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- Restructure our roads so that the average speed during rush hour gets to a target of at least 75% of the speed limit.

As the failed policy of Predict and Provide showed over many years, you can't do that on the supply side. Do you think they can realistically tackle the demand side, against an all-powerful motoring lobby with a strong history of successful lobbying? Even the huge but low-hanging fruit of getting desk-based workers to stop commuting five days a week is struggling to get accepted in the UK.

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Can't provide a reference off-hand, but I have read that 86% of stock market trades are made automatically by computers using algorithms defined by traders, which causes a gradual increase on a daily basis. Only 13% are made by actual decision makers, causing a sharp rise or fall in a particular stock. 1% are done privately.

There is an army of cruisers out there pushing the FTSE (and other markets) up. At some point the actual value of these stocks will be realised, and the whole pack of cards will come tumbling down.

I'm not a financial guru either, no advice given here, just my perspective.

I don't see the FTSE as a buy currently. The downsides risks are too great.

Interesting FaFa.

Perhaps things can be drawn out for some time but it is highly unlikely the central banks can continue to maintain the delicate line between deleveraging/deflation and money printing and asset purchases for decades. If history is any precedent then you will be disappointed and inflation is coming.

Cash is generating poor returns at present. I would be interested to know how you intend to maintain your wealth during this 30 year depression?

GB

You mean financial wealth? Cash is king.

Then you should know that 'investment in large public works programmes' just increases government debt with no impact on the real economy. It's true that if there are programs the government intended to fund for good, rational reasons then now may be a good time if construction companies are lacking work and eager to take any contract for a low price, but throwing money at them just to spend it will not fix economic problems caused by too much government.

In Japan where there was an investment bubble, increased investment didn't and won't work in much the same way that more consumer credit after a consumption driven bubble won't work. As I explained earlier in the thread, a boost of investment in the UK and US should work as that is what is needed to bring the economy back into balance. The problems aren't caused by too much government, they are caused by incompetent government.

Propping up rent seekers

The change to LHA has not come into full force as of yet

No fire sale of BTL due the the reform of HB ? I think if you take a look at the one bed flat market you will be surprised, it`s in free fall around my way but on a whole it has not had that much of a affect as of yet but it will start to bite IMO interest rates are the key to the BTL time bomb ,but as it stands now TPTB prefer to see a death by a thousand cuts

From your mouth to God's ears. But I don't see it yet. I'd very happily eat some humble pie if house prices crash, rather than slowly decline.

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holding Yen and the race to the bottom in the currency wars.

---

What bothers me is £1 = 127Yen.

A loaf of bread is 200 Yen.

No one invents a currency and starts a small unit in 100. It is always 1 as a standard unit. And the rest is history.

Will 1 Yen = £127 Maybe, but it's like jumping from one slide to another as we race down to the bottom and trying to guess which slide is the slower.

slides.JPG

Edited by MrTReturns
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  • 3 weeks later...

Thanks, Fafa. One of the best contributors.

I like the way you showed your workings as your opinion changed.

I don't comprehend MMT, and can't get over my conviction that central authorities will screw it up in ways they can't imagine.

The item that stood out for me was on rent seekers, and I agree with this comment:

Propping up rent seekers

The change to LHA has not come into full force as of yet

No fire sale of BTL due the the reform of HB ? I think if you take a look at the one bed flat market you will be surprised, it`s in free fall around my way but on a whole it has not had that much of a affect as of yet but it will start to bite IMO interest rates are the key to the BTL time bomb ,but as it stands now TPTB prefer to see a death by a thousand cuts

Benefits cuts are just kicking in. I reckon people have become bored with the prospect and underestimate the effect.

In my experience the low end of the BTL market has crashed, is still crashing. On my limited evidence it seems this is covered up by the fact most failed BTLs are taken into possession through receivers, rather than through the courts. I have no idea how the lenders are managing the properties, but I have spoken with professionals in this area who recognise there is dodgy dealing. My guess is there's a regulatory failure of bankster proportions waiting to be exposed.

This is an example I posted a while back - there was a reply to it in another thread from someone who seemed clued up, but I can't find that:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=171511

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It wont be just flats hitting the market ...but houses worth a fair chunk (currently) too ....possibly

Last week Hammersmith and Fulham council announced it is ending lifelong council houses tenancies and from April 2013 will only offer fixed-term tenancy agreements of two years or five years.

