Jump to content
House Price Crash Forum
KingBingo

This Is Going To Hurt

Recommended Posts

I have never copy and pasted an article on this site before, but I read the following and was wowed by it. It sums up pretty much everything for the last ten years and asks the right questions about house prices. It talks about the generational saving glut, developing markets, Central Banks the lot and is well worth you time.

For those of you not in London the best part of the morning commute is picking up a copy of City AM, a free newspaper edited by the excellent Allister Heath, who every morning produces an article that anyone on here would instantly recognize as sound economic thinking but expressed with a clarity I doubt any of us could manage. Read, and enjoy, this is bear food at its very best:

1_fullsize.png

This is going to hurt

Allister Heath

17 September 2011

The worldwide bond bubble will burst, and Britain is not prepared

There is much to be terrified about in today’s global economy. The eurozone’s death dance, China’s slowdown and America’s inability to create jobs are enough to make the most upbeat investors gloomy. But even these problems pale in comparison with the biggest threat, one with implications so hideous that financiers are reluctant to talk about it even now. The truth is that the economies of rich countries, including the UK, are being kept alive by another and astonishingly under-reported bull market — in government debt. This is the bond bubble; and when it bursts, as it surely will, the result will be a recession far deeper than the crash from which we are trying to recover.

This danger is ignored for a very understandable reason: government bonds are so boring that most people pay them no attention. Yet they fulfil a vital role, crucial to Britain’s nascent economic recovery. Bonds are, in effect, the IOU notes issued by debt-hungry governments. America, unsurprisingly, is the biggest issuer. The bond market is the pipeline of debt, flowing into the British economy and setting the price at which banks lend to mortgage holders and small businesses, as well as the cost of borrowing for the large multinationals that employ so many Britons. Bonds have also become the drug to which the political establishment is now addicted.

These bonds have become dangerously cheap. A new record was set this week, when George Osborne’s Treasury was able to borrow at an astonishing 2.2 per cent a year over a ten-year period. The German government can do so at 1.8 per cent a year, and America at 2 per cent. Crucially, in many cases, the interest rate is less than the expected inflation rate. So the ‘real terms’ interest rate at which governments borrow is actually negative. Lending anyone money at zero interest is weird enough. But the bond bubble now means that UK and American governments can be loaned money — and, in effect, be paid for the privilege.

This is crazy. It shows that the bond markets are well and truly in major bubble territory, their valuations as absurd as the rocketing subprime properties of yore. And, just like last time, hardly anyone is sounding the alarm. The bond bubble means that banks can also borrow at very low rates — and pass it on, allowing us to carry on taking out cheap mortgages. Fatally, we have come to think of 3 per cent mortgages as the new normal. Companies, home-owners, storecard holders — everyone is being lulled into a false sense of security. No one is prepared for when the bond bubble bursts and interest rates shoot back to their norm.

So why has debt become so cheap? There are three reasons. The first is Alan Greenspan, former chairman of the US Federal Reserve, who tried to recover from the post-9/11 slowdown by lowering interest rates — a hubristic decision which imagined that cheap debt would generate permanent and real growth. These new, ultra-low American base rates soon spilt over to government bonds, fuelling the bubble.

The second is the rise of the services sector. As developed economies moved away from being reliant on expensive factories, they didn’t have to invest so much in new machines. More money was left over to invest in other things, such as bonds, which pushed down the cost of borrowing.

The third and most dramatic cause of the bond bubble is the savings glut in the emerging markets. Developing countries have been saving their pennies — and lending them to the debt-addicted countries. Thrift, which used to be a virtue of the West, has now gone east. The sums involved are staggering. In 1995, foreign exchange reserves held by the world’s central banks (mainly in emerging countries) stood at about $1.4 trillion. It is now $9.7 trillion, a third of it Chinese, and with an additional $4.7 trillion in sovereign wealth funds held by cash-rich countries like Norway and Qatar. In total, a $14.4 trillion piggy bank — a lump of cash so large that it is distorting the world economy.

