Money Supply And General Liquidity

[jpidding]

I think we are all agreed that there is tons of money sloshing around in the economy and its finding its way into gold, silver, shares etc.

Helicopter Ben has said he will flood the US with paper money to prevent a slowdown and deflation in prices.

Assuming our government will follow suit (UK money supply is growning 1.5 times faster than US at 12% PA!), what is to stop all this liquidity going into housing?

I'm bear property and long gold, but cant find an arguement to suggest the money will go into commodities and not property.

JP.

[BuyingBear]

Sentiment? It's a powerful force, remember that the Fed was flooding the markets with liquidity since 2001 yet the stock markets continued to tank until 2003. There's nothing to say the same wont occur again but in housing, especially if there's other markets with better relative value.

[Dr Doom]

The question really is, in what form this new liquidity is going to enter the system?

As far as I can gather the huge amounts of liquidity sloshing about at the moment is in the form of 'credit' or borrowed money (created out of nothing). There is a strong argument to say that this is driving bubbles in all markets including commodities.

I assume he's not talking about decreasing interest rates and lending a load more liquidity into circulation, this has already been done and is more or less stretched to its limit. He must be talking about firing up the paper printing presses and increasing the quantity of paper money in circulation. Which would obviously be extremely inflationary.

The bit that I'm a bit unsure about is, ok the fed prints a load more cash. Gives it to the government in exchange for treasury bonds. This already happens. The ballooning national debt the U.S. has built up is effectively an increase in the broad money supply.

So if he isn't talking about expanding the national debt further or faster, which is also stretched to the extreme and happening anyway. The only thing left to happen is either China stops buying treasury bonds, or the fed decides to monetise its deficit.

Both of which will destroy the dollar, and perhaps the world economy.

Hyperinflation basically means the price of everything will increase, including houses even. There won't be a crash in nominal terms, but in real terms definitely. Unfortunately it will be quite difficult to see to most people.

To the original question. "what is to stop all this liquidity going into housing?"

Nothing, liquidity will go into everything. That's why we are going to be so ******ed.

It's just that it will go into somethings more than others.

[MarkG]

Hyperinflation basically means the price of everything will increase, including houses even.

Only if wages inflate. If British workers' wages end up at the same real level as Chinese workers after hyperinflation, they won't be able to afford to waste much money on mortgage interest or rent once they've paid a day's wages to put a gallon of petrol in their 50cc motorbike.

And, sooner or later, that has to happen: the real question is whether Chinese workers' wages rise to meet ours (in which case commodity prices will explode anyway, so our real wages will drop), or ours drop to meet theirs.

Edited April 21, 2006 by MarkG

[Guest]

Unless wages go up there will be a crash in nominal terms?

Surely the nominal wage value plus the years a man can live limits credit?

And are we not at that limit yet?

[MarkG]

Unless wages go up there will be a crash in nominal terms?

If we have high price inflation and low or negative wage inflation, certainly. High commodity prices == more outgoings on essential items == less left to spend on non-essential items, including mortgage interest.

To some extent the BoE could compensate with low rates, but then the pound crashes and inflation grows even more.

Edited April 21, 2006 by MarkG

[Killer Bunny]

Hyperinflation basically means the price of everything will increase, including houses even. There won't be a crash in nominal terms, but in real terms definitely. Unfortunately it will be quite difficult to see to most people.

To the original question. "what is to stop all this liquidity going into housing?"

Nothing, liquidity will go into everything. That's why we are going to be so ******ed.

It's just that it will go into somethings more than others.

But...for the first time in history a third of the world economy (UK and EU) has a target for low inflation. And unless GB abd other EU governments alter the target houses will a total disaster zone.

[BuyingBear]

Surely the nominal wage value plus the years a man can live limits credit?

You just change the terms, tweak the rates, extend repayment terms maybe roll over some of the interest into the debt, try and force two strangers to buy a one bed flat? They can be creative, your salary is a mere margin to trade, whatever it takes to keep you in the game, the bank doesn't want to repo your stuff as it's basically worthless without a whole system of supporting fools, they want to keep you running to stand still. It's all about the comfort level, making people happy with paying out increasing proportions of their income in interest and debt repayments, and the stacking and cascading of debt, hence the constant spin.

I don't think the BoE can decide whether wage inflation will cure some of the present problems, it has been a traditional get out in the past, but it may let the genie out of the bottle which causes nasty problems later on.

Brown is a good old fashioned Keynesian, that's why he has created endless 'make work' public jobs and given them annual 7% pay rises, or even more when you look at doctors for example. However this has simply created a disparity as global deflationary forces have been acting as a downward force on salaries in the private sector, thanks to outsourcing of manufacturing and services to China and India, migration to the UK creating an endless pool of cheap labour and very weak union pressure (in the private sector). To top this off, the productive part of the economy is also subject to record taxes in order to pay for all the inflationary Keynesianism in the public sector, something that hasn't spilled over.