New tenants will have to show that they have made a contribution to the community and demonstrate a five-year connection to the borough.

http://www.telegraph.co.uk/news/uknews/terrorism-in-the-uk/9596251/Abu-Hamzas-wife-asked-to-leave-1m-council-house.html

And sell the expensive ones to raise revenue ?

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It wont be just flats hitting the market ...but houses worth a fair chunk (currently) too ....possibly

[/size]http://www.telegraph.co.uk/news/uknews/terrorism-in-the-uk/9596251/Abu-Hamzas-wife-asked-to-leave-1m-council-house.html[/font][/color]

And sell the expensive ones to raise revenue ?

Yep

Council houses as we know them will be gone forever....and replaced by?

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By 2020 there is a 50% chance of a banking collapse leading to complete social and state failure and the break-up of the UK into fiefdoms.

The only option is the government stamps down on the poor, moving the poorest into work camps where they can be controlled, denied the right to vote and prevented from rising up.

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In an effort to post less but say more I am writing the following as an encapsulation of my thoughts and in the hope some find it interesting. Others have covered similar grounds in posts but I thought it might be worth bringing it all together

Interest Rates to Stay Low until Economic Recovery Takes Hold

It is clear that the PTB in countries which are sovereign in their currencies (not the Eurozone) are in complete control of the yield curve of government bonds. As they control the yield of the risk free, this naturally lowers the cost of borrowing across the board. Due to this control of the yield curve and the fact that the pound is free floating means that the government can keep interest rates down. Banks and building societies can and have raised rates, but they will do only slowly to squeeze out the weakest positions for their own benefit. They will not shoot themselves in the foot by raising rates dramatically.

Recovery to Remain Tepid

Economic performance is generally measured by using the Gross Domestic Product (GDP) measure. GDP measures economic activity of a given economy over a given timeframe. It does not measure the quality of output, neither does it consider whether the distribution mechanism within the economy is fair. It is calculated thus:

GDP = Private Consumption + Gross Investment + Government Spending + (Exports - Imports)

Looking at these 4 factors, we can see that the UK has a problem. I think it is fair to assume that private consumption will not increase anytime soon due to massive household debt and the trade imbalance is likely to remain. This leaves government spending and gross investment as means of increasing growth. No major party advocates increasing government spending, though the UK public appears to be moving in this direction. Moves towards investment appear sluggish - if the UK is unable to agree on a new airport or a train line from Birmingham to London it is unlikely the amount of investment will be sufficient to create growth. It is therefore reasonable to assume the UK will continue as it has during the current government until such time private consumption increases due to delveraging or the government substantially assists increases in investment and government spending. Deleveraging the amount of private debt in the economy appears to be a multi-decade effort

Propping Up the Rent Seekers

The government will continue to prop up the rent seekers. Changes to housing benefits appear not to have caused the firesale of BTL hoped for, and pensioners will no longer need to sell their houses to fund their care. Given that people are being bailed out by low interest rates, it is very difficult to see where the selling pressure required for rapid and substantial falls will come from. Moreover, no major party is advocating a substantial shift in the taxation policies of the UK from that of rewarding rent seeking and punishing wealth creation. High income tax combined with low or non-existent taxes on assets or unearned income will remain.

A Run on the Pound Unlikely and Ineffectual

The only risk to the government’s control of the yield curve is that the currency maybe abandoned by international markets, leading to a run. Given the problems in all developed countries I think it is unlikely that the pound should be singled out, but even if it does occur, there maybe a short lived spike up in inflation such as we saw when the pound dropped in the second half of 2008. The government resisted pressure to put up interest rates, and they will resist that pressure again.

Inflation to Stay Low due to the Coming Commodity Crash

China, with 11% of global GDP, currently represents monumental portions of global commodity demand (50% of cement demand, 30% of rubber demand etc). This, on its own, is unsustainable and assuming that supply remained the same, it is unlikely that China can maintain these levels of demand and thus the current high commodity prices are unlikely to last. However there is another factor worth bearing in mind. To meet the large demand from China, a great deal of supply is currently being brought online in Australia, Canada and other resource countries. This means that the world is about to be awash with commodity supply for which there is simply insufficient demand. Commodity prices won’t drop, they will leap screaming off a cliff, following closely by epic busts in Australia and Canada and the other dutch disease countries.