All this money can’t be kept as bank notes under Chinese mattresses. It is usually invested, and western bonds are supposed to be the safest investment there is. So an avalanche of cash cascades from East to West. The sheer volume of this cash inflated the bond bubble, which means western governments can get away with lending at ridiculously low interest rates. For the finance minister, this means cash to fund huge deficits. For the consumer, this means a 3.2 per cent fixed rate mortgage. And for the debt addicts everywhere, this means as much cheap dope as they can lay their hands on.

As economic curses go, cheap debt may not seem to the cruellest. But the bond bubble is dangerous, because it encourages bad behaviour. It creates the impression that anyone can borrow anything — and get away with it. George Osborne argues that Britain’s AAA credit rating is crucial, and he’s right. But when Standard & Poor’s downgraded America’s to AA+, there was no punishment. Instead, there was so much demand for American bonds that the real-terms interest on the bonds went below zero. Barack Obama was ‘punished’ by investors saying they’d pay to borrow from his government.

The verdict of the Keynesians was instantaneous. The economist Paul Krugman was jubilant: ‘What the market is saying — almost shouting — is “we’re not worried about the deficit! We’re worried about the weak economy!”’ Certainly, if investors see no opportunities anywhere else in the economy, they will accept ultra-low rates on government debt. But the bond bubble distorts what the market is saying, sending out a false message. The market is by no means relaxed about the deficit. Asian economies may hate this, as much as America loves it. But the gargantuan pile of cash has to go somewhere and bonds are, for now, the least bad choice.

China spelled out its dilemma after America was downgraded. The Chinese state news agency, Xinhua, said the USA should cure its ‘addiction to debts’ — without seeming to notice the obvious implication that Beijing is the drug pusher. But for all China’s criticisms of America’s profligacy, it has no choice. America’s debt market is the only one big enough to absorb China’s savings pile. Such an appetite for bonds not only allows America and Britain to keep on borrowing, but actively encourages it.

Britain needs this debt, and badly. For all George Osborne’s talk of austerity, the Chancellor plans to borrow more over this parliament than Labour did in 13 years. Certainly, Labour’s published plan would have increased debt by 59 per cent, against the Tories’ 51 per cent. Osborne’s plan — to stop increasing debt in seven years — may not be much different from that of Alistair Darling. But it’s solid and more credible than many of the plans offered on the Continent. This keeps Britain inside the deceptive warmth of the bond bubble, with cheap debt for all. But with a deficit which remains among the worst in Europe (we have the most indebted households in the G7) Britain remains worryingly vulnerable.

The irony is that it was the debt bubble, in its earlier years, that helped cause the financial crisis from which we’re now trying to recover. As the cost of borrowing fell, starting in the early 1990s, everyone started to lose their heads. Nobody ever discusses this because it is easier to criticise greedy bankers; but much of the excessive leverage, the maxed-out credit cards, the house price bubble from Dallas to Dubai, the over-exuberance and the massive misallocation of capital into overvalued property can be laid at the door of the bond markets. And these bond markets were, of course, themselves hugely distorted by the rate-cutting central bankers Alan Greenspan and Sir Mervyn King.

So the bond bubble not only helped cause the boom and subsequent crash. It then helped western governments deal with their hangover by serving another round of debt tequila. An economist from Mars, landing today, would find it extraordinary that most western countries are responding to the debt crisis by doubling their national debt. And if this pipeline of cheap debt dries up, what then?

Slowly, across Europe, we are beginning to find out. The debt bubble is bursting in some countries but not others. Italy, for example, is now having to offer 5.5 per cent interest on its IOU notes — a rise which is causing agony for its government and people. Greek bond markets have gone off the scale, with the market demanding more than 170 per cent to take on its three-year bond. Even the cash-rich Chinese fear that Greece is going bust. This panic over the dodgy European countries only serves to increase demand for bonds in Britain, lowering our debt costs further.

