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Fears That Cheap Money Is Damaging Fragile Economy

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ULTRA-LOW interest rates risk harming rather than helping the economy, top central bankers and the International Monetary Fund (IMF) warned yesterday, in stark contrast to the Bank of England’s view that loose policy is still best. The economy’s rebalancing can be undermined, inflation may be hard to get back under control, and the eventual raising of interest rates will become tougher and more dangerous, according to Jamie Caruana from the Bank of International Settlements. “Prolonged monetary accommodation gives borrowers, financial institutions and policymakers an incentive to keep kicking the can down the road, delaying necessary repair and reform,” said Caruana. And it “can produce other side effects. Monetary stimulus may find its way into asset prices and leverage before influencing goods and services price inflation. Moreover, prolonged very low rates can distort market signals.”

He also warned that central bankers fought hard to cut inflation in the 1970s and 1980s, even at the cost of high unemployment because it was best for long-term growth. These are hard-earned lessons that should not be forgotten.

By contrast the Bank of England has accepted above-target inflation in exchange for lower unemployment, and is expected to ease more under incoming head Mark Carney. The IMF joined BIS in warning the Bank against keeping rates very low when the economy is improving, arguing it could have damaging side effects. “Risk taking behaviour, spurred by accommodative monetary policies, could undermine financial stability,” it said. Link

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They've been saying more or less the same thing for the past 5 years - QE will lead to runaway inflation, etc.

Hasn't happened. We're in a liquidity trap where monetary policy alone is like pushing on a piece of string. How many times do they have to be proven wrong before they just shut up or change the record?

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They've been saying more or less the same thing for the past 5 years - QE will lead to runaway inflation, etc.

Hasn't happened. We're in a liquidity trap where monetary policy alone is like pushing on a piece of string. How many times do they have to be proven wrong before they just shut up or change the record?

Real wages in the private sector shrank by 4.5% over the past year, largely due to inflation. If that's what you call inflation not happening, I'd hate to see what "real" inflation does to living standards in this country.

The majority of jobs created last year in the UK went to non-British workers. So you've had inflation and massive borrowing to fund short-term fiscal stimulus, and all you're doing is creating jobs for a bottomless pool of immigrant labour. The UK economy is seriously messed up. Pumping up the welfare spending is not going to fix it.

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Real wages in the private sector shrank by 4.5% over the past year, largely due to inflation. If that's what you call inflation not happening, I'd hate to see what "real" inflation does to living standards in this country.

What's the alternative to a small amount of inflation? Deflation? Inflation is below 3% and simply not problematic, it's also on a downward trajectory.

The problem isn't a modest amount of inflation, it's low wages and the replacement of well paid, permanent employment with part-time / minimum wage / contract work. This has depressed the average wage. We've stripped out collective bargaining for the most part, most private sector employees are at the mercy of whatever wages employers wish to pay. Take that crappy low paid part-time job or leave it - hardly the way to build a healthy recovery.

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Real wages in the private sector shrank by 4.5% over the past year, largely due to inflation. If that's what you call inflation not happening, I'd hate to see what "real" inflation does to living standards in this country.

I doubt that figure.

Inflation in consumer/retail prices hasn't happened because we have supply-side surpluses (one ingredient of recession being insufficient demand). Also globalisation means we're importing third-world prices, which is what's masked real inflation running way ahead of the price indexes since about 2000 (albeit with a big interruption in 2008/9).

Inflation both real and in prices is what peaked in the 1970s, taking us into something you'd consider unimaginable if you think today is bad. That was bad enough for Callahan to admit defeat, and for the country to vote for something much closer to real austerity.

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What's the alternative to a small amount of inflation? Deflation? Inflation is below 3% and simply not problematic, it's also on a downward trajectory.

At the current rate of falling wages, the UK will have a standard of living lower than Portugal's in less than 15 years. To say that this is "not problematic" is somewhat flippant.

And as for deflation, do you mean that situation where everyone's standard of living improves as the cost of goods goes down? Yeah, that sounds horrible. (It would be if you were an over-indebted chancer living the high life on the back of a debt binge.)

Globalisation is deflationary. Adding 3 billion low-paid workers to the global supply chain is deflationary. Joining the EU and inviting 500 million lower-paid workers to immigrate to your country is deflationary. It's a little late now to decide that you don't want deflation.