They Cannot “Inflate It Away”

So, given the above situation, the talk of “inflating debts away” is erroneous. In the first place there will be little to no inflation and in the second, for said debts to be inflated away there needs to be a general increase in real terms in household income. So there will be no inflating away of debts. There will simply be a long, slow trudge towards deleveraging over a multi-decade period.

The Way Out

The way out for the UK and the US is through investment in large public works programmes. The deficit ultimately reflects the desire in the aggregate of the private sector to save. If the private sector saves less then the deficit will automatically reduce and economic growth would take care of the public debt issue. The private sector needs to be encouraged to invest through subsidy or alterations in the tax system if necessary and if they do not, the government needs to step in. This may prove problematic as the UK and US governments seem to be as allergic to investment spending as the average Oriental is to consuming. The opportunity is there, if the governments are willing to take it.

I think much of the above is known to posters here, but I thought it might be of interest. I’d just like to point out that I am living in Japan and anyone who makes a life changing decision on the basis of some random bloke on the internet is an utter div. I am in cash, 50% yen, 50% sterling. I believe the yen has very probably topped and there will be an opportunity to convert my sterling to yen over the next few years.

You only mention commodities in your comment on inflation

what about the effect of global food and energy shortages on inflation?

Also you claim 'they' cannot inflate away debt because by your analysis there will be no significant inflation

this completely ignores the fact that 'they' can cause inflation any time they wish simply by printing more money

Presumably Mervyn Kings recent comments on the wisdom of ignoring inflation at this time passed you by?

This statement clearly indicated that they are either expecting inflation or are going to cause it by extended QEing

TBH, your analysis just looks like a self deluded attempt at justifying your own political position on the way forward

:)

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This. There will be no recovery until the present system has either collapsed or the Governments stop printing money and allow banks (and everything else that needs to) to fail.

The way it looks at the moment, it seems that they have opted to print to infinity until the final and devastating collapse.

At which point a new system will be put in place.

The dollar will not be a reserve currency for long.

The US will be the Worlds ONLY superpower for at least the rest of this century

because everyone else is utterly screw*d

The idea that China or India will replace America is utterly ludicrous

they will have a hard job just keeping their populations from starving

:blink:

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Interesting FaFa.

Perhaps things can be drawn out for some time but it is highly unlikely the central banks can continue to maintain the delicate line between deleveraging/deflation and money printing and asset purchases for decades. If history is any precedent then you will be disappointed and inflation is coming.

Cash is generating poor returns at present. I would be interested to know how you intend to maintain your wealth during this 30 year depression?

GB

Good luck with this line of reasoning

I keep explaining why we are heading for further inflation

but the 'expert' opinion here is that we are heading for Deflation ??????

:blink:

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  • 1 month later...

Saw this from Mish, thought of this thread:

Last week I was interviewed by Constantine von Hoffman for a CBS news article regarding economic nightmares for Obama's 2nd term.

Calculated Risk was interviewed as well. His nightmare scenario is war, specifically noting the rise of Golden Dawn.

Eight people were interviewed for the CBS article but the organization was maddening. Specifically, there is no way to see all 8 viewpoints of people interviewed at once. You have to click through pages one at a time. I was curious enough to do it, Calculated Risk gave up after the second click.

In a clear effort to generate clicks, articles like this are an extreme turn-off and actually counterproductive. That no readers emailed me with a link to this article says no one bothered clicking through all the pages.

I talked to von Hoffman about numerous things, only one was mentioned in the article. Many of my points were of the nature of things I think should happen (and would benefit the global economy over the long run if they did), but most economists would disagree.

Mish Nightmare Scenario

  1. Not Addressing the Fiscal Cliff
  2. Breakup of the Eurozone
  3. UK exiting the EU
  4. China Growth falls to Zero Because of Rebalancing
  5. Currency Crisis in Japan
  6. Failure to address pension problems in US
  7. Rise of the Neo-Nazi Golden Dawn Party in Greece Leads to War

I mentioned all of those things and more. The first four are things that I actually believe need to happen (and the sooner the better) to prevent a global nightmare!

