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bubbleturbo

Central Banks - Stop Mucking About And Raise Interest Rates

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Good article in the Telegraph today:

Ambiguous economic signals provide reasons not to raise interest rates. But they are also the consequence of the decision not to raise interest rates. The fragility of the “Yes-But” economy is both maintained and sustained by the unwillingness of central banks to end the biggest monetary experiment in history. This is a profoundly unnatural state of affairs – of course it is producing complicated and contradictory side-effects.

Janet Yellen, the chair of the US Federal Reserve, recently suggested that the economic recovery is not yet “complete”. That was seen as a sign that the Fed would keep waiting. But, in reality, the recovery can’t be complete until rates rise.

The unprecedented interventions made by the world’s central banks have distorted asset prices and markets. The economies of many developed countries have effectively been on life support for the past five-and-a-half years. Will removing it be dangerous? Yes, but the longer we keep interest rates low, the more trouble we will be storing up for later.

A recent survey conducted by The Wall Street Journal found that 30 private economists feared the Fed would wait too long before raising short-term interest rates. Just three were worried that the Fed would move too early.

We need to rip off the plaster. And fast.

Edited by bubbleturbo

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"unwillingness of central banks to end the biggest monetary experiment in history."

When will this be acknowledged? Everyone seems to forget this and pretend its some new normal. Everything must be getting better, house prices are going up again!

It's topics like this and the BBC thread that really highlight the constant barrage of propaganda the VI's employ and how powerful it is as a tool.

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folk can complain all they want but the elite are just not going to do what is 'right'. this is the biggest transfer of wealth from poor and middle class to rich in history. French in 18th C have nothing on this

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folk can complain all they want but the elite are just not going to do what is 'right'. this is the biggest transfer of wealth from poor and middle class to rich in history. French in 18th C have nothing on this

That one went wrong when they stopped throwing the plebs their crumbs.....we are a long way from mass starvation of the great unwashed at this point.

And so I agree, there is no reason for the elite to change course at this point.

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I think with london house prices at 30% above the peak that collapse the country's banking system we are at peak danger.

There is going to be a lot of pain to come.

Dont say we didn't warn you ( Hamish ).

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folk can complain all they want but the elite are just not going to do what is 'right'. this is the biggest transfer of wealth from poor and middle class to rich in history. French in 18th C have nothing on this

Umm. It's been going on 60 years. There's loads of oldies around here who bought for £3,000 to £6,000 in the early-to-mid 50s, then whatever it was in 60s, 70s, 80s (parents upsized for £35K, on a street/area where owners now think their very similar houses are worth £350K-£450K), 90s, mad 00s... then into the QE 0.5% years for another 30%+.

It doesn't help we've got a HPC Choir, who, the moment the market turns a little bit, sings excuses for the mobfant buyers who didn't know what they were doing paying £half-a-million+. Same as they sung the same for those who'd paid £250,000 for the same place in 2006, when 2008 came.... a few in this position vs the vast majority of equity rich/outright owners, and BTLers.

Carney warned last year - which I hope doesn't mean standby for another victim doubling - but that a crash is on the way. Too many fools want their homes to go up in value - even FTBs. They will only learn the hard-way. Carney also suggested banks better able to cope with any shocks/corrective shocks.

"Think about the mortgage you are taking on, the debts you are taking on," Carney said when asked what his message was to those aspiring to get on the housing ladder. "You are taking at least a 25-year mortgage, maybe a 30-year mortgage. "Are you going to be able to service that mortgage five years from now, 10 years from now, if interest rates are higher? Or are you counting, even subconsciously, on the price of your house keeping going up and if something happens an ability to sell it quickly and not facing the consequences of not being able to pay?"

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Carney warned last year - which I hope doesn't mean standby for another victim doubling - but that a crash is on the way. Too many fools want their homes to go up in value - even FTBs. They will only learn the hard-way. Carney also suggested banks better able to cope with any shocks/corrective shocks.

Yet, he sat back and did nothing..... :ph34r:

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I feel the house price boom started about 1967 and ended in 2007...a tripling every decade.....3k (1967), 9k (1977) , 27k (1987) 81k (1997) 243k (2007).

These last seven years we have had no nominal house price growth outside London (all the surveys from Haliwide to Rightmove concur) we have had no GDP growth and no wage growth. An economy that has stopped for the first time in two generations and all because we are still trying to avoid a correction.

Put f**king interest rate up, get the reset of asset prices over with and we can start growing again. But they wont.

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I feel the house price boom started about 1967 and ended in 2007...a tripling every decade.....3k (1967), 9k (1977) , 27k (1987) 81k (1997) 243k (2007).

