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What Do You All Predict For Inflation And Interest Rates?

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Those like me who are looking for a house price crash should not be too disheartened by the falling inflation rate. My guess is that the leadership at the BOE are unable to control the markets in a way that the US Federal Reserve does, despite hoping they can. I say that because it seems like they think they can pull off the same master stroke as the Fed. who dropped interest rates in the USA to incredibly low levels without a currency flight – dollar hegemony is a powerful palliative.

My limited view is that there are some key differences between the US and the UK economies. The Fed were able to lower interest rates to dangerous levels following the Wall St ‘dot.com’ crash and Twin Towers attack because of sound fundamentals here in the US. The aim was simple 1) stimulate business and 2) lower the dollars’ value. As we all know the dollar traded at 1.44 against the pound for a period and the base rate was reduced to less than 2 per cent. Just imagine for a moment, that’s nearly free money for manufacturers at a time when American goods sell overseas for 10-15% less than before the rate change, and all because of currency manipulation by the Fed. The net result was oil was cheaper for the world, because it’s sold to everyone in dollars, allowing American corporations to sell more goods to the global market, making record profits at the same time. Were it not for the scandal and greed of errant leaders like Ken Lay (Enron), and the burgeoning trade deficit, the business economy here in the USA would smell like roses.

Compelling evidence of just how good the past 3-4 years have been for US Inc. is the reporting of record profits by many American companies, who now hold huge cash reserves which will be used for share buy-backs. All good news for US equities. I take my hat off to Greenspan for having walked the tightrope of providing support for business on the one hand, and control of the expanding ‘housing and borrowing’ bubble on the other. It’s true that borrowing and the trade deficit are a problem, however, the past few months prove the markets are not unduly worried about the risk. In fact some argue the deficit is a smart Republican move to cripple Medicare and social security by engineering a fiscal crisis. Anyone horrified by this tactic needs to read Lord Turner’s Report and then remind themselves you cant can’t pour a litre of milk out of a pint bottle.

Now compare the situation in the UK. Can’t they do the same as the Federal Reserve and just drop the interest rates? I am guessing Mervyn King and the MPC will think they can, and that Gordon Brown will encourage them for political reasons. The problem is there are several key differences:

First, the UK does not ‘make’ nearly much as they did during the post war period: we’ve switched from being the worlds’ smartest maker of ‘things’, to a seller of services. It’s a lot harder to sell insurance management services using a discounted currency than it is a high tech’ 10,000USD beryllium GPS system bearing.

Second, the dollar is less at risk from a collapse in confidence. If you are currently holding a large sterling reserve and you look at the current dollar vs. sterling rate then how does it make you feel to hear the BOE is about to indirectly devalue the pound? I read that some American advisors predicted a rate of 1:55 in the next 6 months, which looks more realistic by the day, and I now wonder if there will be a crash in the pound.

The final factor is the timing of each reduction in interest rates. In the USA the interest rates were dropped before the subsequent effect of a highly localized boom in property values. Ironically, values increased madly in areas like ‘legislation bound’ California and the hurricane tormented Gulf Coast. The situation is very different in the UK where the boom has already occurred. If the MPC reduce interest rates again it will inflate the property bubble. This is a dangerous strategy and seems political and irrational. We all know that house prices are a Ponzi Scheme investment: there is no net increase in real ‘value’ as prices increase, and like all Ponzi Schemes there comes a point where people lower in the chain are cheated to the point where they react. If this government do nothing to correct the housing and related pensions inequity then I truly hope non-home owners, and those cheated by the pensions crisis, start to act in a coordinated way to redress the inequity forced on them by corrupted and biased fiscal policies. It’s clear at this point that the Labour Party Leadership only care about: their image; their own public sector pensions; and wealthier house owners. If Lord Turner’s report is communicated to all Britons then the future will be a lot brighter for everyone and ironically that includes today’s pensioners who are risking the violent backlash we saw during poll tax demonstrations.

So let’s take the scenario a little further, the MPC decide that a cut in interest rates is needed to prevent a house price crash, and to support business. If you are controlling a country's federal reserve, say in Japan, are you going to want to hold billions of pounds in a currency that is just about to deflate? Or, would you want to be proactive and start sliding money into the dollar, or the Euro? I would certainly be listening very carefully to the messages being issued by the BoE so that I wasn’t caught out, and at that back of my mind I would know there is little impact on the worlds economy if there is a Sterling crisis. Remember George Soros? Clearly, there is a dilemma for the MPC, drop interest rates to support housing inequity and in doing so risk Sterling, or, accept that increasing wage demands, inflation, and the grotesque unfairness of an average house price that exceeds five times earnings means we should deflate the bubble with marginally higher interest rates. Business in the UK will squeal about the increase in borrowing and should look to the US for the limited effect of a 1% increase in lending rate. I don’t old much hope for fairness, but do think the MPC are courting a currency collapse which will damage you all.