It's a good list and I think most of these things could/should come to pass.

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The US will be the Worlds ONLY superpower for at least the rest of this century

because everyone else is utterly screw*d

The idea that China or India will replace America is utterly ludicrous

they will have a hard job just keeping their populations from starving

:blink:

You could have same the same regarding US-UK at 1912 and of course you would be proven wrong.

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I simply don't see it with China - horrible demographics, endemic corruption, water shortages, lack of natural resources other than coal, pollution. You name it, they have a major long term problem.

1. Demographic - I agree it is unfavourable, but not that unfavourable. There still have hundred of millions of people who are at working age - larger than the entire US population.

2. Which of the two are more corrupt - I think this is really debatable. There are legal corruptions and illegal corruptions, but the effects are equally corrosive.

3. China has plenty of shale gas too, just like US. Pollution... US or London at 1912 wasn't a 'clean' place to live either.

4. US has plenty other problem - a social security and medicare commitments, a population with a feeling of entitlements, changing demographic (where the current minority will become majority), the cost through its role in policing the world.

Basically, it is just silly to project things out 50 years with any level of certainty.

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Good luck with this line of reasoning

I keep explaining why we are heading for further inflation

but the 'expert' opinion here is that we are heading for Deflation ??????

:blink:

At the moment I am not seeing the hyperinflationary holocaust. This PC cost £260 at PC World, my rent is 450 p.m (up from 350 p.m 15 years ago), food shops are well within budget especially if done online/include "sale" items/done in middle of month when they reduce everything, jeans/t-shirts as far as I know can still be had from TK Max/Asda for about a tenner sometimes? That is not inflation, and all the money printing is doing is helping banks to stay afloat while they try to somehow re-balance, we had the inflation over the last ten years, houses clothes, TV`s etc. Now prices either drop or demand falls away? The average UK citizen has a LONG way to go before they are eating what could be considered basic food, it is the rent seekers, the banks, the big stores and supermarkets that are hurting from where I sit, not me, so far.

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This. There will be no recovery until the present system has either collapsed or the Governments stop printing money and allow banks (and everything else that needs to) to fail.

The way it looks at the moment, it seems that they have opted to print to infinity until the final and devastating collapse.

At which point a new system will be put in place.

The dollar will not be a reserve currency for long.

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At the moment I am not seeing the hyperinflationary holocaust. This PC cost £260 at PC World, my rent is 450 p.m (up from 350 p.m 15 years ago), food shops are well within budget especially if done online/include "sale" items/done in middle of month when they reduce everything, jeans/t-shirts as far as I know can still be had from TK Max/Asda for about a tenner sometimes? That is not inflation, and all the money printing is doing is helping banks to stay afloat while they try to somehow re-balance, we had the inflation over the last ten years, houses clothes, TV`s etc. Now prices either drop or demand falls away? The average UK citizen has a LONG way to go before they are eating what could be considered basic food, it is the rent seekers, the banks, the big stores and supermarkets that are hurting from where I sit, not me, so far.

The world is trapped in a deflationary depression. The extraordinary measures that have been introduced since 2008 have proven incapable of reversing that depression. Japan's two decades-long struggle with debt deflation suggests that once established its effects are enduring and difficult to overcome, maybe intractably so without a catastrophic default or hyperinflation. We're not there yet. On the other hand, at the present rate of sovereign debt production, we won't have twenty years to find out.

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The world is trapped in a deflationary depression. The extraordinary measures that have been introduced since 2008 have proven incapable of reversing that depression. Japan's two decades-long struggle with debt deflation suggests that once established its effects are enduring and difficult to overcome, maybe intractably so without a catastrophic default or hyperinflation. We're not there yet. On the other hand, at the present rate of sovereign debt production, we won't have twenty years to find out.

Cash still king?

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Difficult isnt it.

I am getting cpi+ a tiny bit on cash.

Stocks a bit better.

Funds a bit better too.

Ive reduced my inflation exposure as much as possible.

I think in 2020 houses will look cheap but from whitch asset class (shut up gold bugs) i have no idea.

