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It Is Possible The Global Economy Will Be Trapped In Qe For Ever

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http://www.independent.co.uk/news/business/news/it-is-possible-the-global-economy-will-be-trapped-in-qe-for-ever-10515698.html

As desperation increases, more extreme policy measures can also be expected

.

The decision by the US Federal Reserve not to increase interest rates highlights the difficulties of reversing the emergency policies implemented to support the global economy after 2008.

The reality is that the level of global debt is simply too great to be dealt with by conventional means. Since 2007, it has grown by $57trn (£37trn), or 17 per cent of GDP, as public and private debt has risen in the big economies. In mid 2014, global debt was $199trn, or 286 per cent of the world’s GDP, up from $87trn in 2000.

If unfunded entitlement obligations such as pensions and healthcare are included, the level of indebtedness rises dramatically. A crude measure of sovereign net worth can be calculated by subtracting these liabilities and government debt from the value of government assets and tax revenues. As a percentage of GDP, this measure shows the US at minus 800 per cent, France minus 600 per cent and the UK minus 1,000 per cent. Italy is at minus 1,250 per cent and Greece minus 1,600 per cent.

Even in emerging countries where levels of borrowing were less extreme at the commencement of the crisis, debt levels have increased. In Asia and Latin America, bank credit has risen at double-digit rates in recent years. In China, debt levels have quadrupled.

Reduction of these liabilities is extremely difficult, perhaps impossible in a world of no or low growth and low inflation. Despite the view of some analysts that this is a “beautiful deleveraging”, the reality is that the process has barely begun. It will have a big economic impact and take many years.

Traditional tools for dealing with high debts – austerity, growth, inflation or default/restructuring – are unavailable or unpalatable. Policymakers will rely on existing fiscal and especially extreme monetary policies, such as low or zero rates and quantitative easing, to avoid economic collapse.

Too many promises have been made, but no one wants to admit it.

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Another thread observes that labour may start to earn more and capital earn less. I think this is another aspect of the same situation.

Too much debt. This means that the capital that exists is only really worth its face value minus all the debt. And workers are only going to be prepared to work, to use their pricing power, where they're not being placed on the hook for all that debt. That's just natural. Governments will be unable to force the young to pay off the debt of the old through their labours.

I don't think capital is so flexible so it may well give miserable returns over the coming decades as a counterweight to the debt.

Edited by Si1

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Author of the article: He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant. [..] He became a financier because he wasn't good enough to be a professional cricketer [..] He lives in Sydney, Australia.

Traditional tools for dealing with high debts – austerity, growth, inflation or default/restructuring – are unavailable or unpalatable.

Maybe unpalatable to you pal, and so perhaps a coarsened view there no real risk of a prime first-world house price crash on its way. Lot of equity on the owner side that is not earning the banks any money.

Edited by Venger

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Author of the article: He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant. [..] He became a financier because he wasn't good enough to be a professional cricketer [..] He lives in Sydney, Australia.

Maybe unpalatable to you pal, and so perhaps a coarsened view there no real risk of a prime first-world house price crash on its way. Lot of equity on the owner side that is not earning the banks any money.

Indeed. You can leave the younger generations to suffer. Or you can crash the lifestyle of the old and smug. He's saying we must chose the first in order to avert the second. Edited by Si1

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The reality is that the level of global debt is simply too great to be dealt with by conventional means.

Not true- default is entirely conventional and has been going on for thousands of years.

What they actually mean is that there is no way to save those holding the debt from their losses unless the global economy is perverted in order to protect those creditors.

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Indeed. You can leave the younger generations to suffer. Or you can crash the lifestyle of the old and smug. He's saying we must chose the first in order to avert the second.

One day this will all be yours my son

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One day this will all be yours my son

No it won't. The sheer costs associated with the year I was born in mean I won't be getting the early retirement nor the general expensive habits of entitlement that your generation have. It's not about inheritance, it's about the current existence of a servant class.

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QE forever. Like growth by perpetual motion. If QE was the answer there would be no more economic problems. If printing money made you wealthy, Zimbabwe would be the richest country on earth.

The language of these crooks is tired old hack phrases used by all usury crooks throughout history.

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QE forever. Like growth by perpetual motion. If QE was the answer there would be no more economic problems. If printing money made you wealthy, Zimbabwe would be the richest country on earth.

The language of these crooks is tired old hack phrases used by all usury crooks throughout history.

The economy needs restructuring. Whisper it.

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There will have to be some kind of global writedown at some point, a reset.

I just don't see how younger generations will voluntarily pay the deferred costs of the boomers extravagant living habits

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I just don't see how younger generations will voluntarily pay the deferred costs of the boomers extravagant living habits

Indeed. They'll probably all p1ss off en-masse.

I keep saying Im from the future but I am - my home region is now full of loads of empty homes and homes occupied by OAPs trying to sell them.

All that are doleys and public sector workers.

If you really want to see the future then go to Blackpool.