Edited by bpw

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:) I'd rather answer this question after reading Peter Warburton's Debt and Delusion, which my mum just bought me for Christmas!

However, I think we are going to see house prices collapse in terms of the price of food and, initially, fuel. I also think wages will collapse in terms of the price of food, fuel and current house prices.

As part of the dynamics of these changes in value, I think we may see supply and/or demand for these goods fall or even fail. By which I mean, that the effects on business of the changing price structures may mean that business-based suppliers will be unwilling or unable to supply customers (or even their own inventory) at any price that is available in the market. In reading the previous sentence be aware that I am using the word "demand" to mean "need plus the money to buy" as opposed to "need without the money to buy".

Actually, what I think I am describing in that last paragraph is the loss of liquidity associated with falling relative money supply in the last stages of an inflation-driven crack-up boom.

Among the lessons that may be re-taught to us in such a scenario I include the value of communities being able to supply the bulk of their own food, of being able to build heat-efficient shelters using voluntary labour and of being able produce and control scrip or tokens of exchange within a community (rather than relying on bankers or government to supply and control it). Even I find these three difficult to believe. However, in my 44 years, I have noticed how often that which I find difficult to believe actually does happen.

Of course, I reserve the right to change my answer after reading Debt and Delusion. :lol:

The part of the inflation argument that I find difficult to absorb (or "understand to a point where I intuitively believe it") is the concept that inflation of the money supply has already occurred on a massive, massive scale and that this historic (as in "already occurred") inflation could leak out of financial asset prices (including property) into the prices of non-financial assets regardless of whether goobermint inflates the money supply or not from here on out.

I don't have a problem believing that goobermint - or, more accurately, the central banks and investment banks - have been inflating the money supply for decades. What I find difficult to grasp is the idea that this previous inflation can move to affect the price of other, non-debt based goods even if the central/investment banks do not continue to inflate.

Though, even as I say this, I get it more and more.

Note that in all the above, I use the word "inflation" to mean increasing money supply. I do not use it to mean "price rises".

Edited by longjohn

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Dont be fooled by gubmint numbers - its all lies - intended to keep down inflation expectations. Inflation is already huge and growing - the people are begininning to know this (http://www.moneyweek.com/file/5505/index.php). Inflation "expectations" are the ultimate self fullfilling prophesy - once you expect rising prices you rush out to buy more, sooner which results in - rising prices. Thats why the gubbmint publishes its lies - to "manage" expectations - thereby managing "inflation". But it can only work for so long. Inflation is pretty much guaranteed from here out because of money supply growth. The trick is to be amongst the first to recognize it.

BAB

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<Re - Original poster's comment:

If the MPC reduce interest rates again it will inflate the property bubble. This is a dangerous strategy and seems political and irrational.>

I think this will happen. They may not go down much or stay down for long but I think another upwards rally in house prices will happen especially given the extra power of VI spin.

No doubt it would not leave the country any better off and I am worried about the impact on my savings all held in sterling. I'm fully aware that now might be a good time to move my funds into another currency like the Canadian Dollar or Euro.

Are there any others worried like me and who would take action to protect their savings like this?

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Of course IR's will fall. That's what happens when a country starts to slide towards recession. Look at the drop in GDP and combine it with the bleak outlook from business especially retail.

But don't expect falling IR's to give the housing market a boost. Look at previous housing busts and you'll see falling interest rates combined with falling house prices.

We are heading towards a recession. Consumer confidence is falling and more importantly unemployment is rising. The effect of IR's is as nothing compared to consumer confidence look at Japan and it's 0.1% interest rate.

I'm 100% sure a recession is coming through it might take to 2006/2007 before we get negative GDP. Inflation is a much trickier call as we have massive monetary growth (I can hear the liquidity sloshing about from here) but I can also see a massive amount of debt combined with a credit crunch that leads to deflation. I'm leaning towards short term inflation (2006) turning into deflation as the debt levels overcome the monetary supply (2007 onwards = recession) but my timing might be off.

As for IR's expect a cut first quarter 2006 and than a further few cuts during the rest of the year. Then down down down to around 2-2.5% as a bottom end 2007/early 2008.

If it looks more like a depression than a recession (e.g. more like Japan than Germany) then I expect we will deal with it differently to Japan e.g. not a long drawn out death by a thousand cuts with loose monetary policy and 0.1% IR's. Instead the BOE will aim to clear out the bad debt by letting the debt ridden companies go bust and the overextended consumers the same. E.g. The medicine will be worse but the disease will be cured quicker.