I think cash up to maybe 50k might as well just stay in the bank or be used for daily/monthly needs, assuming all debt is gone? Beyond that, shares in companies that actually produce something (healthcare for example; protective gloves need to be changed for every cream/ointment applied to a client/patient, so someone getting 3 or 4 different skin creams at night requires the carer to use 3 or 4 pairs of gloves) anything but property at the moment. Where the best store of value is I don`t know, but creating and maintaining seperate income streams must be important? The sheeple are not going to turn away from fiat any time soon?

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Inflation to Stay Low due to the Coming Commodity Crash

China, with 11% of global GDP, currently represents monumental portions of global commodity demand (50% of cement demand, 30% of rubber demand etc). This, on its own, is unsustainable and assuming that supply remained the same, it is unlikely that China can maintain these levels of demand and thus the current high commodity prices are unlikely to last. However there is another factor worth bearing in mind.

To meet the large demand from China, a great deal of supply is currently being brought online in Australia, Canada and other resource countries. This means that the world is about to be awash with commodity supply for which there is simply insufficient demand. Commodity prices won’t drop, they will leap screaming off a cliff, following closely by epic busts in Australia and Canada and the other dutch disease countries.

+1

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In an effort to post less but say more I am writing the following as an encapsulation of my thoughts and in the hope some find it interesting. Others have covered similar grounds in posts but I thought it might be worth bringing it all together

Interest Rates to Stay Low until Economic Recovery Takes Hold

It is clear that the PTB in countries which are sovereign in their currencies (not the Eurozone) are in complete control of the yield curve of government bonds. As they control the yield of the risk free, this naturally lowers the cost of borrowing across the board. Due to this control of the yield curve and the fact that the pound is free floating means that the government can keep interest rates down. Banks and building societies can and have raised rates, but they will do only slowly to squeeze out the weakest positions for their own benefit. They will not shoot themselves in the foot by raising rates dramatically.

Recovery to Remain Tepid

Economic performance is generally measured by using the Gross Domestic Product (GDP) measure. GDP measures economic activity of a given economy over a given timeframe. It does not measure the quality of output, neither does it consider whether the distribution mechanism within the economy is fair. It is calculated thus:

GDP = Private Consumption + Gross Investment + Government Spending + (Exports - Imports)

Looking at these 4 factors, we can see that the UK has a problem. I think it is fair to assume that private consumption will not increase anytime soon due to massive household debt and the trade imbalance is likely to remain. This leaves government spending and gross investment as means of increasing growth. No major party advocates increasing government spending, though the UK public appears to be moving in this direction. Moves towards investment appear sluggish - if the UK is unable to agree on a new airport or a train line from Birmingham to London it is unlikely the amount of investment will be sufficient to create growth. It is therefore reasonable to assume the UK will continue as it has during the current government until such time private consumption increases due to delveraging or the government substantially assists increases in investment and government spending. Deleveraging the amount of private debt in the economy appears to be a multi-decade effort

Propping Up the Rent Seekers

The government will continue to prop up the rent seekers. Changes to housing benefits appear not to have caused the firesale of BTL hoped for, and pensioners will no longer need to sell their houses to fund their care. Given that people are being bailed out by low interest rates, it is very difficult to see where the selling pressure required for rapid and substantial falls will come from. Moreover, no major party is advocating a substantial shift in the taxation policies of the UK from that of rewarding rent seeking and punishing wealth creation. High income tax combined with low or non-existent taxes on assets or unearned income will remain.

A Run on the Pound Unlikely and Ineffectual

The only risk to the government’s control of the yield curve is that the currency maybe abandoned by international markets, leading to a run. Given the problems in all developed countries I think it is unlikely that the pound should be singled out, but even if it does occur, there maybe a short lived spike up in inflation such as we saw when the pound dropped in the second half of 2008. The government resisted pressure to put up interest rates, and they will resist that pressure again.