These last seven years we have had no nominal house price growth outside London (all the surveys from Haliwide to Rightmove concur) we have had no GDP growth and no wage growth. An economy that has stopped for the first time in two generations and all because we are still trying to avoid a correction.

Put f**king interest rate up, get the reset of asset prices over with and we can start growing again. But they wont.

Interesting and plausible. Coincidentally, perhaps, Minsky identified 1966 as the year the US economy made the transition from (free market) robustness to (ponzi-financed) fragility.

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The trouble is interest rates can't go up whilst governments are running deficits. It may also be impossible to raise rates until governments are running significant surpluses to reduce the debt mountings first.

Ensuring everyone's bankruptcy is going to be pretty awkward democratically.

http://news.sky.com/story/1290569/jean-claude-juncker-things-you-need-to-know

"We all know what to do, we just don't know how to get re-elected after we've done it".

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The trouble is interest rates can't go up whilst governments are running deficits. It may also be impossible to raise rates until governments are running significant surpluses to reduce the debt mountings first.

Ensuring everyone's bankruptcy is going to be pretty awkward democratically.

http://news.sky.com/story/1290569/jean-claude-juncker-things-you-need-to-know

"We all know what to do, we just don't know how to get re-elected after we've done it".

The problem isn't that deficits are too high.

On the contrary is far more plausible that deficits are too low.

There simply ain't sufficient risk free assets to satisfy demand for savings from an ageing population.

In the absence of such savings assets (govt debt) what is the rational asset (one of them) for people to hold?

Houses.

You're all barking up the wrong tree fellas.

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Deficits are too low.

Must be big fun in a dream world where house prices double every few years, wage inflation is set by Gov/BoE, and Govs can always spend way more than they get in tax receipts.

No wonder oldies/housing VIs are not rushing to cash in on lottery-win HPI prices - although it doesn't help the HPC choir immediately sings excuses for those who've more recently bought into the ponzi, with huge mortgages to pay what it's worth.

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The problem isn't that deficits are too high.

On the contrary is far more plausible that deficits are too low.

There simply ain't sufficient risk free assets to satisfy demand for savings from an ageing population.

In the absence of such savings assets (govt debt) what is the rational asset (one of them) for people to hold?

Houses.

You're all barking up the wrong tree fellas.

Thanks for the post interesting. I have been taking risks and it has paid off. I think in general risk pays. So if you aren't taking a risk the chances are you will lose.

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Just wonder how long the remaining seven members will continue to side with Carney.

I suspect for ever, new entrants to the BOE jerk circle will be getting younger and will only see todays status quo as being normal. (and will personally have big mortgages+ BTL)

In Australia right now it has been noted by the non mainstream forums that Australias politicians and RBA tossers are all up to their necks in mortgaged or otherwise BTL property. Also they are supporting the currently massively discounted cap gain tax on such entities along with the 'negative gearing' whereby you can put all property losses against your working income. ie little real tax for the makers and shaker VI's

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The problem isn't that deficits are too high.

On the contrary is far more plausible that deficits are too low.

There simply ain't sufficient risk free assets to satisfy demand for savings from an ageing population.

In the absence of such savings assets (govt debt) what is the rational asset (one of them) for people to hold?

Houses.

You're all barking up the wrong tree fellas.

post-14908-0-62095700-1408566855_thumb.jpg

Money in a Maelstrom

Luckily we've built up more debt with cheap money, that's always worked in the past. I really can't think why it hasn't been tried before.

How did holding a house help in the Weimar many had to sell to buy food. When the price of food is all that matters a house is an irrelevant asset if you can't earn stable income.

http://www.thezimmail.co.zw/2014/01/27/govt-over-expenditure-flares-up-budget-deficit/

Government’s propensity to overspend is showing no signs of relenting despite overwhelming demands for fiscal discipline and introduction of austerity measures.

This comes amid indications that the government’s total expenditure for the month ended 31 October 2013 stood at almost $400 million against a total income of about $278m.

As such, government’s fiscal indiscipline in October flared up the country’s budget deficit to $110,573,655,20, representing a 100% increase jump from the previous month.

According to the latest Consolidated Statement of Financial Performance (CSFP) for October, 2013, government missed its revenue target of $329m and collected a mere $278m from all revenue heads and non-tax revenue reporting a variance of 15,41% or $51m.

Government’s recurrent expenditure was oblivious to the dwindling revenue streams chewing up $276m against a budgeted expenditure of $262m.

Capital expenditure amounted to $112 million against the budgeted expenditure of $67m.

Though the law requires treasury to publish CSFP within thirty days after the end of each month, October’s financial report was only availed to the public last week.

Delays in the release of the monthly consolidated statements come in the face of mounting accusations of government’s fiscal indiscipline by opposition party, Movement for Democratic Change and economists.