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Inflation is below 3%

If you believe that, then send me your bank details, I have several million pounds belonging to the late finance minister of Nigeria that I want to send to you. ;)

Inflation is currently running at about 8% for normal people buying normal things.

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If you believe that, then send me your bank details, I have several million pounds belonging to the late finance minister of Nigeria that I want to send to you. ;)

Inflation is currently running at about 8% for normal people buying normal things.

.....just buy a third of what you would normally buy....sorted....make the figures fit, play them at their own game. ;)

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Nominal private sector wages in March 2013 fell 1.3% from a year earlier. RPI was 3.3%.

Total pay from January to March was just 0.4% up year-on-year

Consumer Prices Index shows cost of living is 2.8% higher

Number out of work rises by 15,000 to 2.52 million

article-0-19C97CF7000005DC-207_634x409.jpg

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If you believe that, then send me your bank details, I have several million pounds belonging to the late finance minister of Nigeria that I want to send to you. ;)

Inflation is currently running at about 8% for normal people buying normal things.

+1

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At the current rate of falling wages, the UK will have a standard of living lower than Portugal's in less than 15 years. To say that this is "not problematic" is somewhat flippant.

The problem isn't the low rate of inflation, it's static/falling wages. Different issues caused by different factors.

But hey, people wanted to smash the unions and be left with no collective bargaining power, so let's see how well they can negotiate a decent wage for their retail/call centre job on their own.

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They've been saying more or less the same thing for the past 5 years - QE will lead to runaway inflation, etc.

Hasn't happened. We're in a liquidity trap where monetary policy alone is like pushing on a piece of string. How many times do they have to be proven wrong before they just shut up or change the record?

Wrong, they've done enough to re-inflate. Running a deficit of greater than 20-30% of revenue funded through money printing, over several years, has been a common theme of almost all hyperinflation events.

£375 over 5 years, is £75 billion a year and revenue is about £700 Billion (10-11% of revenue).

Edited by GradualCringe

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The problem isn't the low rate of inflation, it's static/falling wages. Different issues caused by different factors.

But hey, people wanted to smash the unions and be left with no collective bargaining power, so let's see how well they can negotiate a decent wage for their retail/call centre job on their own.

Our prosperity is decided by what we produce, not how many monetary tokens we give to everyone.

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The problem isn't the low rate of inflation, it's static/falling wages. Different issues caused by different factors.

But hey, people wanted to smash the unions and be left with no collective bargaining power, so let's see how well they can negotiate a decent wage for their retail/call centre job on their own.

They didn't have a choice. Unions don't have the same power to blackmail employers for much higher than market rate paying wages any more. Few companies want to hear about you downing tools if you don't get this amount of extra pay, or shutting down the main steel furnace. Mostly companies have too many competitors; pay people more than they are worth to the company and you lose money and go under, whilst your competitors survive and take your clients. If you've gone heavily into debt in the boom, not realising competition was fierce below the surface, then you don't deserve stimulus to keep you in your over-valued house with huge mortgage.

The market still rewards those in terms of higher pay, who bring value to companies, with skills and ability and knowledge. It's just those who can't bring relevant skills to a position, can no longer command higher wages, except under gov stimlus conditions you like, keeping too many people reliant on public funds over-paid, and with wasted money into stimulus projects.

The economic change of recent decades has been from the primacy of manufacturers to that of communications, from machine power to electronic power, from factory to office, from mass production to small teams. As the scale of enterprise falls, so does the potential for sabotage and blackmail in the workplace.

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Another important voice in the camp of print money and stimulus good, austerity and free markets very bad.

Got to keep the leveraged big debtors protected, in order to keep asset values high for those who own a big slice of the same market and don't want to see them fall back in value, towards what they bought them for 20 or 30 years ago.

Government creates jobs apparently, and need their stimulus above commercial world participants in a market economy.

Fri May 17, 2013 3:25pm EDT

(Reuters) - The Federal Reserve has not done enough to lower U.S. borrowing costs to boost economic growth, a top Fed official said on Friday, citing his outlook for overly low inflation and overly high unemployment over the next two to three years.

http://www.reuters.c...E94G0O620130517

Vincent Reinhart, Morgan Stanley’s chief U.S. economist and a former senior official at the Fed’s Board, even used the dreaded d-word in his latest research note to clients.

http://blogs.reuters.com/macroscope/2013/05/18/kocherlakota-on-fed-stimulus-dont-stop-til-you-get-enough/

http://www.forbes.com/sites/afontevecchia/2013/04/18/the-fed-is-inflating-asset-prices-and-increasing-volatility-and-it-should-do-more-kocherlakota-says/

Edited by Venger

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Wrong, they've done enough to re-inflate. Running a deficit of greater than 20-30% of revenue funded through money printing, over several years, has been a common theme of almost all hyperinflation events.