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"Promises" is one of my wake-up-and-post triggers.

I have to keep reminding myself that money is simply a promise. It eventually has all the reliability of someone just changing their mind. When enough people can't keep their promises, the rest will decide that their money really isn't worth anything.

As you say, too many promises have been made. They will be broken.

The current situation is that those promises are being shifted to the next generation. "Well kids, you promised to pay for your education, you promised to pay that mega-mortgage, keep those promises as I need you to pay for my retirement".

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It took decades of poverty, unemployment and a world war to repair the First Great Depression. Why should the Second Great Depression be any different?

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Author of the article: He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant. [..] He became a financier because he wasn't good enough to be a professional cricketer [..] He lives in Sydney, Australia.

Maybe unpalatable to you pal, and so perhaps a coarsened view there no real risk of a prime first-world house price crash on its way. Lot of equity on the owner side that is not earning the banks any money.

Are you sure about that?

Just because a house is mortgage free doesn't mean to say it's of no use to a bank. The mortgage free ones reduce the supply that's for sale. This helps puts a floor under prices and so protects the assets that the bank has lent against. Then as each mortgage free house eventually comes back to market they can be sold to people who have to use two incomes to service debt on a house that was bought using only one income.

I don't agree with your idea that banks want HPC so they can sell more houses. If the value of their assets fell they would be bust and unable to lend. The whole central bank policy has not been helping the economy, it's solely been helping banks by protecting their assets.

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No rate rise until May/August 2016, says CEBR, as the UK ponzi economy dies on its @rse. ^_^

It forecasts the UK economy will grow by 2.5% this year, slowing to 2% in 2016 and then averaging 1.7% over the years 2017-2020. In contrast, the Office for Budget Responsibility expects growth to remain above 2% over this period.

The CEBR said if the global economy continued to falter, then these forecasts were at risk, with exports and business investment both likely to be hit.

Scott Corfe, head of macroeconomics at CEBR, said: “It is clear that the global economy has deteriorated significantly over the past few months and there are significant downside risks to the UK’s own prospects.

“With inflation expected to remain below the Bank of England’s central target of 2% until 2017, we think the Bank rate will remain on hold until the middle of next year. A rate rise in May or August seems most likely, to coincide with the inflation reports released in these months.

“Even when the Bank of England does raise rates, we expect the pace of rate rises to be very gradual. Even by 2020, we expect the bank rate to stand at just 2% – what CEBR believes is the ‘new normal’ for interest rates.”

http://www.theguardian.com/business/2015/sep/28/uk-interest-rate-rise-unlikely-may-2016-cebr

Edited by zugzwang

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Of course I'm not certain, Democorruptcy. It's a position I have taken in the market vs these house prices. That they will let it happen (hpc) and that fresh lending in volume thereafter will be good for the banks. Question is when they can let it happen. When do they reach that point, vs the debt position the banks still hold. MMR is there for a reason. Tax-Relief shock was something that the BTLers thought could never happen too.

If it comes in, some will have taken the opposite position, in that belief 'they can't let HPC happen because banks need to support asset prices on their books'... and thus why they outbid my family by magnitudes of order for housing last few years.

Yes the past 6-7 years have been all about positioning the banks, and reflation has helped them unload positions, including lot of UKAR stock in large tranches. Also tempting in forever HPI-heads such as that early 50s couple, just retired, who just bought themselves new house at around £440K (memory) in Nottingham, and big smiles for them adding a BTL.

Three Truths for Finance - speech by Mark Carney

Remarks given at the Harvard Club UK Southwark Cathedral dinner, London.

21 September 2015

[...]Moreover, when next time proves no different, the financial intermediaries at the core of the system will be on a substantially stronger footing. Their capital requirements have already increased ten-fold and their liquid assets are up four-fold. Their trading assets are down by a third and intra-bank exposures by two-thirds.

http://www.bankofengland.co.uk/publications/Pages/speeches/2015/843.aspx

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Are you sure about that?

Just because a house is mortgage free doesn't mean to say it's of no use to a bank. The mortgage free ones reduce the supply that's for sale. This helps puts a floor under prices and so protects the assets that the bank has lent against. Then as each mortgage free house eventually comes back to market they can be sold to people who have to use two incomes to service debt on a house that was bought using only one income.

I don't agree with your idea that banks want HPC so they can sell more houses. If the value of their assets fell they would be bust and unable to lend. The whole central bank policy has not been helping the economy, it's solely been helping banks by protecting their assets.

The stress test of 16 December 2014 showed the major banks passed, or were close to passing, this chain of events.

  • Sterling falls by about 30%
  • House prices fall by 35%
  • Bank rate rises to 4.2%
  • CPI inflation peaks at 6.6%
  • Unemployment rises to nearly 12%
  • GDP falls by 3.5%
  • Share prices fall by 30%

http://www.bbc.co.uk/news/business-30491161

They would be able to lend because they would get influx of new backing/share purchases/FLS, against the safety of lending on much lower asset prices, imo. I would argue its less risky to lend to new mortgage borrowers lower advances in order to buy homes during/after HPC, even if there is hard recession at same time.

