being overvalued, and mass mortgage default due to lots of people being overleveraged.

What we really need is one currency for inside the M25 and another currency for outside the M25..

Correct.

Alternatively mortgage and lending rates determined by post code.

Having a single rate for entire swathes of land is rather bonkers when everything else can simply be price set by postcode or satellite location in the post 19th century world.

Central Banksters need to try a little 'innovation' B)

(It's Spring 2008 all over again - seems quite a few people refuse to learn from history. When we have people on the main forum asking how to buy long dated options oil options to get rich when it hits $600 I'll know to get heavily short again!)

Edited by Red Karma

Share this post


Link to post
Share on other sites

There is no question that inflation can be controlled if wanted - it is always about the price / consequences of doing that and who win/who loose.

I presumed he will agree that if we raise rate to 10% and stop deficit spending and inflation/imported inflation will be quashed (if not outright deflation) - though the price is probably too high. (not advocating 10% rate....)

I don't think he would agree. Please see sun n sea's post above, to which I have nothing to add, except to present to you the evidence against your assertion:

http://liminalhack.wordpress.com/2010/11/08/the-philosophers-stone/

At that link there is a graph of historical real and nominal interest rates going back into the 19th century.

Now would you care to provide some actual evidence that inflation (in goods and assets) has EVER been controlled in history?

Share this post


Link to post
Share on other sites

I don't think he would agree. Please see sun n sea's post above, to which I have nothing to add, except to present to you the evidence against your assertion:

http://liminalhack.wordpress.com/2010/11/08/the-philosophers-stone/

At that link there is a graph of historical real and nominal interest rates going back into the 19th century.

Now would you care to provide some actual evidence that inflation (in goods and assets) has EVER been controlled in history?

I am not entirely sure what you are trying to say in your blog. Can you summarise that please?

Not entire sure what you are asking here regarding "evidence of inflation (in goods and assets) has ever been controlled." There was no inflation

targeting until around the creation of Fed. After that, the targeting is one way (up only). The central bank controls the RATE of inflation by altering the

quantity of the money available.

As for SunNSea - his viewpoint is what Uncle Ben et all holds - you need more borrowing / cheap money to create 'employment' / stimulate demand.

If it is that simple (as opposed to skills, training, incentive etc), then we would not have poverty round the world as government can simply go ZIRP

and all 'spare capacities' will be magically mopped up and full employment achieved. The issue with UK unemployment is one of skills and incentive,

not one that interest rate can fix.

While many are feeling the pain, many are getting very rich out of these £150bn ( a few more trillions US spending) deficit spending (banker bonus)

and ZIRP based carry trade is adding to that (unless your ZIRP everywhere equilibrium is achieved). Corporate profits are also at records.

Share this post


Link to post
Share on other sites

forget what the blog post is saying and take a look at the graph. You will find the difference between nominal and real rates of interest (e.g. inflation) to be all over the shop going back to the beginning of the graph in the 1800 s. Negative real interest rates are very common for most of this period.

Only in the last few decades have real interest rates been both less volatile and more or less permanently positive.

Wild price fluctuations are the norm, not the exception if you look at economic history.

Share this post


Link to post
Share on other sites

forget what the blog post is saying and take a look at the graph. You will find the difference between nominal and real rates of interest (e.g. inflation) to be all over the shop going back to the beginning of the graph in the 1800 s. Negative real interest rates are very common for most of this period.

Only in the last few decades have real interest rates been both less volatile and more or less permanently positive.

Wild price fluctuations are the norm, not the exception if you look at economic history.

which interest rates and which Inflation??

Share this post


Link to post
Share on other sites

forget what the blog post is saying and take a look at the graph. You will find the difference between nominal and real rates of interest (e.g. inflation) to be all over the shop going back to the beginning of the graph in the 1800 s. Negative real interest rates are very common for most of this period.

Only in the last few decades have real interest rates been both less volatile and more or less permanently positive.