£375 over 5 years, is £75 billion a year and revenue is about £700 Billion (10-11% of revenue).

Except monetary policy as it's currently being executed is really just pushing on a piece of string. You can give banks all the liquidity in the world, but if there is no demand from businesses for their loans (say, for investment, in response to demand for a product or service) it just won't work.

QE hasn't been inflationary because so little of it is getting through to the real economy. I also have to wonder why people on a forum who are generally hoping for a house price crash are averse to inflation. A good dose of inflation will reduce the real cost of housing just as effectively as a nominal price crash (provided it is accompanied by corresponding wage increases - and with weak collective bargaining in the private sector, that remains to be seen).

I don't want to come across as a QE apologist - I think the way it has been executed has been ineffectual and simply wrong. Far better would have been to use QE money (although less of it) to fund social house building, which would have a very direct stimulus impact on economic growth and positive social benefits too. Not to mention helping to speed up the correction in house prices.

Banks may, however, have a liquidity problem without QE. I really think full nationalisation of banks who could not support themselves, and the creation of a public sector bank providing essential banking services, would have been vastly preferable. Banking should serve the real economy, not be it's master.

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They've been saying more or less the same thing for the past 5 years - QE will lead to runaway inflation, etc.

Hasn't happened. We're in a liquidity trap where monetary policy alone is like pushing on a piece of string. How many times do they have to be proven wrong before they just shut up or change the record?

How about the deflationists? They have been well off the mark.

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They didn't have a choice. Unions don't have the same power to blackmail employers for much higher than market rate paying wages any more.

I agree with you to the extent that people are being paid what employers can currently get away with, i.e. market rates. The choice is unemployment or poorly paid employment for many - not much of a choice, but the balance of power during a period of high unemployment is on the side of the employer. All very logical.

However we arrived at this point not through natural evolution, but by policy design.

When you target inflation over unemployment, as we continue to do, you make a very clear choice - and in doing so, you take away employees strongest bargaining chip, which is of course a scarcity of labour achieved through full employment. It's hard to cut peoples wages in real terms if there is healthy competition for their labour.

But even with full employment, the decline of collective bargaining limits the power of individuals to attain a fair share of their output. Corporate profits are at a record high, whilst wages stagnate - the market is currently tilted too strongly in favour of employers, which has the end result of depressing wages for the vast majority. This isn't economically healthy, we need active and confident consumers to drive economic growth - having millions of people in low-wage, insecure, part-time employment is a drag on our economy.

The market we have designed operates according to a set of rules we have designed. Like any market, it requires those rules to function. There is nothing 'natural' or 'free' about this market, it is by our specific design that it operates. 'Market rates' are defined by the conditions and rules we make, in which the market operates. Rates of pay are declining because the balance of power needs to be shifted slightly back toward individuals over corporations, and because we fetishise low inflation over full employment.

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How about the deflationists? They have been well off the mark.

At the moment deflation is a much bigger risk than rampant inflation, which isn't happening anywhere. The US, in fact, could well be about to tip into deflation unless they do something drastic to avoid it.

Edited by Dr_Mibbles

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Far better would have been to use QE money (although less of it) to fund social house building, which would have a very direct stimulus impact on economic growth and positive social benefits too. Not to mention helping to speed up the correction in house prices.

+1

Edited by Eddie_George

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I don't want to come across as a QE apologist - I think the way it has been executed has been ineffectual and simply wrong. Far better would have been to use QE money (although less of it) to fund social house building, which would have a very direct stimulus impact on economic growth and positive social benefits too. Not to mention helping to speed up the correction in house prices.

The way to speed things up is there should be no government intervention to try an advert a correction. The market should be allowed to sort itself out naturally. If anything they should be assisting the correction by liquidating everything. The problem is that politicians and bureaucrats now think that all corrections must be controlled.

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At the moment deflation is a much bigger risk than rampant inflation, which isn't happening anywhere. The US, in fact, could well be about to tip into deflation unless they do something drastic to avoid it.

What is wrong with deflation, it is in the natural order of things after a credit bubble.

Edited by Take Me Back To London!

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  • 245 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%



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