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Swedish Lessons Show Even Deflation Cannot Cure The House Price Bubble

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http://www.telegraph.co.uk/finance/comment/10778474/Swedish-lessons-show-even-deflation-cannot-cure-the-house-price-bubble.html

Last week Sweden became the first northern European country to report that it had fallen into outright price deflation, a state of affairs that worries economists because if consumers and companies expect falling prices, they tend to postpone purchases, investment and hiring, potentially leading to a downward spiral in demand.

The reason Stockholm’s plight is attracting more attention than the rest of Europe, where eight countries are now in price deflation, is because Sweden came through the financial crisis relatively unscathed.

..

To Mr Svensson’s mind, the Riksbank was guilty of declaring victory before it had been won. Rather than focusing on the continuing risk of deflation and stagnation, the Riksbank instead turned its attentions to surging house prices, rising household debt and the threat they pose to financial stability.

In the jargon, it “lent against the wind”, and attempted to take the heat out of the housing market by raising interest rates even though inflation was low and likely to remain so.

The parallels with Britain, with its resurgent housing market and now again growing levels of household indebtedness, are obvious – only in Britain, with a much more serious banking crisis to deal with, the Bank of England has adopted the opposite approach, and allowed inflation to overshoot target rather than, as in Sweden, to undershoot.

Growth has now finally returned to the UK but it is of a type which, for the moment at least, seems worryingly dependent on surging house prices. This, in turn, throws up an old dilemma. Does the Bank of England let house prices rip or do something about them? So far, the answer has been of the do nothing variety. Conveniently, Sweden seems to point unambiguously to the dangers of dealing with emergent house price bubbles by raising interest rates.

Or does it? No doubt the Riksbank has made mistakes. Yet even in Britain inflation is now below target and that’s without lifting the foot off the monetary accelerator for as much as a moment. The same is true of the US, where tapering is merely a toning down of monetary stimulus, not a tightening as such. This suggests structural disinflationary forces way beyond the effects of domestic policies.

..

When debt is this high, you need to be particularly careful about disinflation, for there is nothing more guaranteed to add to the burden of debt than price and wage deflation. But the Riksbank can hardly be blamed for wanting to choke off the countervailing upward climb in house prices and credit.

If we just keep printing more and more money we can fix the economy and pay all the debt back with meaningless money. As long as no one figures out it's a con this time next year rodders we'll all be millionaires!

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Interesting. Sweden has definitely been going down the path of HPI as an economic strategy. Clearly not enough.

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In the UK, too many BTLers and older owners, housing VIs, multiple properties, few coming to market to sell up, blistering HPI treble-bubble, have Stockhome Syndrome.

Mistakes of raising interest rates? I'm sure forever HPI here, 10%+ a year, is all without any problem at all. Not like some of us feel like we're under ferocious attack, and system is in needs of rebalancing.

To Mr Svensson’s mind, the Riksbank was guilty of declaring victory before it had been won. Rather than focusing on the continuing risk of deflation and stagnation, the Riksbank instead turned its attentions to surging house prices, rising household debt and the threat they pose to financial stability.

In the jargon, it “lent against the wind”, and attempted to take the heat out of the housing market by raising interest rates even though inflation was low and likely to remain so.

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Interesting article.

This suggests that a better approach to HPI is some form of capital controls - restrictions on lending, foreign buyers coming into the market and so on.

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But the BoE hasn't sat idly and done nothing! We've had to endure six years of financial repression already with no end in sight. The FPC could have argued for macro-pru or higher rates at any time but chose not to do so. They are every bit as implicated in the bubble as Osborne.

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Last week Sweden became the first northern European country to report that it had fallen into outright price deflation, a state of affairs that worries economists because if consumers and companies expect falling prices, they tend to postpone purchases, investment and hiring, potentially leading to a downward spiral in demand.

It's funny how economists are terrified of postponed consumption but have no problem at all with consumption based on debt which is the opposite- pre consumption- based on income yet to be earned. On the face of it a world of deferred consumption in which consumers make their purchases from accumulated savings would seem a more sustainable arrangement than a world in which we are all pulling demand forward from the future based on ever higher levels of debt.

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It's funny how economists are terrified of postponed consumption but have no problem at all with consumption based on debt which is the opposite- pre consumption- based on income yet to be earned. On the face of it a world of deferred consumption in which consumers make their purchases from accumulated savings would seem a more sustainable arrangement than a world in which we are all pulling demand forward from the future based on ever higher levels of debt.

Never mind the ultimate horror known as sustained wage rises..

The thing is, history tells us that in both the 1970s bubble and the 1980s bubble in house prices, the vast majority of the real-terms decrease in house prices was through inflation, which hit 10% in the early 1990s,

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Pre consumption guarantees that the hamster wheel will be turning. No such guarantee with delayed consumption.

its not the hamster we need worry about.

Its the hamsters children now stuck on a wheel.

Indeed, we are all on the wheel today...we just dont realise it...thats what financialisation does, and it starts with DEFICIT SPENDING, now about 100 years old.

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Pre consumption guarantees that the hamster wheel will be turning. No such guarantee with delayed consumption.

It guarantees it turns now, the exponential function implies at some point it will stop.

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Pre consumption guarantees that the hamster wheel will be turning. No such guarantee with delayed consumption.

It's almost as if the idea is to load people up with debt so that they can't stop working.. or think political thoughts..

I suspect that this is the real reason why TPTB hate inflation so much. After all, the majority of people don't have fixed incomes or large piles of cash under the mattress; government finances positively benefit from sustained moderate inflation, and ongoing wage-price inflation of 5-10% aligns well with people's instincts when it comes to money.

However, if you happen to be of the Banker persuasion and you like to control both individuals and governments through the mechanism of debt, inflation is a terrible thing.. lets people off the hook. Bankruptcy and debt write-offs are also terrible things.. it's already been deemed impossible/illegal for governments to go bankrupt, student debts can't be bankrupted away.. just wait for mortgage and personal debt to go the same way.

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It guarantees it turns now, the exponential function implies at some point it will stop.

Not in a fiat money system it doesn't. Although occasionally you'll need to cross off a few zeros from the currency.

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I guess the learning that the Bank Of England will take from Sweden's experience is don't be tempted to raise interest rates too fast or too soon.

2% base rates in 2020? Maybe less.

or maybe to raise them faster than in Sweden... the more money that goes into housing the less that is available for other consumption

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At least Osborne's managed to bring the primary deficit down to just £108bn for 2013/14... on the back of a 37% yoy increase in stamp duty receipts (£12.8bn in total).

So the deficit is just 6.6% of GDP now (excluding financial interventions and debt interest repayments). :lol:

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Edited by zugzwang

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