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Letter To The Managing Director Of Economics At Hsbc

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Dear Mr. King,

Very much enjoyed reading this article earlier today.


I think its true that the rules regarding inflation have changed but its not only central banks that haven't realised, I think most individuals haven't fully considered the impact either.

House Prices are probably the best example of this as it used to be the case that natural inflation of wages would errode large mortgage debts significantly over time. This was dependant on two factors; firstly that wages would increase and secondly that the initial debt wasn't so large that even with wages increases it would be hard to pay off.

The low Interest Rates of the past five years have meant that many individuals don't realise that low IR + High Debt may be equally affordable, but is much harder to errode by wage inflation, than the opposite scenario. Similarly the discussions on cheap labour abroad, either outsourcing production or services (the globalisation effects you mention) causes deflationary influences on the economy as items are cheaper, and thus does nothing to propagate a round of wage increases.

As you intimate the influx of migrant workers into the UK also means that at lower level incomes wage rises are unlikely due to large numbers of unskilled but keen workers entering the jobs market. Although in reality much of their savings returns will leave the UK and be invested back in their home markets either gradually or eventually.

One of the other factors is the very low level of GDP growth seen in recent years (bordering at around 2%) which means our businesses aren't actually taking much bigger profits in general than may be expected by looking at the FTSE 100's recent return to within 1,000 points of the dot.com peak. And yet by revaluation of homes and less strict lending criteria the UK Net Worth has been rising dramatically over the last 5 years at a rate not seen for decades.

The inflation issue you describe has led to a much smaller range in the Inflation/Interest Rates regime to be possible (I estimate between 5-7%) than ever before... if Interest Rates rise too much with current UK borrowing so high (Secured and Unsecured) its likely that the number of bank customers going insolvent/bankrupt/repossed/IVA's etc. will increase at a rate unseen since the last Tory government. And similarly inflation is being countered currently by the labour market changes of globalisation, but this is unlikely to always be the case.

But perhaps its not our fault... the US lowered its Interest Rates to 1% in the wake of 9/11 (or was it in the wake of the Stock Market crash - I can never be sure) and much of the world's economy was subtly forced into taking similar actions. However with Greenspan leaving his position and US IR now at 4.5% and expected to rise and the Eurozone IR also expected to rise its difficult to see how the BoE MPC will be able to maintain its low inflation regime whilst much of the globalised world is pursuing IR rises to combat the increased costs (i.e. oil) which you have highlighted in your article.

I think a credit crises is looming for many countries and you have touched on some of the reasons within your article but only those with the appropriate background to realise the implications of your comments might understand this 'bottom line'.

Any comments would be appreciated - particularly if I have missed any other key elements of your discussion.


- Pye (Property Speculation Ninja :ph34r: )

/me wonder how he'll take this? Muhahahaha :P

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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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