5.0% Ir

[vinny]

Good idea, all we need to do now is work out a way to make time run backwards!

I'll get my TARDIS, you bring the sonic screwdriver.

[Guest horace]

you bring the sonic screwdriver.

Sonic screwdriver?

Harvey Wallbanger.... for those who purchased at the top of the market?

Any other cocktails with a property theme?

horace

Edited March 8, 2006 by horace

[CrashBear]

I can see a rate rise really hitting people hard, everyone seems very highly geared

a couple of point rises and it could seen the economy tumbling.

Edited March 8, 2006 by CrashBear

[Marina]

That is a meaningless response that can be used to attack anything you do not agree with.

No it itsn't. It is an illustration that economists are as much sheep as anyone else. I well remember predictions of a 40000 DOW within 10 years in the dotcom days. Who stood up and said 'rubbish!'

The fact that most economists now still think IRs can go down - because they have been low for the last few years - in the face of rising IRs globally just proves that most of them cannot see any further than their nose.

You do get the odd one saying we are in a debt-driven inevitable nightmare scenario - a question of if not when.

For the rest it is just wishful thinking. If they think an economy can grow forever on borrowed money - well 'economist' is not the word I would use to describe them. 'Fool' would be a more accurate one.

Good idea, all we need to do now is work out a way to make time run backwards!

Time is about to run backwards.

The increase in employment over the last 7 or 8 years - about to reverse.

The increase in house prices over the last 7 or 8 years - about to reverse.

Low interest rates ... about to reverse.

All that money borrowed .... going to be paid back (or defaults / repos etc) - either way the bank will be back where they started.

You don't need Doctor Who involved - Gordon Brown has presided over a boom - he will now preside over a bust.

[nodumsunreader]

I agree..

also remember.. look at the IR's you are talking about..

for most of history 5% would have been unbelievable..

Now we talk about massive economic turmoil when it goes back to what is essentially below the long term average

WRONG!! It is only the period of historically high inflation from the mid 1960's until 2000 that rates above 5% were considered the norm. Prior to that, inflation both in the UK and worldwide was in low single figures with IR's mostly in the range 1-3%. Since 2000 we have a return to low inflation and low IR's as was the historical economic norm. You can forget any return to 5% whilst inflation remains low - the future is more like 3%.

[George Mainwaring]

You can forget any return to 5% whilst inflation remains low

Except it isn't is it.

[BuyingBear]

WRONG!! It is only the period of historically high inflation from the mid 1960's until 2000 that rates above 5% were considered the norm. Prior to that, inflation both in the UK and worldwide was in low single figures with IR's mostly in the range 1-3%. Since 2000 we have a return to low inflation and low IR's as was the historical economic norm. You can forget any return to 5% whilst inflation remains low - the future is more like 3%.

The reason inflation was much lower before the above timeframe is simply down to the gold standard, or implicit backing, after Bretton Woods collapsed there was no constraint on the amount of paper you could print, or the sort of deficits you could run up. You cannot have M4 indefinitely running at 10% in the UK and expect inflation to sit <2% with rates of 3% that would drive the money supply even higher, the only option would be the imposition of wage constraints and price controls, even then you will impoverish your work force with lower standards of living. This already happens to a degree with outsourcing, immigration and weak unions keeping a lid on wages with imported goods from China and cut-throat retailers enforcing unintended price controls or deflation in consumer goods. However, something will break eventually, as we're seeing with energy and commodities.

[nodumsunreader]

Except it isn't is it.

Explain?

[Last Hun Standing]

nodumsunreader

Sorry, I disagree - The low inflation of the earlier periods was a product of the Gold standard. i.e. as I'm sure you can appreciate, the amount of money could only increase at the rate of accumulation of gold since the currency was notionally redeemable.

"Since 2000 we have a return to low inflation and low IR's as was the historical economic norm." Reported inflation and core inflation have been low.

This obviously excludes things in the real world where taxes are certainly part of a workers perception of inflation since they reduce their spending power. With the attempt to exclude energy and food through reporting of "core" rates, (wtf like people don't need to eat or heat) clearly inflation has been politicised.

People far more informed than I have posted at length about the statistical manipulations used such as hedonic and seasonal adjustments - all driven by a political civil service to deliver their paymasters requests.

So even ignoring housing, whilst reported inflation may be low, real world inflation for someone actually working, has clearly been very significant.

"You can forget any return to 5% whilst inflation remains low - the future is more like 3%." No unfortunately I believe there is merely a political decision to delay rate rises, to get Fudge Gordon into power and then the market will have its revenge.