The thing about bubbles is that you never know when they will burst. But already there are signs of strain. The governor of China’s central bank recently declared that its reserves ‘exceed reasonable requirements’ — a nod to the fact that Brazil, China, Russia and India are facing pressure to spend the cash on development at home. As the emerging markets grow richer, they will spend far more on machinery and roads — and deposit less in their piggy banks. If the $14 trillion worldwide piggy bank starts to be emptied, the bond bubble will deflate, pushing up interest rates around the world. The populations of emerging countries are also getting older. This means they will dip into pension pots, thus also reducing the amount of money available to go into bond markets.

If debt starts to be priced at normal rates, the adjustment will be agonising — not least for Osborne’s government. How many Brits would be comfortable if their mortgage interest rates went back to 6 per cent, which was normal, even cheap, for so much of our recent history? Or 10 per cent? Trillions of pounds’ worth of pension and insurance money is invested in bonds, so when they crash it will destroy wealth on a massive scale. Stock markets will fall, in some cases severely, while the great property boom will give way to a crash — as the cost of mortgages climbs permanently higher.

After the last crash, the Queen visited the London School of Economics and asked a killer question: ‘Why did no one see it coming?’ The answer is the same reason that no one now talks about the bond bubble: mankind is hubristic. There is a huge willingness to believe that artificial prosperity, caused by excessively cheap credit, is actually real. The bubble may hang over Britain for many more months, perhaps even years. But it is madness to think it will last forever. Sooner or later, the party will be permanently and ignominiously shut down, the real hangover will begin. And this time, the only cure will be belt-tightening, sweat and hard work.

Allister Heath is editor of City AM and an associate editor of The Spectator.

Edited by KingBingo

Share this post


Link to post
Share on other sites

cracking article, I feel like buying gold now.

Really? Wouldn't falling bond yields, hence rising interest rates be a sell signal for gold as there would no longer be negative rates?

Share this post


Link to post
Share on other sites

Really? Wouldn't falling bond yields, hence rising interest rates be a sell signal for gold as there would no longer be negative rates?

there will be a whole lot of printing before they admit defeat.

Share this post


Link to post
Share on other sites

Really? Wouldn't falling bond yields, hence rising interest rates be a sell signal for gold as there would no longer be negative rates?

Yes, exactly. It is the negative real rate environment that is putting a rocket under gold.

Mods please merge with "the bond bubble" thread.

Share this post


Link to post
Share on other sites

Is the elephant in the room is Japan? They had a similar problem, and have been bobbing along the bottom for 15 years+ with mega low interest rates. It feels like the 'developed' world has caught the bug japan caught years ago. What would stop the developed world from having the lingering zombie economy japan has had for the same length of time?

Edited by AteMoose

Share this post


Link to post
Share on other sites

cracking article, I feel like buying gold now.

Me too.

Really? Wouldn't falling bond yields, hence rising interest rates be a sell signal for gold as there would no longer be negative rates?

Yes, exactly. It is the negative real rate environment that is putting a rocket under gold.

Mods please merge with "the bond bubble" thread.

I think you are mistaking a functioning financial system for a soon to be destroyed one.

Ask yourself what will happen if the bond bubble pops. Rates will go up, pushing repayments past affordable, leading to either individual defaults or, worse, sovereign defaults. Why on Earth would you lend an individual, or a sovereign, money in this situation? If they were struggling to repay it when rates were low, they will be unable to pay when rates are high! 170% on Greece's debt isn't a 'buy signal', it's a 'get the f**k out' signal.

If sovereigns have to make massive austerity cuts, this is going to put people out of work and/or decrease their available money. If mortgages are going up at the same time, it's game over... game over. You would be as wise to lend in such conditions to such borrowers, as you would be to lend Greece money; it ain't going to be repaid.

What happens when defaults occur? The creditors don't get some/all of their money back. People who have given their money to their banks (i.e. depositors of 'savings'), will suddenly be very keen to get it back out. As the panic ensues, the banks will either have to close their doors or the government will have to print up the difference (where countries have their own currencies and have this option). In the former, the banks will fold and many will lose almost everything. In the latter, the printed money will soon become untrusted, leading to people spending it, causing hyperinflation and a rejection of fiat currency.

What happens when there is a threat of default? People move to hard assets. What happens when the money to buy said hard assets has been churned out of a printer first? Hyperinflation and state failure.

