In 2002 A Stark Warning From Mervin King

[apom]

http://business.guardian.co.uk/story/0,3604,843624,00.html

With the recession-hit manufacturing sector struggling to rebuild output, Mr King warned that the economy was too reliant on consumer spending, propped up by roaring house prices. "Even the optimistic Mr Micawber would realise that this cannot continue indefinitely," he said.

For the economy to recover its balance one of three things might happen. First, sterling could weaken against foreign currencies, cutting the value of the pound in shoppers' pockets and forcing them to tighten their belts.

Second, a rise in unemployment or interest rates could shock debt-laden households and cause a sharp downturn in consumer spending.

Third, Mr King is nervous that homeowners may not realise that although low interest rates make mortgage repayments affordable, high inflation will not erode the value of their borrowing, as it did in the 1970s - and when they do catch on, house prices will plunge.

"The immediate question is whether changes in asset prices have led to an imbalance within the economy that poses the risk of a large negative demand shock at some point in the future," he said. "I believe the answer is yes."

[bubbleturbo]

Heh heh heh

That is a bit of a find.

I think Mervyn knows what the score is and is a very good economist - hence the position he is in.

He knows that the game is about to stop, hence the Hawkish and blame offloading statements recently.

[erd]

I think Mervyn knows what the score is and is a very good economist - hence the position he is in.

Unlike his sucessor, who no doubt will come hot foot from the treasury, like all the other vacant posts at the boe have recently.

[undersupply]

Heh heh heh

That is a bit of a find.

I think Mervyn knows what the score is and is a very good economist - hence the position he is in.

He knows that the game is about to stop, hence the Hawkish and blame offloading statements recently.

I suppose if you cry wolf often enough and 4 long enough, one might escape from a zoo somewhere someday.

Even a stopped clock tells the right time twice a day.

[Marina]

I suppose if you cry wolf often enough and 4 long enough, one might escape from a zoo somewhere someday.

Even a stopped clock tells the right time twice a day.

Your point?

[Ignorant Steve]

Firstly he doesn't quantify the risk. 1% 25% or 50%.

Secondly, points 1 and 2 in the article ie pound falling making imports more expensive for consumers and interest rates increasing to cut consumption generally have happened since.

What he is warning is that without 1 & 2 above he predicts a crash.

Are you claiming that he's averted one?

[werewolves]

Good old Mervy (God bless him...)

[jellybean]

I suppose if you cry wolf often enough and 4 long enough, one might escape from a zoo somewhere someday.

Even a stopped clock tells the right time twice a day.

And I was very very drunk.

[Milkshock]

the most striking thing about this statement was that it was made all of 3 years ago, yet it still applies today.

[undersupply]

Your point?

You all champion him, but his cutting of IR fuelled the house price rises of 20% pa and the consumer debt.

Interest rates weren't increased at the RIGHT time to cause a slowdown.

So a lot of hot air and rhetoric from Merv to his LSE friends but no IR rises to hurt the credit junkies.

He talks the talk, but does he walk the walk?

And I was very very drunk.

Cant keep up with the metaphors- let me explain -predicting an economic downturn after an upturn doesn't win you the nobel prize for economics these days.

[apom]

Cant keep up with the metaphors- let me explain -predicting an economic downturn after an upturn doesn't win you the nobel prize for economics these days.

my favourite quote ever...

and the clearest point ever made...

It might sound weird.. but if I wanted now to describe the bust..

I would use that.. and you can't argue it..

Perfect

[Nem]

Even a stopped clock tells the right time twice a day.

Good quote undersupply, great film too!

[jellybean]

Cant keep up with the metaphors- let me explain -predicting an economic downturn after an upturn doesn't win you the nobel prize for economics these days.

Gotcha that time. Appologies. Although it's not so much waiting for the wolf to come allong as pointing out the cage door is of it's hinges and there is an open can of chappy outside.

Edited November 11, 2005 by jellybean

[oracle]

Gotcha that time. Appologies. Although it's not so much waiting for the wolf to come allong as pointing out the cage door is of it's hinges and there is an open can of chappy outside.

well the EA's are looking spookily like "THE BOY WHO CRIED WOLF" now aren't they??

...how many times have the meeja/VI's said ...oh no...it's gonna crash!!,only to be followed up by"...ha....not just yet,we're still piling on the pounds....up up and away"

....but if anyone is familiar with this story they will know the outcome......in short,they cry wolf.....people ignore them and THE WOLF IT IS!!!!...AND HE'S HUNGRY!

[eric pebble]

Heh heh heh

That is a bit of a find.