Everything that goes into China is expensive, i.e. metals, oil, commodities and everything that comes out is cheap, it's like a very odd Soviet factory where input and labour costs aren't reflected in the final price, it has screwed up traditional Western economics, the elastic shouldn't stretch this far.

This was Greenspan's ultimate conundrum, it went deeper than the yield curve.

Edited April 21, 2006 by BuyingBear

[Guest]

It's one hell of a realisation that if the bank repossessed everyone's stuff, it would be worth nothing.

[jpidding]

Interesting comments guys!

I agrree that some of the liquidity could go into housing, but more of it wil probably find its way into commodities etc.

In the absence of wage inflation I dont believe it can go too far into property though. The only way that prices can go higher with relatively static wages is with longer mortgages and/or lower IR's. Such a large proportion of people are on IR only now that the former will not make much difference. Trouble is that I dont rule out the BOE lowering rates in quarter point chunks to try to keep things alive a little longer. This can only work short term, but it may serve to keep the ball rolling for another couple of years yet.

Think I'll buy a nice 3 bed apartment in Germany instead. If only they weren't such w@nkers it would be a good place to live!

[Realistbear]

I think we are all agreed that there is tons of money sloshing around in the economy and its finding its way into gold, silver, shares etc.

Helicopter Ben has said he will flood the US with paper money to prevent a slowdown and deflation in prices.

Assuming our government will follow suit (UK money supply is growning 1.5 times faster than US at 12% PA!), what is to stop all this liquidity going into housing?

I'm bear property and long gold, but cant find an arguement to suggest the money will go into commodities and not property.

JP.

http://www.moneyweek.com/file/5138/m3-0212.html

December 2005 article.

He may see 1929 coming back:

http://www.federalreserve.gov/boarddocs/sp...2004/200403022/

Edited April 24, 2006 by Realistbear

[kenclarkesshoes]

Think I'll buy a nice 3 bed apartment in Germany instead. If only they weren't such w@nkers it would be a good place to live!

coming from a brit that is rich. the germans are 100 times cooler than the brits who have become obsessed

with law and order to such an extent that they cant function any more. just like hte americans,

the germans have a much more rational approach which leads to a far healthier climate all round,

they are also not politically correct morons like here who want to persecute everyone for smoking and other

imaginary sins.

their attitude to sex is also much more open and healthy than here.

[jpidding]

coming from a brit that is rich. the germans are 100 times cooler than the brits who have become obsessed

with law and order to such an extent that they cant function any more. just like hte americans,

the germans have a much more rational approach which leads to a far healthier climate all round,

they are also not politically correct morons like here who want to persecute everyone for smoking and other

imaginary sins.

their attitude to sex is also much more open and healthy than here.

Having lived in Germany for 6 years I can tell you straight from the horses mouth what they are like.

On the subjext of law and order I was surprised at how easy going and tolerant the police were of my "relatively minor" traffic offenses. Their trading laws however are 20-30 years out of date. When I arrived in '98 you simply couldnt go shopping (even in large malls) after 2pm on a Saturday in most places except city centres. That is changing lately esp under Angel Merkel (sp?).

On the subject of smoking (I presume you are one), they are amongst the worst for flouting (or not having in the first place) rules about smoking in public places. Ford Motor Company offices only banned it in 2002. All sports clubs allow smoking IN ALL AREAS. People openly smoke in front of young children (even with them sitting on their laps). There is a total disregard fro non-smokers rights, despite surveys showing that less than 50% of people smoke.

Try holding a door open for 20 germans and see how many of them even look at you as they walk through, let alone thank you for it. I kid you not you will be amazed.

On the motorway (and other roads) their manners are terrible. W@nkers in beemers and mercs will keep flashing you out of the way even when you want to go faster but there is a car in front of you. This type of driving really raises stress levels and is infectious. If there is a traffic queue just see how many of them push down the wrong lane/hard shoulder to get to the front.

I have many good german friends and it might be the minority that stick in the memory for bad stuff, but on the whole it has to be noted that germans do have a deep rooted insecurity that makes them less than relaxed about themselves and they allow it to manifest by being overly defensive/aggressive in their manerisms.

The Nurburgring absolutley kicks @rse though! Becks is best (or Bitburger, or Weizen etc). Cost of living is lower. You can get a good flat in the city for half what you'd pay in the UK. Easy drive down to the Alps. Well connected in central EU. Will probably weather a downturn better than most with its manufacturing exports rather than "service based" economy.

JP.