I think some understand the severity of this situation, but many, including most politicians do not have a clue at the sh*t storm which is brewing. There are a whole load of dominoes (banks and sovereigns) lined up and if they start to fall, there will be nothing which can stop the destruction. No talking heads saying calming words will help. No cans will be left to kick. The pile of promises will not be worth the paper they are written on.

PMs aren't an investment to offset inflation - look at historic data and you will see this - they are insurance against a systemic crisis, in which retaining your wealth becomes the only priority.

Share this post


Link to post
Share on other sites

Me too.

I think you are mistaking a functioning financial system for a soon to be destroyed one.

Well, there is that!

Ask yourself what will happen if the bond bubble pops. Rates will go up, pushing repayments past affordable, leading to either individual defaults or, worse, sovereign defaults. Why on Earth would you lend an individual, or a sovereign, money in this situation? If they were struggling to repay it when rates were low, they will be unable to pay when rates are high! 170% on Greece's debt isn't a 'buy signal', it's a 'get the f**k out' signal.

If sovereigns have to make massive austerity cuts, this is going to put people out of work and/or decrease their available money. If mortgages are going up at the same time, it's game over... game over. You would be as wise to lend in such conditions to such borrowers, as you would be to lend Greece money; it ain't going to be repaid.

What will probably happen is debt destruction by default. Then you can lend again (at normalised, i.e. higher, rates).

What happens when defaults occur? The creditors don't get some/all of their money back. People who have given their money to their banks (i.e. depositors of 'savings'), will suddenly be very keen to get it back out. As the panic ensues, the banks will either have to close their doors or the government will have to print up the difference (where countries have their own currencies and have this option). In the former, the banks will fold and many will lose almost everything. In the latter, the printed money will soon become untrusted, leading to people spending it, causing hyperinflation and a rejection of fiat currency.

What happens when there is a threat of default? People move to hard assets. What happens when the money to buy said hard assets has been churned out of a printer first? Hyperinflation and state failure.

Well, yes, if the printing option is taken. I agree that even just uncertainty about printing could spike gold up in these circumstances, however if there is massive deflationary default without printing, then gold (and every other asset) would crash relative to the hard currency. Perhaps an unlikely course for governments - I'm just saying.

I think some understand the severity of this situation, but many, including most politicians do not have a clue at the sh*t storm which is brewing. There are a whole load of dominoes (banks and sovereigns) lined up and if they start to fall, there will be nothing which can stop the destruction. No talking heads saying calming words will help. No cans will be left to kick. The pile of promises will not be worth the paper they are written on.

PMs aren't an investment to offset inflation - look at historic data and you will see this - they are insurance against a systemic crisis, in which retaining your wealth becomes the only priority.

Yes I agree, for the Armageddon scenario, provided you can keep it safe. I'm not quite as confident as you that we are heading for an imminent destruction of most fiat though.

Share this post


Link to post
Share on other sites

What will probably happen is debt destruction by default. Then you can lend again (at normalised, i.e. higher, rates).

Not before a lot of people have lost a lot of money first. If said people are keen on not losing money, I would expect them to be making defensive manoeuvres.

Well, yes, if the printing option is taken. I agree that even just uncertainty about printing could spike gold up in these circumstances, however if there is massive deflationary default without printing, then gold (and every other asset) would crash relative to the hard currency. Perhaps an unlikely course for governments - I'm just saying.

They've already done the printing in many cases though. It's all sitting there... waiting... for the mass withdrawal, followed by rocketing prices of goods. They don't need to do any more printing for this to happen, but it will make it even worse in the long run if they do.

If you think your bank is going to fail, you withdraw your money. If you think your sovereign currency is going to fail, you spend your money on alternative assets. PMs have a habit of being good in this situation.

IMO, the difference between this crisis and the one from 3 years ago, is the safe haven of western government bonds is rapidly disintegrating. The promises made by governments are simply not credible; no amount of austerity will fix this. What else will creditors turn to, when they look for a return of investment, rather than a return on investment? Hard assets.