Inflation to Stay Low due to the Coming Commodity Crash

China, with 11% of global GDP, currently represents monumental portions of global commodity demand (50% of cement demand, 30% of rubber demand etc). This, on its own, is unsustainable and assuming that supply remained the same, it is unlikely that China can maintain these levels of demand and thus the current high commodity prices are unlikely to last. However there is another factor worth bearing in mind. To meet the large demand from China, a great deal of supply is currently being brought online in Australia, Canada and other resource countries. This means that the world is about to be awash with commodity supply for which there is simply insufficient demand. Commodity prices won’t drop, they will leap screaming off a cliff, following closely by epic busts in Australia and Canada and the other dutch disease countries.

They Cannot “Inflate It Away”

So, given the above situation, the talk of “inflating debts away” is erroneous. In the first place there will be little to no inflation and in the second, for said debts to be inflated away there needs to be a general increase in real terms in household income. So there will be no inflating away of debts. There will simply be a long, slow trudge towards deleveraging over a multi-decade period.

The Way Out

The way out for the UK and the US is through investment in large public works programmes. The deficit ultimately reflects the desire in the aggregate of the private sector to save. If the private sector saves less then the deficit will automatically reduce and economic growth would take care of the public debt issue. The private sector needs to be encouraged to invest through subsidy or alterations in the tax system if necessary and if they do not, the government needs to step in. This may prove problematic as the UK and US governments seem to be as allergic to investment spending as the average Oriental is to consuming. The opportunity is there, if the governments are willing to take it.

I think much of the above is known to posters here, but I thought it might be of interest. I’d just like to point out that I am living in Japan and anyone who makes a life changing decision on the basis of some random bloke on the internet is an utter div. I am in cash, 50% yen, 50% sterling. I believe the yen has very probably topped and there will be an opportunity to convert my sterling to yen over the next few years.

who wrote this [email protected]?

the way out for us and uk is to start making stuff again and stop buying crap from other people.

money has to be earnt before it gets spent(that's the bit socialists don't get).

lavishing money we don't have on endless public works projects(like PFI) wihout proper oversight on cost,efficiency and deadline keeping is not on.

core infrastructure projects like repairing our clapped out transport system are needed, but building drop in feng-shui your dog centers for local councils is most certainly not.

we need proper monitoring of our government official.both national and local, with SEVERE penalties for those who do not perform.

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Talking off the cuff:

2020 is a long way off and so requires consideration of much more than government and policy. Technological, social and environmental changes should be factored in. For example:

- technology : it seems unlikely that the UK will spearhead the next technological breakthrough, especially if we put public money into the same old "shovel ready" projects. Lamentable investment means that we can't even build our own nuclear power stations, let alone be in the vanguard of a new tech revolution. Somewhere else will lead that charge and that means somewhere else will become a more likely home for investment. Given all we do is banking, and corrupt, incompetent, self-serving banking at that, what right will we have to be the global centre for funding this new tech? Will we lose our banking per-eminence? What will happen to our gdp if the city shrinks?

- social : the young are starting life saddled with huge debts. Their method of coping will be either to leave our shores (and take their tax with them) or boomerang back to Mum& Dad: there are currently 3m '2g' boomerangers (grown-up kids living at home) and some 400k '3g' boomerangers (kids living at home with kids of their own). This phenomenon is becoming mainstream, just as it did in Japan. Once it happens the stigma of living at home disappears (if you've ever watched "Take Me Out" you might have noticed a dramatic drop in how many women are turned off by men saying they still live at home) and the finances become ever more attractive. However, these boomerangers have no idea how to save, so it's just as likely they will spend any money saved on entertainment, rather than stashing it away for a deposit. This trend poses a serious threat to BTL.

- social : ~50% of couples with two children in their household have no plans for funding their retirement. They enter their 50s thinking it is time to plump up the pension pots. Now they will find themselves subsidizing the lives of their boomerang children. Generational proximity will inevitably lead to the children becoming increasingly aware of the value of money, as they realise that the £50k they blew on an education is both very difficult to accumulate yet simultaneously hopelessly inadequate as a means of generating a retirement income . The competing demands of student debt, deposit-saving and retirement saving will be a massive wakeup call Whether this leads them to become super-scrimpers or hopelessly state-dependent depends on their character.

- environmental : if weather patterns are becoming more disrupted and weather more extreme, food will inevitably become more expensive, and that is before we factor in a growing and increasingly affluent world population.