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Of course IR's will fall. That's what happens when a country starts to slide towards recession. Look at the drop in GDP and combine it with the bleak outlook from business especially retail.

But don't expect falling IR's to give the housing market a boost. Look at previous housing busts and you'll see falling interest rates combined with falling house prices.

Given the willingness of people to slam their asking prices up to the max, IMO IRs=3.5% are still priced in. This gives us a 1%points "cushion".

So a move out of Sterling might be wise now? Why do people keep mentioning the Canadian Dollar? Just a question.

Edit - Thanks for the interesting post bpw

Edited by megaflop

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<Re - Original poster's comment:

If the MPC reduce interest rates again it will inflate the property bubble. This is a dangerous strategy and seems political and irrational.>

I think this will happen. They may not go down much or stay down for long but I think another upwards rally in house prices will happen especially given the extra power of VI spin.

No doubt it would not leave the country any better off and I am worried about the impact on my savings all held in sterling. I'm fully aware that now might be a good time to move my funds into another currency like the Canadian Dollar or Euro.

Are there any others worried like me and who would take action to protect their savings like this?

I would also want to protect myself against this.

I think the BoE will only look at CPI inflation (take a look at an e-mail I received from them http://www.housepricecrash.co.uk/forum/ind...ndpost&p=253597 ). They may also mention economic stability, and no boom and bust, but I think they have failed with this. There has been a massive boom, just not in the CPI measure because of deflationary effects from China. Economic stability? Don't make me laugh! It's all based on debt debt debt!!!

So what are my expectations for CPI inflation?

Well, looking at November's numbers it shows that the high street have reduced prices alot to encourage spending and I expect the same in December's figures, hence a lower CPI figure. But the problem is the retailers are not making the money/margins they used to, and ultimately this will lead to rising unemployment. This will be the start of the recession.

The question is what will retailers do in the new year? You may expect them to increase prices to maintain margins, but I expect retailers will find this very difficult as the lack of consumers. So although I expect the CPI figure to rise, I don't expect a huge jump.

I don't beleive there will be a rally in prices with an IR cut, only because I don't expect alot of cuts (if any). Looking back to the summer, there was a huge expectation that IR would reduce several times (look at some posters predictions), which had a big expectation to consumers, and, in turn house prices. Remember a reduction of 0.25points is approx £11 on a £100k mortgage - which is peanuts in the scale of things!

Because of the predicted rise in the cost of living next year (council tax, tax, transport, food etc) I expect the economy to be in big trouble, and there will be a lot of squealing for big IR cuts. Therefore, paying over the odds for a house will be a no go area, and the forced sellers will bring prices down - which will slowly snowball!

I think the BoE will let sterling fall, so investing in another currency would be a good idea. The problem I would have is I don't have much of a clue what's happening with different currencies, all I know is the money supply is increasing rapidly. So I think gold may be a good idea - especially if IR (i.e. sterling) goes down.

There were big bubbles in the last few weeks, but now gold is back to circa $500 - a gentle increase will do me.

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Why do people keep mentioning the Canadian Dollar? Just a question.

Edit - Thanks for the interesting post bpw

-Peace, order, stability, prosperity.

-Canadian Tar Sands contain more oil than Saudi Arabia in Alberta.

-vast quantities of every other natural resource imaginable.

-C$ still trades at discount to U$.

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-Peace, order, stability, prosperity.

-Canadian Tar Sands contain more oil than Saudi Arabia in Alberta.

-vast quantities of every other natural resource imaginable.

-C$ still trades at discount to U$.

Thanks! I heard someone say they were buying travellers cheques, but I don't think they were holidaying. :lol:

I thought the Tar Sands was de-bunked in a Peak Oil article I read ages ago, because it's too difficult to extract efficiently.

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Noone really knows the answer to this one, but I can see 4 perfectly plausible scenarios:

1) Inflation rises (The Stagflation scenario).

BoE raises interest rates causing a relatively swift correction in the housing market in real terms. Of course everything else goes up, so all in all, the real value of your STR savings/deposit falls and you are not much better off, especially as the economy suffers and unemployment rises. You are okay as long as you hold on to your job.

2) Inflation remains roughly where it is (The Soft Landing scenario).

Interest rates stay more or less where they are and we see continuing stagnation in the housing market. People spend less as MEWing falls, leading to lower but still positive economic growth. Lenders slowly tighten their lending criteria and the market eventually corrects in real terms but over quite a long period of time.

3) Inflation falls modestly (The Prolonged Bubble scenario).

Interest rates are cut modestly and the bubble remains. In 12 months time, we're all still waiting.

4) Inflation falls dramatically and we get deflation (The Japan scenario).

Interest rates are cut aggressively, but as the size of peoples' debts grows further in real terms, people stop spending. Economic growth falls and lenders tighten their lending criteria. A credit crunch ensues, bringing down the housing market and the economy with it.