Wild price fluctuations are the norm, not the exception if you look at economic history.

Is that a UK or US graph? It does looks like most time when real interest rate goes significantly negative, it happens during war time (which is expected).

The one in 1981 was caused by government who thought that printing money is the way to solve all ills.

Before the latest central bank inflate only fiat money schemes, prices did move wildly based on supply/demand/weather etc but tend move back to the equilibrium after the event.

The problem with the 'latest scheme' is that fiat issuer makes those people who are close to the fiat issuer 'rich', which then creates a short term demand (though it is difficult

to know where that demand will be/where they will spend their money). As the money was obtained without using skills with equivalent economic substance, the demand moves

prices up.

p.s.: I am not advocating high real interest rates, but one that broadly maintain the purchasing power of the currency. Nowadays, demands are global, financial markets

are global, money printing are global and inflation must be seen in the context of coordinated actions among the main central banks.

Share this post


Link to post
Share on other sites

Is that a UK or US graph? It does looks like most time when real interest rate goes significantly negative, it happens during war time (which is expected).

The one in 1981 was caused by government who thought that printing money is the way to solve all ills.

Before the latest central bank inflate only fiat money schemes, prices did move wildly based on supply/demand/weather etc but tend move back to the equilibrium after the event.

The problem with the 'latest scheme' is that fiat issuer makes those people who are close to the fiat issuer 'rich', which then creates a short term demand (though it is difficult

to know where that demand will be/where they will spend their money). As the money was obtained without using skills with equivalent economic substance, the demand moves

prices up.

p.s.: I am not advocating high real interest rates, but one that broadly maintain the purchasing power of the currency. Nowadays, demands are global, financial markets

are global, money printing are global and inflation must be seen in the context of coordinated actions among the main central banks.

The graph is for the US. This paper is the original source -

http://www.spectrumeconomics.com/specpdfs/Realrate.pdf

some snippets:

The real rate of interest has not been historically a matter of great concern. As illustrated

in Exhibit 1, for most of American history the nominal rate of interest was stable while

inflation varied substantially. For example, for the period 1800 to 1930, nominal rates of

interest were relatively stable in the range of 3 - 6%, averaging 4.5% with a standard

deviation of 0.7%. The geometric average inflation rate, in contrast, was -0.02% and the

arithmetic average 0.16% with a 6.1% standard deviation.

With the notable exception of Fama's 1975 finding, subsequently retracted in 1982,

modern scholars have generally rejected the hypothesis of a stable real rate. For example

Walsh (1987) and Rose (1988) tested whether the real rate is stationary (constant) or

nonstationary (random walk) for the U.S. and other countries. They failed to reject the

hypothesis that real rates are not stationary, implying that interest rates do not have a

tendency to return to a long run average value.

It is interesting how peoples impression of how an economy should work is dominated by the recent history of central bank control/smoothing and how little weight people attach to actual historical evidence.

This leads some people to think, you can have a stable real rate (aka managed price level, cf 1980-2010) AND low/stable inflation.

If you think that, just goes to show how much modern economists and idealogues (austrians, keynsians and monetarists alike) have pulled the wool over your eyes and led you to believe in magic.

Share this post


Link to post
Share on other sites

This leads some people to think, you can have a stable real rate (aka managed price level, cf 1980-2010) AND low/stable inflation.

If you think that, just goes to show how much modern economists and idealogues (austrians, keynsians and monetarists alike) have pulled the wool over your eyes and led you to believe in magic.

In your graph, it looks about 80% of the time the rates are +ve, and the only time it goes negative are during war time where shortage triggered

inflation kicked in.

I agree you can't have a stable real rate but why does that then translate into managed price level? Real rates needs to move up/down to manage price levels

and moving up/down means it is not stable...

The original question is whether the BoE/BoJ/Fed/PbOC china together (which is ultimately backed by lots of guns) can stop inflation. I think they can if they want to

(though they are other side effects such as debtor's riot, or saver riot if they don't).

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 312 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.