Yes I agree, for the Armageddon scenario, provided you can keep it safe. I'm not quite as confident as you that we are heading for an imminent destruction of most fiat though.

IMO, Greece is the first domino, with many other western countries jostling for subsequent spots. When Greece fails, for many, the penny will drop and the game will be up.

All roads seem to lead to mass defaults of both individual and/or sovereign promises. I don't see how this can end well for the banks or the fiat currencies they peddle.

Share this post


Link to post
Share on other sites

Is the elephant in the room is Japan? They had a similar problem, and have been bobbing along the bottom for 15 years+ with mega low interest rates. It feels like the 'developed' world has caught the bug japan caught years ago. What would stop the developed world from having the lingering zombie economy japan has had for the same length of time?

If some how the governments can stop creditors (sovereign and bank) from panicking, they may be able to keep it going for a long time. However, I just don't think they will manage it. This Euro crisis has shown the politicians to be impotent and even any action they could take, would be met with mass unrest from their populous. In a world which is so tightly coupled, I don't see how the contagion can be stopped from spreading either.

Share this post


Link to post
Share on other sites

If some how the governments can stop creditors (sovereign and bank) from panicking, they may be able to keep it going for a long time. However, I just don't think they will manage it. This Euro crisis has shown the politicians to be impotent and even any action they could take, would be met with mass unrest from their populous. In a world which is so tightly coupled, I don't see how the contagion can be stopped from spreading either.

It can't unless it changes its name.

p-o-p

Share this post


Link to post
Share on other sites

Is the elephant in the room is Japan? They had a similar problem, and have been bobbing along the bottom for 15 years+ with mega low interest rates. It feels like the 'developed' world has caught the bug japan caught years ago. What would stop the developed world from having the lingering zombie economy japan has had for the same length of time?

The difference surely is that their little Zombieland existed in an era of global demand for their exports, hence ability to have yields through the floor, stratospheric public debt and deflation as their population relentlessly save (as one article asked recently, if their GDP has been so underperforming for years, how come they are still ranked the same relative to other economies as in 1989? Has the Western GDP merely measured inflation?).

How are we going to run this massive private sector surplus? The only way is if we consider ourselves as a unit with China et al. In this model, the Chinese are the Japanese public, running a surplus and "saving" it with us (the Japanese govt) who blow it on tat. In other words we've been like Japan for years now.

The only problem there is that we have reached our debt service limit. It started in the private sector but has spilled over into the public and now the period of debt destruction is commencing.

Japan's government will reach its debt service limit in the near future, just as soon as global rates rise, global demand drops, and its people start retiring.

Japan propped up their deflationary collapse by levering up public debt serviced by private savings gained from demand from the global Ponzi.

When the global Ponzi deflates we discover that both our private and public sectors are already levered up on the back of Chinese savings. We have further levered up the public sector to cover private deflation, and kept it going for a bit, but there is a limit to how long that can continue. One big reason for this is that while the Ponzi was inflating in the private sector, confidence remained intact because it was all supposedly underpinned by asset values. Now the Ponzi is transferred to the public sector it becomes obvious for what it is with no appreciating asset values to justify the credit creation, only Government promises of "growth"! So:

1. Creditors are losing confidence - no collateral assets and doubt that there is going to be real production with which to pay them back, and at some stage that will be reflected in yields. Greece obviously a microcosm of this mechanism.

2. Changes in creditor nations - China ageing, starting to have wage inflation and feeling effects of malinvestment.

3. Resource constraints.

Japan will hit these walls in time - particularly with a drop in global demand and ageing, but it's particular Ponzi has been supported with a good income and high confidence so far. Since it hasn't had the fig leaf of an asset value bubble covering its debt bubble, I guess the confidence results from the ability to earn income.

Share this post


Link to post
Share on other sites

Not before a lot of people have lost a lot of money first. If said people are keen on not losing money, I would expect them to be making defensive manoeuvres.

They've already done the printing in many cases though. It's all sitting there... waiting... for the mass withdrawal, followed by rocketing prices of goods. They don't need to do any more printing for this to happen, but it will make it even worse in the long run if they do.

