Jump to content
House Price Crash Forum
beerhunter

A Worry... Is Higher Inflation A "way Out" For Those That Don't Want A Crash?

Recommended Posts

A friend who I work with (and who its a OO and BTL) said to me recently

"What we need is a period of higher inflation".

It surprised me, but thinking about it, it would erode debt (including paying over the odds for housing).

I'm not an economist but why can't Gordon Brown up the inflation target to (say) 5%.. which (I think) is around the average over the previous 25 years?

Playing devil avodacate a bit;

1) people stop saving if inflation is high... they aren't saving now, so no effect.

2) unemployment rises... but employment is (apparently) high, so overall we could afford for unemployment to rise a bit.

Who can come up with a simple explaination why this won't happen?

Share this post


Link to post
Share on other sites
Guest muttley

It would be very damaging politically.

Inflation leads to higher wage demands,so the Government would either have to raise taxes or confront the unions.The Chancellor is already faced with a shortfall in tax revenue,so having to find even more money would be very difficult.His other option would be higher unemployment.

There is a historical precedent; the 1978 "Winter of Discontent" The following May the then Labour Government were thrown out and banished into the wilderness for 18 years.When they did get back they weren't even Socialists anymore!

It's hard to say which way they'll jump if things get desperate,but don't imagine that allowing creeping inflation would be painless for the population or the government.

Share this post


Link to post
Share on other sites

I think it will only work if wage inflation follows it up. At the moment I think most companies will opt to restructure or move overseas. There's no guarantee that we can inflate our way out of this, even though it has crossed my mind that's what they want to do. The other thing is, if we have a dodgy inflation measure then your pay increases are likely to lag inflation anyway.

Working for a company that has used offshoring to brutal effect, I can say one thing, the jobs aren't coming back in a hurry.

The problem with upping the inflation target is foreign investors may start taking their money elsewhere too, so how does the government fund it's fools erands overseas or the many other ventures that Gordon plans.

As for unemployment. Again IMO a tricky game, you're assuming that they can actually control the level of employment to the nth degree. When you run an economy that consumes more than it produces, it relies heavily on confidence. We're losing that now, that's probably why they'll slash IRs and just about do anything to keep things turning over.

All IMO of course. The inflation thing does play on my mind, it could get to a stage where the real IR isn't much and if inflation starts to erode debt maybe buying isn't so bad.

As I've said in other posts, we'll all have to keep on our toes.

;)

Share this post


Link to post
Share on other sites

Inflation has been rising for quite some time, but it has been hidden in statistical jiggery pokery. If it does become public, it will be accompanied by increased rates, so the housing market will slow down (or crash) anyways.

Share this post


Link to post
Share on other sites
Inflation has been rising for quite some time, but it has been hidden in statistical jiggery pokery. If it does become public, it will be accompanied by increased rates, so the housing market will slow down (or crash) anyways.

But even if it's hidden it's still felt in people's pockets, and that's what affects spending habits.

Share this post


Link to post
Share on other sites

It would be a way out if it translated into wage inflation...but the prices of the stuff coming in from overseas will prevent this. A friend of mine said years ago that we couldn't compete with China and India etc, but the link didn't seem ver yclear to me. Now it looks clearer and clearer every day...HPI means we need high wages to live, so a big fall in HPI is a necessary prelude to wage falls compared to other countries (remember Thatcher's mantra about not pricing ourselves out of jobs?).

Inflation would be a way out but it's hard to see how we can do it unilaterally as a nation.

Share this post


Link to post
Share on other sites

If inflation were high, interest rates would need to match it (well, be a few points above it). If interest rates do not rise to match, the value of the pound would fall. As we import far more than we export the cost of those imports would also rise, leading to further inflation. And so the cycle goes on.

If this situation were not controlled, people would loose faith in money (it is fiat money after all).

The worst example would be hyper-inflation, and money would become worthless. If this were to happen you would have to take all your cash/notes to the bakery to get that loaf of bread!

Ever heard of the chap who stole a wheel-barrow full of money, dumped the cash, and legged it with the wheel-barrow?

Share this post


Link to post
Share on other sites
A friend who I work with (and who its a OO and BTL) said to me recently

"What we need is a period of higher inflation".