In a speech at a Crisis Coalition Zimbabwe public forum in Harare last week, former Finance minister Tendai Biti warned of pending deflationary conditions and the imminent return of a local currency.

“The government has been borrowing to pay the wage bill, in the process committing the cardinal sin that you do not borrow for consumption or recurrent expenditure,” Biti said.

Biti said that the ‘broiler syndrome mentality’ will lead the country into a serious ‘financial dislocation’ that will force the ruling government no choice but to re-introduce the local currency.

Still I have to admit it's been a resounding success in Zimbabwe.

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...

There simply ain't sufficient risk free assets to satisfy demand for savings from an ageing population.

In the absence of such savings assets (govt debt) what is the rational asset (one of them) for people to hold?

Houses.

You're all barking up the wrong tree fellas.

Counter thesis:

House prices are bid up with credit money.

The creation of new credit money does not require the existence of savings, only the existence of banks who are willing to provide new loans and the existence of willing borrowers.

As day to day bank solvency is determined by reserve account balances of the clearing banks at the Bank of England, then in the absence of other limits (e.g. capital requirements) the creation of new money can proceed without limit provided at each individual bank the credit money that flows out each day as the cash balances which are drawn down (when the loans granted by that bank are spent) washes out against credit money coming the other way, created by the same process at another bank.

During the boom phase a range of structured finance techniques were developed by the banks in order to subvert even the fairly tame capital requirement actually imposed. Hence essentially new credit money could be created without limit, hence the appellation credit boom.

In fact it was even worse than that. If capital requirements had no force because they had been subverted by structured finance, it would still appear at first glance to be the case that a bank lending too adventurously would not see the credit money outflows netted to zero by credit money inflows. If you are the bank that lends the most (e.g. Northern Rock) then day to day there will be a net move from you to another clearing bank that was lending less adventurously (e.g. LloydsTSB). Eventually, your reserve account at the BoE would go to zero. However, during the boom phase 'savings' of trading partner nations (e.g. South Korea, China, Germany etc) pursuing the so called Japanese growth model could act as a body of credit money 'savings' to fill the holes in any bank which was spilling out new credit money faster than new credit money was flowing in (e.g. Northern Rock). Hence the coming into being of the so called funding gap, the significance of which became very obvious during the freeze of the interbank lending market and the wholesale funding markets in the immediate wake of the crisis.

The idea that the by the late boom phase the balance sheets of the High Street banks remained loans to retail customers on one side and deposits from retail customers on the other is pure fantasy. Read the excellent Hubris by Ray Perman for a telling account of how retail banking M&A during the boom was driven by lenders who had rapidly growing loan books but limited customer deposits marrying up with banks with weak loan growth but oodles of retail deposits. The driver for these acquisitions was that banks knew that excessive dependency on wholesale markets made them vulnerable to the willingness of those markets to extend credit at prices which made the bank profitable. And time has shown that they were right to be worried.

Hence the only game in town is loans (which are the source of new credit money). You could have a massive asset price bubble even if there was no internal demand for savings at all - i.e. no ageing UK cohorts looking to save. You can have a pretty decent asset price bubble even in the absence of external 'savers' - i.e. nations looking to run trade surpluses, it's just that in their absence banks with dodgy plans to fund their balance sheets blow up sooner rather than later.

Are you suggesting that we had a credit boom because there was a savings boom?

This strikes me as inconsistent the plain fact that during the boom we had dwindling savings ratios, dwindling uptake of private pensions and dwindling provision of occupational pensions.

If you think that we need a savings boom in order to have a massive expansion in the broad money supply, then in my opinion you simply fail to understand how the contemporary banking system creates new money.

Edited by bland unsight

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The problem isn't that deficits are too high.

On the contrary is far more plausible that deficits are too low.

There simply ain't sufficient risk free assets to satisfy demand for savings from an ageing population.

In the absence of such savings assets (govt debt) what is the rational asset (one of them) for people to hold?

Houses.

You're all barking up the wrong tree fellas.

Are savings in Building Society account risk free?And many old dears were quite happy with those five plus years ago.

The simple reality is that five years of ZIRP have led to corresponding drops in velocity,thus negating any supposed benefit of increasing the money supply.Yet our Central banks response to drops in velocty has been cranking the money supply.

The solution to our problems lies in dealing with the debt whilst gettting the velocity of money back up.

Clearly,as CB's have driven down income,ordinary people have reined in spending and the only people spending are the 10% of the population with excess assets.

If interest rates went up,asset bubbles would deflate and it would be relatively easy for ordinary to get some interest coming through their accounts.

Edit to add,obviously not going to happen as politicians love asset bubbles.

Edited by Sancho Panza

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