I'm not sure I believe that. They would have to print into double figure trillions to entirely cover the credit destruction. I don't believe anything net is just sitting there waiting to multiply up in a spending frenzy. It is sitting there set aside to cover the massive and unknown losses hiding on balance sheets.

Nonetheless, it is possible (perhaps even likely) that further along the road there may be more significant episodes of printing that may have large local or temporary effects, but until this thing deflates people are in hoard mode.

Maybe destruction of fiat follows in the end stages, I don't know.

If you think your bank is going to fail, you withdraw your money. If you think your sovereign currency is going to fail, you spend your money on alternative assets. PMs have a habit of being good in this situation.

Once you have got your hard cash in a situation of credit destruction, is there any evidence that you would go out and spend it on stuff? Is that what happened when banks were failing in the Great Depression?

Conversely, if you were worried about massive hyperinflationary printing, then why would you be worried about your bank collapsing?

I guess its the uncertainty in between, but particularly fear of the latter scenario, where gold might be the good option.

IMO, the difference between this crisis and the one from 3 years ago, is the safe haven of western government bonds is rapidly disintegrating. The promises made by governments are simply not credible; no amount of austerity will fix this. What else will creditors turn to, when they look for a return of investment, rather than a return on investment? Hard assets.

IMO, Greece is the first domino, with many other western countries jostling for subsequent spots. When Greece fails, for many, the penny will drop and the game will be up.

All roads seem to lead to mass defaults of both individual and/or sovereign promises. I don't see how this can end well for the banks or the fiat currencies they peddle.

I could imagine an outcome where there is large scale debt restructuring and we just drop our standard of living hugely and grumble along for a while, possibly with a few wars.

Not sure why currency destruction is necessary at this stage of Greece defaulting. Just think how long they've held up house prices!

Edited by mirage

Share this post


Link to post
Share on other sites

I'm not sure I believe that. They would have to print into double figure trillions to entirely cover the credit destruction. I don't believe anything net is just sitting there waiting to multiply up in a spending frenzy. It is sitting there set aside to cover the massive and unknown losses hiding on balance sheets.

Nonetheless, it is possible (perhaps even likely) that further along the road there may be more significant episodes of printing that may have large local or temporary effects, but until this thing deflates people are in hoard mode.

Maybe destruction of fiat follows in the end stages, I don't know.

http://research.stlouisfed.org/fred2/series/BASE

$800bn - $2800bn in about 3 years. That's almost 4 times the amount of base money already, which has been used to paper over defaulted credit. Ofc, these are US figures, but IIRC, the UK numbers aren't dissimilar.

If you think the banks are still failing and the government is printing to paper over the problem, you are unlikely to hold onto said paper, IMO. I certainly wouldn't.

Once you have got your hard cash in a situation of credit destruction, is there any evidence that you would go out and spend it on stuff? Is that what happened when banks were failing in the Great Depression?

Conversely, if you were worried about massive hyperinflationary printing, then why would you be worried about your bank collapsing?

I guess its the uncertainty in between, but particularly fear of the latter scenario, where gold might be the good option.

IIRC, the gold standard stopped them printing in the Great Depression. Therefore, withdrawing your money was probably your primary concern.

This time around, they've shown that they're not afraid to print, but we all know that there are limits to what they can do before people believe it will cause problems. The price of PMs, fuel, food etc are showing money leakage already... I doubt they can keep their fingers in the dyke indefinitely.

I could imagine an outcome where there is large scale debt restructuring and we just drop our standard of living hugely and grumble along for a while, possibly with a few wars.

Not sure why currency destruction is necessary at this stage of Greece defaulting. Just think how long they've held up house prices!

Perhaps, but I think the stakes have been pushed too high. There have been decades of malinvestment and bubble blowing. The imbalances both nationally and internationally are huge and seem to be showing little sign of getting better quickly enough to prevent problems.

IMO, the markets will move quickly now they smell blood. I think the politicians will be caught flat footed and the populous will be caught under prepared.

