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What Does This Mean For Hpc?

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The Economist

This article seems to suggest that the powers that be will allow the value of sterling to fall (no IR increases?) over the next year or so.

The pound and the euro

Signs of weakness

Apr 12th 2006

From The Economist print edition

Why sterling may lose ground against the single currency

TWICE during Labour's first six years in office, Gordon Brown thwarted Tony Blair's ambition to join the euro. First in October 1997 and then in June 2003, the chancellor of the exchequer in effect vetoed the prime minister's plan.

One compelling reason for staying outside the euro was the unusual strength of sterling, as it is unwise to fix a currency at an overvalued rate. Since the euro started in January 1999 at €1.42 to the pound, sterling has generally traded high against it, breaching €1.75 in 2000 and, at its lowest in 2003, falling only just below €1.40 (see chart). This contrasted with sterling's weakness against an equivalent basket of European currencies after it tumbled out of the exchange-rate mechanism on “Black Wednesday” in September 1992.

The pound's dominance may, however, be drawing to an end. Some City economists are now forecasting a sharp fall against the euro in the months ahead. John Butler of HSBC thinks that the pound will fall to €1.33 by the end of 2006—the lowest in ten years.

Currency forecasts are notoriously fallible, but there are some good reasons to expect such a weakening. The pound's strength against the euro has largely reflected Britain's economic performance compared with that of the euro area—an achievement that Mr Brown has seldom missed a chance to crow about. For over a decade, Britain has consistently grown faster than the single-currency bloc. Even though GDP growth slackened to 1.8% last year, the slowest since 1992, this still outstripped the euro area's sluggish 1.3%.

However, this margin looks set to narrow this year despite the latest setback to reforms in France. The Economist's panel of forecasters expects Britain to grow by 2.3%, only just ahead of the euro area's 2.1%. Some City economists think that the tables will be turned this year. For example, Robert Barrie of Credit Suisse has just raised his forecast for euro-area growth in 2006 from 2.1% to 2.5%, outpacing Britain.

As important as the rate of growth is its source. For the past decade, consumers have propelled the British economy forward. But now they are burdened by high debt and rising taxes. With business investment weak and the impulse from public spending losing momentum, the impetus for growth must now come from exports. Official figures released on April 11th, however, showed a deterioration in Britain's trading performance, which has been disappointing for several years. The deficit in goods and services in the three months to February widened to £13.2 billion ($23 billion) from a shortfall of £11.9 billion in the previous quarter.

What this suggests is that exporters need a helping hand through a decline in sterling. With half of Britain's exports going to the euro area, the pound thus needs to fall against the single currency.

If the pound does weaken against the euro, this could re-open the politics of joining the single currency. Euro membership will be an easier sell when the pound is weak than when it was strong.

Any comments?

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GB forecasts growth of over or near 3% for both 2007 and 2008.

The lower costs of labour and nominal static wages from massive immigration have lowered inflation (interest rates) and boosted growth by 1% (at the expense of ordinary workers), of course when real living costs are taken into account, standards of living are falling for most people in terms of energy, houseprices and wages - especially when they realise that high houseprices in real terms are here to stay which many here do not accept yet..

Edited by brainclamp

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of course when real living costs are taken into account, standards of living are falling for most people in terms of energy, houseprices and wages - especially when they realise that high houseprices in real terms are here to stay which many here do not accept yet..

So we all (well, most of us) have less money available, but high house prices are going to stay regardless? How does that work then?

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"One compelling reason for staying outside the euro was the unusual strength of sterling, as it is unwise to fix a currency at an overvalued rate."

This sounds stupid to me. Surely, strong Sterling would give us more Euros and make us all richer. Unless they were evil communists trying to make us all poorer... Never mind I think I answered my own question.

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GB forecasts growth of over or near 3% for both 2007 and 2008.

The lower costs of labour and nominal static wages from massive immigration have lowered inflation (interest rates) and boosted growth by 1% (at the expense of ordinary workers), of course when real living costs are taken into account, standards of living are falling for most people in terms of energy, houseprices and wages - especially when they realise that high houseprices in real terms are here to stay which many here do not accept yet..