Unfortunately, justice will not be done, since the innocent will be washed away by the resulting financial tsunami as well.

[nodumsunreader]

nodumsunreader

Sorry, I disagree - The low inflation of the earlier periods was a product of the Gold standard. i.e. as I'm sure you can appreciate, the amount of money could only increase at the rate of accumulation of gold since the currency was notionally redeemable.

"Since 2000 we have a return to low inflation and low IR's as was the historical economic norm." Reported inflation and core inflation have been low.

This obviously excludes things in the real world where taxes are certainly part of a workers perception of inflation since they reduce their spending power. With the attempt to exclude energy and food through reporting of "core" rates, (wtf like people don't need to eat or heat) clearly inflation has been politicised.

People far more informed than I have posted at length about the statistical manipulations used such as hedonic and seasonal adjustments - all driven by a political civil service to deliver their paymasters requests.

So even ignoring housing, whilst reported inflation may be low, real world inflation for someone actually working, has clearly been very significant.

"You can forget any return to 5% whilst inflation remains low - the future is more like 3%." No unfortunately I believe there is merely a political decision to delay rate rises, to get Fudge Gordon into power and then the market will have its revenge.

Unfortunately, justice will not be done, since the innocent will be washed away by the resulting financial tsunami as well.

Regarding inflation, whilst heating, fuel and housing costs have been rising ahead of inflation, food, clothing and many impoted goods have actually fallen in price over the past few years. In a consumer driven economy, why would any politician want to kill the consumer by raising interest rates, causing a HPC and mass unemployment - especially when there is no reason to do so?

[BuyingBear]

Regarding inflation, whilst heating, fuel and housing costs have been rising ahead of inflation, food, clothing and many impoted goods have actually fallen in price over the past few years. In a consumer driven economy, why would any politician want to kill the consumer by raising interest rates, causing a HPC and mass unemployment - especially when there is no reason to do so?

If you're driving straight at a brick wall at 90mph why would you want to slam the brakes on and give yourself whiplash... especially if you don't need to (yet).

Eventually the debt burden will kill the consumer economy as ever increasing amounts of money are sapped from the real economy to pay down interest on debt that isn't eroding, thanks to low 'official' inflation and poor wage growth. Not to mention the inflating cost of essentials and energy eating into disposable income.

[nodumsunreader]

If you're driving straight at a brick wall at 90mph why would you want to slam the brakes on and give yourself whiplash... especially if you don't need to (yet).

Eventually the debt burden will kill the consumer economy as ever increasing amounts of money are sapped from the real economy to pay down interest on debt that isn't eroding, thanks to low 'official' inflation and poor wage growth. Not to mention the inflating cost of essentials and energy eating into disposable income.

All the above are reasons why IR's will remain low and not reasons for raising them.

Edited March 8, 2006 by nodumsunreader

[bandylegs]

Regarding inflation, whilst heating, fuel and housing costs have been rising ahead of inflation, food, clothing and many impoted goods have actually fallen in price over the past few years. In a consumer driven economy, why would any politician want to kill the consumer by raising interest rates, causing a HPC and mass unemployment - especially when there is no reason to do so?

I don't think any politician will need to nodum, surely it's not the cost of the borrowing but the size of the repayment that will choke the golden goose.

Sure things will keep going until the greatest fool slips the financial noose around there heavily indebted neck, but you can be sure that sooner or later we will get to the greatest fool.

Edited March 8, 2006 by bandylegs

[BuyingBear]

All the above are reasons why IR's will remain low and not reasons for raising them.

What's the point of lower rates and ever increasing debt if people haven't got the resources to pay back the capital and haven't got inflation to bail them out.

[Badlad1967]

Interesting thread!

It seems pretty clear that both the EU and the US are going to continue raising rates.

If we don't, the £ will drop in value and imports will rocket in price.

CPI will go up and so will interest rates.

Do you honestly think the BOE (or rather Gordon) will allow the entire economy to go up in a puff of smoke to save the people who have bought a house in past 6 years?

[bandylegs]

Interesting thread!

It seems pretty clear that both the EU and the US are going to continue raising rates.

If we don't, the £ will drop in value and imports will rocket in price.

CPI will go up and so will interest rates.

Do you honestly think the BOE (or rather Gordon) will allow the entire economy to go up in a puff of smoke to save the people who have bought a house in past 6 years?

Your question makes the most salient point on this thread. My answer is "no".

It's the margins of the markets that get hit hardest, we are not looking at all home owners just the recent transactions.