Share this post


Link to post
Share on other sites

Great read, only question is the time scale. It could be many years away.

Only once the central banks have decided they are good and ready, they completely control the bond markets.

It could be once incomes have caught up with debt on aggregate (e.g. rising wages as relentlessly pushed by the BOE despite claims to the contrary).

Or it could be once banks have built up a sufficient capital cushion to suffer the shock which might be never seeing how much capital extraction bank execs are engaging in with their bonuses.

Share this post


Link to post
Share on other sites

http://research.stlouisfed.org/fred2/series/BASE

$800bn - $2800bn in about 3 years. That's almost 4 times the amount of base money already, which has been used to paper over defaulted credit. Ofc, these are US figures, but IIRC, the UK numbers aren't dissimilar.

Yes, base money has multiplied but base money is a small fraction of credit, and the deflation is driven by credit destruction.

If you think the banks are still failing and the government is printing to paper over the problem, you are unlikely to hold onto said paper, IMO. I certainly wouldn't.

IIRC, the gold standard stopped them printing in the Great Depression. Therefore, withdrawing your money was probably your primary concern.

This time around, they've shown that they're not afraid to print, but we all know that there are limits to what they can do before people believe it will cause problems. The price of PMs, fuel, food etc are showing money leakage already... I doubt they can keep their fingers in the dyke indefinitely.

The commodity price inflation is still dwarfed by the deflationary potential of credit collapse. That's what bond prices are saying too, for now.

I accept that there is potential for eventual massive printing and mass rejection of fiat, but frankly QE 1,2 or 3 are neither here nor their compared to an event of that magnitude.

Perhaps, but I think the stakes have been pushed too high. There have been decades of malinvestment and bubble blowing. The imbalances both nationally and internationally are huge and seem to be showing little sign of getting better quickly enough to prevent problems.

IMO, the markets will move quickly now they smell blood. I think the politicians will be caught flat footed and the populous will be caught under prepared.

Quite possibly. I think there is quite a bit more left of the show first though. I'm sure I'll be caught flat-footed too.

Share this post


Link to post
Share on other sites

Yes, base money has multiplied but base money is a small fraction of credit, and the deflation is driven by credit destruction.

If every pound of 'savings' (read: promises for the bank to repay you) in the bank is a liability for every pound of credit lent to others, credit destruction is bad for banks (and therefore their depositors). This is a simplification ofc, but base money is key - everything else is just promises for it.

Although monetarists like to think topping up base money will make up far a fall in broad money, I think this ignores what is actually going on. Broad money may fall if people are making fewer promises (less loans) or promises are getting broken (defaults). Printing more money to replace promises, is like growing more apples to replace oranges - they are two different things.

The commodity price inflation is still dwarfed by the deflationary potential of credit collapse. That's what bond prices are saying too, for now.

I accept that there is potential for eventual massive printing and mass rejection of fiat, but frankly QE 1,2 or 3 are neither here nor their compared to an event of that magnitude.

If credit collapses, then the ability for the banks to cover its liabilities is going to be stretched to breaking point. I wouldn't want to leave my money in the bank under this situation, would you?

IMO, if banks are failing, people will withdraw their money (like Northern Rock, Greek banks etc). If they print to stop the banks failing, it undermines the currency and people will want to swap it for something else.

Maybe they will keep the plates spinning and blissful ignorance will convince people to leave their money in the bank. Me? I wouldn't keep more than a small amount of money in the bank (as much as needed day to day) and invest the rest elsewhere.

Quite possibly. I think there is quite a bit more left of the show first though. I'm sure I'll be caught flat-footed too.

It all just feels too wobbly for me these days. It's like 2008, but with virtually all options exhausted. As the dragons would say - "I'm out."

Edited by Traktion

Share this post


Link to post
Share on other sites

I feel like getting a 3.something percent 10 year mortgage, much to my chagrin.

Wells that is key is it not it.

Are you better off paying the heady values for a house now, and locking in a 10 years 3.2% mortgage, or wait a year or two until rates are ?? say 9%, sure house prices will be a lot lower, but will your cost of servicing the mortgage fall as much?