Edited by doogie

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A fascinating thread. Everyone makes a very good argument.

I tend to agree with andrew_uk's view that UK IRs will fall in the Spring (Despite them rising everywhere else in the World including our closest trading partners - the EU and the US.), no doubt leading to VI spin and some kind of increase in HPs, but that the underlying trend will be deflation. I have always thought that deflation is the big worry for the UK going ahead in the next 5 years.

However, as andrew_uk posted, the reduction in IRs will have, at best, a temporary affect and it might be the case that the affect is very limited. We are heading into a recession - you don't need to be an economist to see this happening. It just takes some basic maths when you look at the huge amount of debt in the UK and/or being old enough to have seen this all before. The only difference this time that 'having seen this all before' will not really cut the mustard as I think the downturn is going to be disasterous for a large section of the UK population. Japan went through it, Germany is still going through it. Our turn is next.

Once deflation kicks in we will, like Japan, see the real pain of high HPs as wages fall, jobs are lost, IRs plummet and the reality of enormous mortgages that are never whittled away, due to no inflation in wages, become painfully obvious.

The bottom line is that when the economy turns South the BOE, Brown, etc, are not going to give a monkeys about people maxed out on credit or who have enormous mortgages. Such people will be left to economic ruin IMPO. Big business will see to that as pressure will be bought to bear on Brown and the BOE to make the economic conditions in the UK 'ideal', as possible, for business and not for, as no doubt some in the City will put it, "a bunch of ill-educated chavs who who were too stupid, too greedy and too naive!". Whilst I do not believe in 'black helicopters' or little silver men landing at Roswell I am pretty convinced that there are those in the City, who have not only sat back and enjoyed the enormous debt levels built up by the British Public in recent years, who probably, coldly and rationally, engineered it.

The four options that doogie points out are also very much still on the table. I think the best option now for the UK is that the BOE - not that they will do this - pricks the housing market bubble, raises IRs repeatedly for several months and engineers a crash which, although painful, will be short and sharp allowing them to then address the fundamentals of the wider UK economy. Of course, the BOE will not do this because, as we all know, this is what many economists have stated they should have done back in 2003.

We are between a rock and a hard place. It ain't going to be nice.

Dont be fooled by gubmint numbers

Don't take this the wrong way but English is a wonderful, sophisticated language. It is the language of Shakespeare, Wordsworth, Dickens et al. One of the great joys of being British is that we have this wonderful language. It took me a few reads of your post to try and figure out what on earth you were talking about re 'gubmint'.

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Thanks! I heard someone say they were buying travellers cheques, but I don't think they were holidaying. :lol:

I thought the Tar Sands was de-bunked in a Peak Oil article I read ages ago, because it's too difficult to extract efficiently.

Tar sands are economic at oil >U$55bl and there's a lot of oil there

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Once deflation kicks in we will, like Japan, see the real pain of high HPs as wages fall, jobs are lost, IRs plummet and the reality of enormous mortgages that are never whittled away, due to no inflation in wages, become painfully obvious.

This is a crash in other words. No buyers / forced sellers through job losses / repos.

* EDIT: I don't mind just so long as all roads lead to Rome, so to speak!

Edited by megaflop

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Interesting discussion. IMO we are going to see inflation numbers falling and my money would be on cuts next year, perhaps one in Feb and then a pause while the BOE sits back and looks at the numbers coming in. But I can't see any reason why they shouldn't carry on cutting if growth carries on falling back. OK, US rates may have one or two more points to go up, but hasn't the market priced these in already? I think the possible shock to sterling might come about when the markets think the Fed has finished raising only to find that it hasn't. Cutting rates is a blunt instrument but it does in time make people's mortgages cheaper. I agree the economy's unbalanced, and I agree the glory days, if that's the expression, of the HM are over; but cutting rates often works and it could work again.

BA

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I am sorry but am i missing something here.

All this talk of cutting base rates, the cost of living is on the up, the Yanks base rate is on the up.

Yet we will cut ours to the bone while the rest of the globe push theirs upwards.

We must be in great shape, hey.

Earn less, or nothing, unemployed. Pay more for goods and services, but hey, lets borrow ourselves out of the shit, the base rate is so attractively f@cking low.

God i love this chancellor, he does it, so we all must do it to survive.

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but cutting rates often works and it could work again.

Cutting rates helps the economy in the short-term because it reduces borrowing costs for businesses, and encourages more debt-financed consumer spending.

However, there comes a point where lenders decide enough is enough. They cannot risk unlimited exposure, especially when it is either unsecured or the security (i.e. property) is not increasing in value. That's when the trouble really starts.

Edited by doogie

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  • 301 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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