Edited March 8, 2006 by bandylegs

[nodumsunreader]

What's the point of lower rates and ever increasing debt if people haven't got the resources to pay back the capital and haven't got inflation to bail them out.

No point whatsoever if you are on the receiving end. Lots of point however if you are a politician - especially a politician who has the power to perpetuate the illusion - hence low IR's

[BuyingBear]

No point whatsoever if you are on the receiving end. Lots of point however if you are a politician - especially a politician who has the power to perpetuate the illusion - hence low IR's

If people have got utility bills and council tax each rising at 10-25% they can soon see through the illusion because they run out of cash! There simply isn't enough money left to fuel a retail boom or service debts, regardless of the nominal rate.

That's why credit card spending is falling and why the retail sector and discretionary in general is on its back.

[nodumsunreader]

If people have got utility bills and council tax each rising at 10-25% they can soon see through the illusion because they run out of cash! There simply isn't enough money left to fuel a retail boom or service debts, regardless of the nominal rate.

That's why credit card spending is falling and why the retail sector and discretionary in general is on its back.

You make the point for lower IR's well.

[bandylegs]

You make the point for lower IR's well.

Ah come on Nodum we take you seriously for a while and you spoil it.

This circular reasoning is no more intellectual than school children saying "I know that's what you are but what am I?" over and over.

It's not as simple as - things bad lower rates. What if the things that are bad get worse when you lower the rates?

[BuyingBear]

You make the point for lower IR's well.

Ok, lets get to the nub of your argument and just drop the rate to 0%, without wage inflation how are they going to repay the capital?

[CaptainClamp]

As someone said above, it is a circular argument.

The reason it's going in circles is that the economy is essentially painted into a corner.

Lower IRs -> debt mountain will pile higher as people get further into debt and inflation due to the major external factor of oil price will be exacerbated by excess liquidity

Higher IRs -> people collapse under combined weight of debt service and higher prices due to oil costs

Basically, the economy is shagged no matter what cos there's too much debt and it's not robust enough to withstand the oil price increase in the medium term as suppliers have to pass on the prices. There's some things IR's can't fix.

The only thing that can fix it is possibly a carefully measured injection of non-debt-based money into the economy (i.e. money that the government prints). This will ensure there's enough cash about that people can pay off some debt, and save a bit, which they will if this period is accompanied by rumblings about higher IR's and oil prices. And also that sort of thing gets nobody reelected.

Ye are all going to say 'inflationary' here but in point of fact this sort of injection doesn't cause inflation. See here (http://en.wikipedia.org/wiki/Debt-free_money) if you care why.

Then we'd be in a position to increase IR's and cool things down a bit and avoid inflation over and above what's going to be inevitable due to the oil stuff anyway.

Unfortunately someone really should have thought of the above three years ago. But no, we get low IR's and circuses.

[Pluto]

Anyone can say 10% - without giving a time – when is it going to go back to 10% -

pay back is coming as you say – but it’s likely to be years – we would need Japan and china to change their polices – it’s starting but it will take a long time

10% by December 2007

That's Pluto's prediction. Once we get to 7% there is going to be 1/2 or maybe whole point increments. Too much cheap money floating about - this has to be controlled - otherwise we're in for global hyperinflation. The Fed's little quarter point a month is having little effect, they need to be more agressive.

Enjoy those cheap mortages while they last, the swinging late 90's and early 00's are over.

[CaptainClamp]

10% by December 2007

People would be rioting in the streets. It's too big a jump too quickly.

The level of debt default at 10% would be unreal, people would be defaulting or living on noodles, spending would drop to bare bones and everything would grind to a halt.

[Pluto]

People would be rioting in the streets. It's too big a jump too quickly.

The level of debt default at 10% would be unreal, people would be defaulting or living on noodles, spending would drop to bare bones and everything would grind to a halt.

I don't think so. 10% is only double where we are now, or close enough. You need to think about interest rates in terms of percentages, that is why the BoJ rising their rates 1/4 of a point is such a big deal.

Enjoy the cheap money while it lasts. Payback time is a'coming...

The next recession is not going to be like the early 90's one and here's why:

1) We don't have lots of north sea oil to bail us out - we are a net importer of oil - this is a big deal;

2) Our manufacturing base has shrunk since the early 90's;

3) British people are addicted to DEBT much more than before; they don't know how or why they should save.

So my prediction for 10% interest rate stands--- unless we abandon sterling and go for the Euro- which ain't gonna happen.

Interest rates are not going to solve the problem either, it's just going to make people realize the value of money again.

Edited March 8, 2006 by Pluto