It surprised me, but thinking about it, it would erode debt (including paying over the odds for housing).

I'm not an economist but why can't Gordon Brown up the inflation target to (say) 5%.. which (I think) is around the average over the previous 25 years?

Playing devil avodacate a bit;

1) people stop saving if inflation is high... they aren't saving now, so no effect.

2) unemployment rises... but employment is (apparently) high, so overall we could afford for unemployment to rise a bit.

Who can come up with a simple explaination why this won't happen?

Very good points.

I think this is EXACTLY Gordon Brown's plan.

If he can increase consumer inflation, without Joe Public realising, he may be able to deflate the bubble.

So we have DVD players falling in price, keeping the CPI around 2%.

Sadly the essentials in life, gas, water,electricity, petrol, are rocketing, and the wheels are starting to fall off.

What usually happens about now is that Joe Public realises he's getting poorer, and demands wage increases. Inflation rockets along with rates.

But maybe not this time. Tony's got Labour too tied up.

If you suspect you're being duped with regard to your personal wealth in England, watch the value of Sterling. Inflation may not show in goverment figures, but it WILL show in the exchange rate.

Protect yourselves from a Sterling crisis. My two cents.

Edited by BandWagon

Share this post


Link to post
Share on other sites
It would be very damaging politically.

But not as damaging as perhaps other possible outcomes.

Inflation leads to higher wage demands,so the Government would either have to raise taxes or confront the unions.The Chancellor is already faced with a shortfall in tax revenue,so having to find even more money would be very difficult.His other option would be higher unemployment.

I agree higher wage demands could and probably would occur.

Considering the unions are (in my opinion) weaker than say the 70's... and that the area where they still have a stronghold" is the public sector, where workers are "better off" than the private sector (as mentioned in the press a month or two ago), I can't see the unions having so much to argue over the next few years.

Whereas I think tax rises may just cause the polictical bubble to burst.

I also agree, I see unemployment rising... as employment is "high" there is some slack (ok not for the people without a job, but the overall economy),

There is a historical precedent; the 1978 "Winter of Discontent" The following May the then Labour Government were thrown out and banished into the wilderness for 18 years.When they did get back they weren't even Socialists anymore!

It's hard to say which way they'll jump if things get desperate,but don't imagine that allowing creeping inflation would be painless for the population or the government.

It depends how its packaged... ie everyone knows fuel prices are high, today it might be perceived as a blip, tomorrow a trend, the day after a reason for revaluing the inflation limits... do that a couple of times and you have a 5% limit.

I think it will only work if wage inflation follows it up. At the moment I think most companies will opt to restructure or move overseas. There's no guarantee that we can inflate our way out of this, even though it has crossed my mind that's what they want to do.

I agree with the need for wage inflation, but not all companies can move/transfer work overseas (which isn't a good thing in my books)... yes restructuring and cutting out the dead wood would happen which would raise unemployment... but make companies more competitive in the long run.

The other thing is, if we have a dodgy inflation measure then your pay increases are likely to lag inflation anyway.

Doesn't that actually help. inflating our way out if it?

Working for a company that has used offshoring to brutal effect, I can say one thing, the jobs aren't coming back in a hurry.

The problem with upping the inflation target is foreign investors may start taking their money elsewhere too, so how does the government fund it's fools erands overseas or the many other ventures that Gordon plans.

How much external money is invested in the uk? And how much do we as a country invest in other countries?

I always thought / assumed that being one of the richest countries, the net flow was outwards?

As for unemployment. Again IMO a tricky game, you're assuming that they can actually control the level of employment to the nth degree. When you run an economy that consumes more than it produces, it relies heavily on confidence. We're losing that now, that's probably why they'll slash IRs and just about do anything to keep things turning over.

Thats an interesting point... especially with so many more service oriented businesses, which I would guess are more confidence driven, and more dynamic in their willingness to sack people if things go bad.

All IMO of course. The inflation thing does play on my mind, it could get to a stage where the real IR isn't much and if inflation starts to erode debt maybe buying isn't so bad.

As I've said in other posts, we'll all have to keep on our toes.