On top of all this, it should be pointed out that the devastating impact of QE on pensions and the subsequent impact on investment by private companies means QE is not a benign tool that can be used ad infinitum w/o consequences. Rises in the price of food and fuel are and will continue to be exacerbated by the weakening of sterling through QE, meaning consumers have less disposable income and less ability to consume. Moreover investors recognise that asset prices are being held at unsustainable levels and this is hurting investment. Indeed, going forward it seems likely that QE will do just as much "harm" as "good" to GDP.

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Talking off the cuff:

2020 is a long way off and so requires consideration of much more than government and policy. Technological, social and environmental changes should be factored in. For example:

- technology : it seems unlikely that the UK will spearhead the next technological breakthrough, especially if we put public money into the same old "shovel ready" projects. Lamentable investment means that we can't even build our own nuclear power stations, let alone be in the vanguard of a new tech revolution. Somewhere else will lead that charge and that means somewhere else will become a more likely home for investment. Given all we do is banking, and corrupt, incompetent, self-serving banking at that, what right will we have to be the global centre for funding this new tech? Will we lose our banking per-eminence? What will happen to our gdp if the city shrinks?

- social : the young are starting life saddled with huge debts. Their method of coping will be either to leave our shores (and take their tax with them) or boomerang back to Mum& Dad: there are currently 3m '2g' boomerangers (grown-up kids living at home) and some 400k '3g' boomerangers (kids living at home with kids of their own). This phenomenon is becoming mainstream, just as it did in Japan. Once it happens the stigma of living at home disappears (if you've ever watched "Take Me Out" you might have noticed a dramatic drop in how many women are turned off by men saying they still live at home) and the finances become ever more attractive. However, these boomerangers have no idea how to save, so it's just as likely they will spend any money saved on entertainment, rather than stashing it away for a deposit. This trend poses a serious threat to BTL.

- social : ~50% of couples with two children in their household have no plans for funding their retirement. They enter their 50s thinking it is time to plump up the pension pots. Now they will find themselves subsidizing the lives of their boomerang children. Generational proximity will inevitably lead to the children becoming increasingly aware of the value of money, as they realise that the £50k they blew on an education is both very difficult to accumulate yet simultaneously hopelessly inadequate as a means of generating a retirement income . The competing demands of student debt, deposit-saving and retirement saving will be a massive wakeup call Whether this leads them to become super-scrimpers or hopelessly state-dependent depends on their character.

- environmental : if weather patterns are becoming more disrupted and weather more extreme, food will inevitably become more expensive, and that is before we factor in a growing and increasingly affluent world population.

On top of all this, it should be pointed out that the devastating impact of QE on pensions and the subsequent impact on investment by private companies means QE is not a benign tool that can be used ad infinitum w/o consequences. Rises in the price of food and fuel are and will continue to be exacerbated by the weakening of sterling through QE, meaning consumers have less disposable income and less ability to consume. Moreover investors recognise that asset prices are being held at unsustainable levels and this is hurting investment. Indeed, going forward it seems likely that QE will do just as much "harm" as "good" to GDP.

Great post, thank you.

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  • 10 months later...

In an effort to post less but say more I am writing the following as an encapsulation of my thoughts and in the hope some find it interesting. Others have covered similar grounds in posts but I thought it might be worth bringing it all together

Interest Rates to Stay Low until Economic Recovery Takes Hold

It is clear that the PTB in countries which are sovereign in their currencies (not the Eurozone) are in complete control of the yield curve of government bonds. As they control the yield of the risk free, this naturally lowers the cost of borrowing across the board. Due to this control of the yield curve and the fact that the pound is free floating means that the government can keep interest rates down. Banks and building societies can and have raised rates, but they will do only slowly to squeeze out the weakest positions for their own benefit. They will not shoot themselves in the foot by raising rates dramatically.

