"inflate Or Die"

[jpidding]

So much of the comment that I read regarding USA's debt seems to agree that the only way out is to continually increase the money supply. This will keep the economy going by forcing the consumer to spend, whilst at the same time robbing anyone with savings.

Ben Bernanke has said he will drop dollars from a helicopter if necessary.

"inflate or die" is the mantra.

Savings in other fiat currencies will not be safe as other countries attempt to keep their currencies (and hence exports) on a par with the US. Short term rates may well be raised, but the relentless printing of money will accelerate.

My question is this:

If the above scenario happens, what is to stop house prices going further and onward to the stratosphere? We all agree that prices are well away from trend and SHOULD return, but last week I read that in Dublin 4 bedroom semi-detached properties are going for €3.5 million! I would have thought that a figure about one tenth of this would be about right, which means that our estimates of 30-50% overvaluation for the UK are just childsplay!

I'm still a confirmed bear, but getting worried when considering all the possibilities.

JP.

[non-FTBer]

Certainly a worry.

This won't work IMHO. High inflation without wage inflation can only be short term, as people will notice they are getting poorer and poorer and it won't be a popular policy.

If wage inflation tracked real monetary inflation then there is no problem with higher HPs, so long as your wages rise faster (not likely). What is important is the relationship between HPI and wage inflation. (ie if house price inflation is lower than wage inflation then the only threat is devaluation of your deposit funds).

The government trying to keep inflation low is quite a big nod (IMHO) to the fact that wage inflation cannot continue in hand with globalisation... if we keep inflating wages then we will be even less competitive in a global sense.

EDIT TO ADD: Looking at the levels of unemployment, pension issues and economic performance/trends (offshoring, economic immigration etc) can you really see wage inflation keeping track with real inflation? I can't see it happening.

Rampant inflation can only be hidden for so long... people are starting to notice that they are getting (generally, not everyone) poorer and have less disposable income. People have themselves exacerbated this by taking on high levels of credit (more disposable income lost to interest payments).

I think the most likely scenario is governments trying to constrain inflation (higher IRs) but inflation still coming through mainly due to energy/oil increases over the next few years. Higher IRs are IMHO a certainty if governments/central banks were honest.... what will happen in the real world may be something completely different.

Edited March 20, 2006 by non-FTBer

[look to the past]

"inflate or die" is the mantra.

which means that our estimates of 30-50% overvaluation for the UK are just childsplay!

I'm still a confirmed bear, but getting worried when considering all the possibilities.

JP.

I have been worried about this happening for about a year now – is interest rates come down then I see it as a definite possibility that house prices will continue going up – there are usual arguments against this like affordability and lack of FTB’ers but these have not stopped Irelands prices sky rocketing – 6x wages is nothing –

I see a recession with extremely low interest rates and house prices rocketing up to fend of the worst of the recession. It’s the only logical choice for the BOE because anything else will cause a crash which would be worse – saying that the crash is inevitable – it just could be postponed another 10 years – personally I am going to wait until the end of this year before I make up my mind just to see if the BOE’s hand is forced

[right_freds_dead]

This won't work IMHO. High inflation without wage inflation can only be short term, as people will notice they are getting poorer and poorer and it won't be a popular policy.

what. you mean like it is at the moment ?

wages are so low compared with real living costs such as 'housing/fuel/medical/taxes'

= its pointless working a job if your under 25 and were not already on the gravy boat.

= if your a house owner you may have to pay back all those equity loans you took out.

none of this boom-bust policy is good for anyone.

why the government didnt do everything in its power to stop it is beyond me.

perhaps without the boom the tills would have shut 3 years ago.

the cheap money concept was supposed to boost business, all its done is allow public greed to devastate the uk housing market and its inflated away a lot of peoples savings.

[Sledgehead]

I do agree that the central premise of ever accelerating inflation, both as a tool to reduce the impact of external debt and as a mean sof restoring competitiveness, is a worry. As you say, Bernanke has made some startlingly wreckless statements concerning debt monetisation in his time. Whether he is willing however to roll the dice on the real-wrld consequences is another thing.

Issues surrounding this topic are covered in "THE "CARRY TRADE" ECONOMY" (financialsense.com), where possible parallels are drawn with the "Great Inflation" in Germany in 1920s. Here is an extract from Parsson's book "Dying of Money", which describes this period:

Until 1922 and the very brink of collapse, Germans and especially foreign investors were absorbing marks in huge quantities. Only the international reputation of the Reichmark, the faith that an economic giant like Germany could not fail, made this possible. ... The precise moment when the inflation turned sharply upward, toward its vertical climb, was undoubtedly timed by no event, but by the dawning psychological awareness of the German and foreign investor that Germany was not going to back its money. With that, the rush to get out of the mark was on. Like a damn bursting, the seas of marks flooded into the markets and drove prices beyond all bounds. The German government strove mightily to outflood the sea. The sea of marks which had been stored up by Germans and especially by trusting foreigners flooded forth and fought to buy into other investments, foreign currencies, tangible goods, almost anything but marks

Dying of Money: Lessons of the Great German&American Inflations, Jens O. Parsson

I guess you could easily read Dollars for Marks.

Note however that huge amounts of US citizens wealth is stored up in US stock markets. Being seen to allow the currency to collapse would undoubtedly force down stock prices as foreign investors exited dollar denominated stock positions, even while US rates dropped ( - if you don't believe stocks can collapse as interest rates fall see US post 2000 or Japan).