I think Mervyn knows what the score is and is a very good economist - hence the position he is in.

He knows that the game is about to stop, hence the Hawkish and blame offloading statements recently.

Spot on!

[laughing_goat]

Apom,

This is a gem of a find. I've always thought he's had a hard time as an economist. Lets hope he remains in the BOE top job for sometime.

LG

[karhu]

The long-term question is clear – will the Great Stability continue? Will the next ten

years be as nice as the past ten? That seems rather unlikely. As I said two years ago in

Leicester: “The strategy which the Monetary Policy Committee has pursued in recent

years – stimulating domestic demand to compensate for weak external demand in the face

of a strong exchange rate – carries the risk that there could be a sharp correction to the

level of consumer spending at some point in the future.” That risk has, at least in part,

crystallised. Some of the influences that have in the past provided a boost to consumer

spending may be going in to reverse.

Speech by MERVYN KING

GOVERNOR OF THE BANK OF ENGLAND

TO THE CBI NORTH EAST ANNUAL DINNER

11 OCTOBER 2005

[apom]

the head of the bank of england..

the head of the MPC..

Has been shouting for as long as possible about this..

You can't have more warnings then he has given..

IR's made debt easy..

but his warnings have been clear and consisitent and comon as to what risks are involved.

People didn't listen..

But you can't say he hasn't been warning everyone..

[BuyingBear]

stimulating domestic demand to compensate for weak external demand in the face

of a strong exchange rate – carries the risk that there could be a sharp correction to the

level of consumer spending at some point in the future.” That risk has, at least in part,

crystallised. Some of the influences that have in the past provided a boost to consumer

spending may be going in to reverse.

He's quite obviously talking about the yuan here and the fact that deflation in material goods (like DVD players, TV's, etc) has come to an end since they've hit the level where raw material costs (that are rising) prevent any further price falls, not to mention that many factories in China are kept alive on loans from state banks just to quell social unrest... so production cost of the goods doesn't represent the final retail price, this cannot continue forever.

The reason tax rises, stealth taxes and council tax hasn't bitten is purely because their cost has been offset by the fall in the cost of consumer goods in recent years, it's not enough that those prices are now standing still, they need to fall to offset rises otherwise we now have this squeeze of rising inflation in basic living costs and falling private incomes in real terms, in effect everyone is going to have to live like a pensioner on a fixed income! With no HPI people can't MEW their way out of the problem either!

If it wasn't for MEW'ing and the rapid rise of Chinese production we would have been in recession in 2003, this would have been the double dip from 2001 where it was delayed and therefore should have been worse, now we need to work off the excess that should have been solved by two mild recessions combined with a new slowdown with high oil prices and wild fiscal deficits to boot!

Edited November 13, 2005 by BuyingBear

[apom]

He's quite obviously talking about the yuan here and the fact that deflation in material goods (like DVD players, TV's, etc) has come to an end since they've hit the level where raw material costs (that are rising) prevent any further price falls, not to mention that many factories in China are kept alive on loans from state banks just to quell social unrest... so production cost of the goods doesn't represent the final retail price, this cannot continue forever.

The reason tax rises, stealth taxes and council tax hasn't bitten is purely because their cost has been offset by the fall in the cost of consumer goods in recent years, it's not enough that those prices are now standing still, they need to fall to offset rises otherwise we now have this squeeze of rising inflation in basic living costs and falling private incomes in real terms, in effect everyone is going to have to live like a pensioner on a fixed income! With no HPI people can't MEW their way out of the problem either!

If it wasn't for MEW'ing and the rapid rise of Chinese production we would have been in recession in 2003, this would have been the double dip from 2001 where it was delayed and therefore should have been worse, now we need to work off the excess that should have been solved by two mild recessions combined with a new slowdown with high oil prices and wild fiscal deficits to boot!

we were entering recession in 2003...

but we had a war to pay for and the country had no way of affording it..

House prices were at a peak..

So .. drop IR's to 3.5%..

Watch everyone go into a debt frenzy..

Oh look.. we can afford the war..

Nice

[pdg]

Apom,

I hope you dont mind but I have borrowed your finds (with credit to hpc.co.uk) to start a thread on TMF.

pdg

Edited November 14, 2005 by pdg

[r thritis]

Good to see this one:

"Third, Mr King is nervous that homeowners may not realise that although low interest rates make mortgage repayments affordable, high inflation will not erode the value of their borrowing, as it did in the 1970s - and when they do catch on, house prices will plunge."

This has always been my personal favourite argument for a HPC. I reckon people are starting to catch on just about now...