If I take out a 10 year fixed mortgage at 3.2% of £250,000 it will cost me £1,200 a month for the first ten years, and if I want to pay off with ten years I need to overpay by £1,200 as well.

If the property drops in value and I need only a £150,000 mortgage, but interest rates are at 6% it is £1,600 a month over term.

If rates are at 9% it costs £1,865 a month on that £150k.

You guys should play around with the spreadsheet I have attached, but I suspect the correct answer is just to save a monster deposit for the crash. Whenever the hell that is.

Share this post


Link to post
Share on other sites

The other thing being if the author of the article is correct and there is a massive bond bubble burst, there will be only real assets. i.e. property you own outright and PM that will help you.

Share this post


Link to post
Share on other sites

Wells that is key is it not it.

Are you better off paying the heady values for a house now, and locking in a 10 years 3.2% mortgage, or wait a year or two until rates are ?? say 9%, sure house prices will be a lot lower, but will your cost of servicing the mortgage fall as much?

If I take out a 10 year fixed mortgage at 3.2% of £250,000 it will cost me £1,200 a month for the first ten years, and if I want to pay off with ten years I need to overpay by £1,200 as well.

If the property drops in value and I need only a £150,000 mortgage, but interest rates are at 6% it is £1,600 a month over term.

If rates are at 9% it costs £1,865 a month on that £150k.

You guys should play around with the spreadsheet I have attached, but I suspect the correct answer is just to save a monster deposit for the crash. Whenever the hell that is.

Lock in. Reduce your outgoings and pay off that mortgage as fast as possible. When the mortgage has gone...you are free.

Share this post


Link to post
Share on other sites

If every pound of 'savings' (read: promises for the bank to repay you) in the bank is a liability for every pound of credit lent to others, credit destruction is bad for banks (and therefore their depositors). This is a simplification ofc, but base money is key - everything else is just promises for it.

Although monetarists like to think topping up base money will make up far a fall in broad money, I think this ignores what is actually going on. Broad money may fall if people are making fewer promises (less loans) or promises are getting broken (defaults). Printing more money to replace promises, is like growing more apples to replace oranges - they are two different things.

They are two different things, however if a bank goes bust because of these broken promises for money, then you can indeed fix the balance sheet by printing some up fresh.

Similarly, if there is massive credit deflation, it increases demand for base money. At the moment the credit deflating dwarfs the increase in base money.

If credit collapses, then the ability for the banks to cover its liabilities is going to be stretched to breaking point. I wouldn't want to leave my money in the bank under this situation, would you?
No, cash would be best.
IMO, if banks are failing, people will withdraw their money (like Northern Rock, Greek banks etc). If they print to stop the banks failing, it undermines the currency and people will want to swap it for something else.
Still think it unlikely that they print to the degree necessary to cause hyperinflation, i.e. rejection of fiat.

That blows up the system. Waves of printing the not-quite soak up the credit collapse is more likely, and what has happened so far. The result of this is that you get spasmodic surges in asset prices, the bankers and others with access to the new money make a packet, and the ordinary worker get slowly bled dry - many default, many just scrape by servicing credit, all have lower real wages. The money rich can then clean up in the credit-dependent asset price fire sale. What's not to like?

Weimar hyperinflation happened in an environment where they had no idea what was causing it (strange to think about).

Zimbabwe hyperinflation happened because of ******wittery but even that was controlled with the regime and currency still in place.

I'm not saying it couldn't happen here, but it would take quite a lot of doing.

Maybe they will keep the plates spinning and blissful ignorance will convince people to leave their money in the bank. Me? I wouldn't keep more than a small amount of money in the bank (as much as needed day to day) and invest the rest elsewhere.

It all just feels too wobbly for me these days. It's like 2008, but with virtually all options exhausted. As the dragons would say - "I'm out."

I'm none too comfortable either but I don't think this represents the public mood. Beside, if the currency really does blow up, I don't think a few gold coins or offshore accounts are going to do jack shit for me over the long run. The quality of life will be ruined regardless.

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.

  • 276 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.