This latter point may well decide whether inflation is a decent strategy for the Fed. Dropping rates when stock prices are falling is likely to put those approaching retirement in extreme financial distress (as it has here to a lesser extent). In a country with an aging population it may well prove politically devicive.

I should also point out that market effects associated with such "mega-trends" are often well ahead of events on the ground. The TMT bubble illustrated this: whilst adoption of technologies continues apace, share prices for most associated companies remain well off of their 2000 highs. Remember that mega-trends are just that: they take years to complete. That means even if you buy into the whole US inflation story, you aint't gonna benefit much from making snap decisions.

Edited March 20, 2006 by Sledgehead

[DoubleBubbleTrouble]

Surely Japan demonstrated the likely path for this. They'll try to inflate but we'll end up with deflation instead?

[Bingley Bloke]

If the above scenario happens, what is to stop house prices going further and onward to the stratosphere?

Lack of wage inflation will, eventually, bring the whole corrupt sham grinding to a halt. Unless, of course, there is sudden and massive wage inflation, which is highly unlikely.

[Without_a_Paddle]

Been trying to tell you about this for a while now.

Expect low rates up to the election with an increase in the money supply just ahead of the election so there is extra money sloshing around between voters. (shopkeepers, small businesses etc)

Homeowners (voters) will continue to feel OK as their mortgage repayments will keep low.

Consumers (voters) will continue to spend, the govt will continue with borrowing and public spending (more happy 'civil' voters) to keep the economy propped up until the election.

After the election we will see raised taxes and maybe continued inflation with slowly rising interest rates. Nominal house prices will hardly fall and wages will slowly catch up and we will get the soft landing as prices gradually correct.

A HPC is not a votewinner.

Time to throw in the towel if you are expecting big reductions in nominal prices in the next 2 or 3 years.

It ain't gonna happen....

Surely Japan demonstrated the likely path for this. They'll try to inflate but we'll end up with deflation instead?

The Japanese deflation scenario has been well documented. They made things worse in the early 1990s with poor timing/control of interest rates and also poor disclosure of badly performing loans.

Hindsight is a wonderful thing but I am sure that the Western economies will try to avoid deflation at all costs.

[how much...?? you must be joking]

Homeowners (voters) will continue to feel OK as their mortgage repayments will keep low.

Consumers (voters) will continue to spend, the govt will continue with borrowing and public spending (more happy 'civil' voters) to keep the economy propped up until the election.

...continue to spend..??

Savings Rise Again

..if people are worried about their jobs it doesn't matter how much cash is pumped their way... it will simply be saved...

[Duplex]

The crucial factor in the coming years will be the impact of cheap labour on western economies. In the past recessions governments have attempted to counter recessions by increasing the supply of money in order to encourage investment. The difficulty this time is that the productive value adding sectors of the economy are smaller and any reflationary attempts will see money channelled into asset price inflation and the purchase of foreign goods and services, hastening the likelihood of a Weimar type meltdown.

Lets not forget that the Bank of England have lowered rates over the past few years in an attempt to breath life back into the UK economy with no affect. The problem with the UK economy is not a dearth of spending by consumers; the problem is a lack of competitiveness.

Low interest rates in Japan and Germany have not stopped deflation, and they won’t stop deflation in the UK or US.

[MediaTrash]

So much of the comment that I read regarding USA's debt seems to agree that the only way out is to continually increase the money supply. This will keep the economy going by forcing the consumer to spend, whilst at the same time robbing anyone with savings.

Ben Bernanke has said he will drop dollars from a helicopter if necessary.

"inflate or die" is the mantra.

Savings in other fiat currencies will not be safe as other countries attempt to keep their currencies (and hence exports) on a par with the US. Short term rates may well be raised, but the relentless printing of money will accelerate.

My question is this:

If the above scenario happens, what is to stop house prices going further and onward to the stratosphere? We all agree that prices are well away from trend and SHOULD return, but last week I read that in Dublin 4 bedroom semi-detached properties are going for €3.5 million! I would have thought that a figure about one tenth of this would be about right, which means that our estimates of 30-50% overvaluation for the UK are just childsplay!

I'm still a confirmed bear, but getting worried when considering all the possibilities.

JP.

bang all your spare cash into gold then Histroy suggests Gold always wins against an inflating paper currency

[non-FTBer]

what. you mean like it is at the moment ?

wages are so low compared with real living costs such as 'housing/fuel/medical/taxes'

Yep, just like it is at the moment. But it cannot continue forever... there are limits beyond which people have to choose between neccessities... "Do I pay my mortgage or feed the kids?".

I agree that disposable income is already being decimated by:

1) Tax creep (tax brackets not inflation linked, effectively stealing part of wage inflation)

2) Higher taxation (council tax, stamp duty etc etc).

3) Wage inflation lower than 'real' inflation

But if it continues unabated then it will reach a point where it is no longer acceptable, even to the english who really need to get p1ssed off before they revolt/riot/campaign etc.

[aussieboy]

Surely Japan demonstrated the likely path for this. They'll try to inflate but we'll end up with deflation instead?

Have to be careful using the Japanese as a comparator. I seem to recall their government giving them a "use it or lose it" USD200 shopping voucher to each Japanese to get things going and the uptake was pitiful. They just love to save.

If they tried it in the UK, there would be a sales spike at Burberry and the money would be spent in the first 2 hours on baseball caps.