I finally have time this evening to address this response to my post.

You're using exactly the same generalisation of a systemic banking crisis as RK did, and although it all sounds very scary, I'd ask you to carefully read my own post again and give it more than a cut-and-paste consideration. We're all well aware of what a bank run is, and I don't think anyone on this forum has written more than I have regarding the Great Depression and the arguments that still persist to this day about the policy response from the Federal Reserve.

I wasn't talking about the sort of circumstances that occurred in 1929-32 or 2007-09, when there were underlying reasons for the systemic financial crisis that went way beyond concerns regarding possible falls in houses prices (if you recall, UK house prices were not falling at the time of the Northern Rock affair and had yet to peak on several of the indices).

My words were (my bold): "Not sure why it's being implied that a collapse in the value of the underlying security automatically leads to the destruction of the banks' loan assets".

I'm talking about a hypothetical situation where (say) over the next three to five years UK house prices drop nominally by 30%. You claim "we know exactly what happens" and cite the bank runs of the Great Depression.

I'd say that is a completely absurd scenario. The bank run you talk of is purely a liquidity issue, and the BoE is far better prepared for this now than it was in 2008. Back then the Special Liquidity Scheme (SLS) and long-term repos gave the banking system the requisite liquidity to avoid balance sheet funding issues. At its peak in Q1 2009, SLS supplied £185bn of funding to the banking system through a collateral swap for Treasury Bills, before QE had even started (and I'd remind everyone that QE created new bank deposits).

So if you are going to claim that we will have a meltdown that will result in the loss of savers' deposits, you need to describe the process that will lead to the collapse of the banks through insolvency, not lack of liquidity. I specifically gave a link to the BoE QB article on negative equity (which you appear to have ignored) because past experience has shown that people will continue to service their mortgage even when they are deeply in negative equity. That was the experience in the 1990s crash, and it was also the experience more recently, leading the FSA to conclude in the MMR that LTV caps were not particularly useful because the correlation between high LTVs and mortgage default was weak. However you claim that "a heck of a lot of people will default" without giving any estimate whatsoever. Just the arm-waving, scary language that RK uses, with no data whatsoever to back it up.

If you want a specific example to use, how about Nationwide, which is predominantly a domestic mortgage lender so its balance sheet isn't cluttered with derivatives, commercial loans, or investment banking related activities.

The 2014 accounts are here. On page 93 you will find a detailed breakdown of their mortgage book by LTV (including on a regional basis as well).

Please describe the scenario that leads to Nationwide deposit holders losing ANY of their funds under a 30% nominal fall in house prices.

[i'll add as a final point that if you can make a convincing case for a loss for depositors, then we need to let the BoE know ASAP, because they're about to stress test banks against a 35% fall in house prices, and the expectation is that banks' Tier 1 capital will be able to take the hit.]

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In a variation of the helicopter drops of money favoured by Federal Reserve chairman Ben Bernanke, one scheme advocates a “treasure hunt” where cash is buried and the population is urged to seek it out and spend it. Other proposals include finite time limits on currency, which would lose all value if not spent by the specified date.

You can be sure that the people who bury the cash will be the first to arrive on the scene to spend it. Your savings vanish if you don't spend it in time - not a new idea.

Running the economy like a garden fete.

Edited by billybong

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Of course I'm not certain, Democorruptcy. It's a position I have taken in the market vs these house prices. That they will let it happen (hpc) and that fresh lending in volume thereafter will be good for the banks. Question is when they can let it happen. When do they reach that point, vs the debt position the banks still hold. MMR is there for a reason. Tax-Relief shock was something that the BTLers thought could never happen too.

If it comes in, some will have taken the opposite position, in that belief 'they can't let HPC happen because banks need to support asset prices on their books'... and thus why they outbid my family by magnitudes of order for housing last few years.

Yes the past 6-7 years have been all about positioning the banks, and reflation has helped them unload positions, including lot of UKAR stock in large tranches. Also tempting in forever HPI-heads such as that early 50s couple, just retired, who just bought themselves new house at around £440K (memory) in Nottingham, and big smiles for them adding a BTL.

I agree MMR is there for a reason. Personally I think it's sole purpose is to extend the length of mortgage terms. Computer says NO unless to reduce monthly payments, borrowers take out longer mortgages and ultimately pay lots more in mortgage interest.

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Author of the article: He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant. [..] He became a financier because he wasn't good enough to be a professional cricketer [..] He lives in Sydney, Australia.

Maybe unpalatable to you pal, and so perhaps a coarsened view there no real risk of a prime first-world house price crash on its way. Lot of equity on the owner side that is not earning the banks any money.

Right, there will be a time where it will be a show down - Equity or The Financial System, I know what the powers that be will have to choose.

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