Recovery to Remain Tepid

Economic performance is generally measured by using the Gross Domestic Product (GDP) measure. GDP measures economic activity of a given economy over a given timeframe. It does not measure the quality of output, neither does it consider whether the distribution mechanism within the economy is fair. It is calculated thus:

GDP = Private Consumption + Gross Investment + Government Spending + (Exports - Imports)

Looking at these 4 factors, we can see that the UK has a problem. I think it is fair to assume that private consumption will not increase anytime soon due to massive household debt and the trade imbalance is likely to remain. This leaves government spending and gross investment as means of increasing growth. No major party advocates increasing government spending, though the UK public appears to be moving in this direction. Moves towards investment appear sluggish - if the UK is unable to agree on a new airport or a train line from Birmingham to London it is unlikely the amount of investment will be sufficient to create growth. It is therefore reasonable to assume the UK will continue as it has during the current government until such time private consumption increases due to delveraging or the government substantially assists increases in investment and government spending. Deleveraging the amount of private debt in the economy appears to be a multi-decade effort

Propping Up the Rent Seekers

The government will continue to prop up the rent seekers. Changes to housing benefits appear not to have caused the firesale of BTL hoped for, and pensioners will no longer need to sell their houses to fund their care. Given that people are being bailed out by low interest rates, it is very difficult to see where the selling pressure required for rapid and substantial falls will come from. Moreover, no major party is advocating a substantial shift in the taxation policies of the UK from that of rewarding rent seeking and punishing wealth creation. High income tax combined with low or non-existent taxes on assets or unearned income will remain.

A Run on the Pound Unlikely and Ineffectual

The only risk to the government’s control of the yield curve is that the currency maybe abandoned by international markets, leading to a run. Given the problems in all developed countries I think it is unlikely that the pound should be singled out, but even if it does occur, there maybe a short lived spike up in inflation such as we saw when the pound dropped in the second half of 2008. The government resisted pressure to put up interest rates, and they will resist that pressure again.

Inflation to Stay Low due to the Coming Commodity Crash

China, with 11% of global GDP, currently represents monumental portions of global commodity demand (50% of cement demand, 30% of rubber demand etc). This, on its own, is unsustainable and assuming that supply remained the same, it is unlikely that China can maintain these levels of demand and thus the current high commodity prices are unlikely to last. However there is another factor worth bearing in mind. To meet the large demand from China, a great deal of supply is currently being brought online in Australia, Canada and other resource countries. This means that the world is about to be awash with commodity supply for which there is simply insufficient demand. Commodity prices won’t drop, they will leap screaming off a cliff, following closely by epic busts in Australia and Canada and the other dutch disease countries.

They Cannot “Inflate It Away”

So, given the above situation, the talk of “inflating debts away” is erroneous. In the first place there will be little to no inflation and in the second, for said debts to be inflated away there needs to be a general increase in real terms in household income. So there will be no inflating away of debts. There will simply be a long, slow trudge towards deleveraging over a multi-decade period.

The Way Out

The way out for the UK and the US is through investment in large public works programmes. The deficit ultimately reflects the desire in the aggregate of the private sector to save. If the private sector saves less then the deficit will automatically reduce and economic growth would take care of the public debt issue. The private sector needs to be encouraged to invest through subsidy or alterations in the tax system if necessary and if they do not, the government needs to step in. This may prove problematic as the UK and US governments seem to be as allergic to investment spending as the average Oriental is to consuming. The opportunity is there, if the governments are willing to take it.

I think much of the above is known to posters here, but I thought it might be of interest. I’d just like to point out that I am living in Japan and anyone who makes a life changing decision on the basis of some random bloke on the internet is an utter div. I am in cash, 50% yen, 50% sterling. I believe the yen has very probably topped and there will be an opportunity to convert my sterling to yen over the next few years.

Anniversary bump!

I think it is always good to take stock of predictions. Thus far I would not say that there is much I would alter in the above except -

(I). It appears that household debt has deleveraged to a point where the percentage of household income going to service debt is now historically low. Given the main obstacle to the housing market is high cost of deposits, the Chamcellors give away (HTB) has the potential to create a short lived boost with knock on effects. However once household debt goes up the economy will slowdown again. It is not sustainable but may get them re-elected.

(ii). I still believe that rebalancing needs to occur via infrastructure investment and government support for manufacturing. I used to think this would need to occur for growth, but I now think that we could simply see a continuation of the house price economy ad infinitum until the country eventually becomes third world. We are, however, a fair distance from that. Nevertheless with the UK dropping precipitously in international education league tables, the long term trend is not good.

(iii). I'd like to reiterate that I see commodities as linked to China, we'll need to see a marked slowdown from them.

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