;)

A very valid point about buying if inflation starts... 5% annual inflation over 5 years is almost an effective drop of 20% in what you pay.. assuming your salary rises with inflation... and if interest rates where low too

;)

Share this post


Link to post
Share on other sites
If he can increase consumer inflation, without Joe Public realising, he may be able to deflate the bubble.

So we have DVD players falling in price, keeping the CPI around 2%.

Sadly the essentials in life, gas, water,electricity, petrol, are rocketing, and the wheels are starting to fall off.

What usually happens about now is that Joe Public realises he's getting poorer, and demands wage increases. Inflation rockets along with rates.

Enough of the DVD players, which make up a tiny proportion of the CPI. The biggest downward drag on the CPI is clothing, which has gone down in price massively, and I think you can count as an essential of life.

Share this post


Link to post
Share on other sites
Enough of the DVD players, which make up a tiny proportion of the CPI. The biggest downward drag on the CPI is clothing, which has gone down in price massively, and I think you can count as an essential of life.

Yep, you're right.

I wish we had a few more sensible people on this site who could disagree.

It helps weed out lazy thinking.

However, my inference was that I beleive the goverment are fiddling inflation numbers to make use feel wealthier, while eroding our savings.

To me Gordon Brown's change from the RPI-X to the CPI in 2003, when inflation started looking too high, is a good example. Call me a cynic.

Share this post


Link to post
Share on other sites
Protect yourselves from a Sterling crisis.

I have: I've moved most of my money abroad already. The only problem is that my salary is paid in Sterling and increasing by far less than the real rate of inflation...

It's the poor who'll be really screwed by high inflation: pensioners whose pensions increase based on the fiddled inflation figures which are probably 4-5% below real inflation, and low-paid workers who can barely afford to live now. Precisely the kind of people that Labour are supposed to support.

Share this post


Link to post
Share on other sites
A friend who I work with (and who its a OO and BTL) said to me recently

"What we need is a period of higher inflation".

It surprised me, but thinking about it, it would erode debt (including paying over the odds for housing).

I'm not an economist but why can't Gordon Brown up the inflation target to (say) 5%.. which (I think) is around the average over the previous 25 years?

Playing devil avodacate a bit;

1) people stop saving if inflation is high... they aren't saving now, so no effect.

2) unemployment rises... but employment is (apparently) high, so overall we could afford for unemployment to rise a bit.

Who can come up with a simple explaination why this won't happen?

Hyperinflation is the standard solution for governments faced with a massive debt burden. The German government "flamed off" its war debt from the First World War in the hyperinflation of the early 1920s, leaving all debt inflated away to worthless paper and all savings annihilated. Ferguson's The Cash Nexus has an excellent chapter on how governments have used inflation to wipe out debts. The current situation is a tough one since to pay off the debt requires economic growth but that growth is hard to achieve if energy prices are rising and there isn't the political will to prevent waste. The US in particular is an interesting case, as they refuse to reform their lifestyle, are getting hit by fuel inflation and have a big weight of private and public debt. The combined debt is so great (something like $150K per US citizen) that it is hard to envision how they will ever pay it off.

We live in interesting times.

Share this post


Link to post
Share on other sites
A friend who I work with (and who its a OO and BTL) said to me recently

"What we need is a period of higher inflation".

He obviously hasn't thought this through properly. If inflation increases interest rates will have to go up, and probably knock his highly-leveraged a55 into the middle of next week.

As for the "Gordon Brown could raise the inflation target to 5%" argument, this would cause the bond markets to crash, and government borrowing would become much more expensive, so no more employing armies of unproductive public sector workers, and without that added stimulus (plus the higher taxes that would probably ensue) the economy would tank.

Share this post


Link to post
Share on other sites
He obviously hasn't thought this through properly. If inflation increases interest rates will have to go up, and probably knock his highly-leveraged a55 into the middle of next week.

As for the "Gordon Brown could raise the inflation target to 5%" argument, this would cause the bond markets to crash, and government borrowing would become much more expensive, so no more employing armies of unproductive public sector workers, and without that added stimulus (plus the higher taxes that would probably ensue) the economy would tank.

He probably thinks we can have higher inflation without any changes to interest rates or prices for the things he buys.

Like the guy at my work with a couple of BTL's who thinks that the central bank can and should drop interest rates by 2% or so.

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...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 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.