Brainclamp you numpty try making a post that does not contain the words "massive immigration ". It is soooooo damn boring to hear you spout your fascist rubbish

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Brainclamp you numpty try making a post that does not contain the words "massive immigration ". It is soooooo damn boring to hear you spout your fascist rubbish

And while you're at it, try making a post that doesn't include the logical contradiction and UTTERLY LUDICROUS hypothesis of falling wages AND high house prices. IT DOESN'T MAKE ANY SENSE, NO MATTER HOW MANY TIMES YOU REPEAT IT!

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Essentially what the article is saying is quite true, when economic growth weakens the currency starts to reflect the weakened state of the economy.

This weakening currency gives rise to the late-cycle inflation that comes along right at the very time the economy needs it least.

Interest rates then have to rise to encourage investment and protect the currency.

The economy slides into recession as interest rates are forced up at the worst possible time.

That's how it usually pans out, not that it will happen that way again.

But don't be surprised to see enormous inflationary pressure start to build in the economy.

Edited by BandWagon

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Essentially what the article is saying is quite true, when economic growth weakens the currency starts to reflect the weakened state of the economy.

This weakening currency gives rise to the late-cycle inflation that comes along right at the very time the economy needs it least.

Interest rates then have to rise to encourage investment and protect the currency.

The economy slides into recession as interest rates are forced up at the worst possible time.

That's how it usually pans out, not that it will happen that way again.

But don't be surprised to see enormous inflationary pressure start to build in the economy.

Yes, I agree that's the way it seems to be panning out. We may be in for a period of rising nominal HPs and falling real ones.

One implication is to find a hedge against inflation in that deposit or STR fund.

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So we all (well, most of us) have less money available, but high house prices are going to stay regardless? How does that work then?

Brainclamp said in "real terms" which could mean anything really.

Like a nominal lopping of 30% off the current price, by which time his immigrants have whopped your wages down by 30% too. So house just as expensive as before.

Really brainclamp is saying that people need to start learning the value of their money once again. It's just a matter of discipline.

Of course, laced with a little bit of "(at the expense of ordinary workers)" spin.

:lol:

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Brainclamp said in "real terms" which could mean anything really.

Like a nominal lopping of 30% off the current price, by which time his immigrants have whopped your wages down by 30% too. So house just as expensive as before.

Good point.

Really brainclamp is saying that people need to start learning the value of their money once again. It's just a matter of discipline.

I know the value of my money right now - it's worth b*gger all :D

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So we all (well, most of us) have less money available, but high house prices are going to stay regardless? How does that work then?

I know..

does anyone remeber if people claimed that high house prices were here to stay all of the way to the bottome last time..

I have read reports of people claiming that prices only dipped 13% last time..

People will always try to blow smoke up your ****.

but dropping your trousers and bending over is looking a little too eager to get.

well..

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Yes, I agree that's the way it seems to be panning out. We may be in for a period of rising nominal HPs and falling real ones.

One implication is to find a hedge against inflation in that deposit or STR fund.

Are you are saying that inflation goes through the roof but IRs stay low?

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I have read reports of people claiming that prices only dipped 13% last time..

They probably did. Sounds about right for an average.

Some people will have lost more depending on how unlucky they were at both transactions.

Some people will have lost less, probably depended on where in the country you were, and how much boom was seen.

Still.

It was a LONG time before the pickup started, and there was plenty of high wages knocking around in the late 90s internet boom period!!! You'd have thought things would have got going much sooner.

Sentiment must play a massive role. Look at last year. Going belly up it was until that rate cut! Maths matters not.

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They probably did. Sounds about right for an average.

Some people will have lost more depending on how unlucky they were at both transactions.

Some people will have lost less, probably depended on where in the country you were, and how much boom was seen.

Still.

It was a LONG time before the pickup started, and there was plenty of high wages knocking around in the late 90s internet boom period!!! You'd have thought things would have got going much sooner.

Sentiment must play a massive role. Look at last year. Going belly up it was until that rate cut! Maths matters not.

Prices fell by less than 13% in some areas (and more than 30% in others). No-one denied prices were falling, it was well-reported. Prices began to recover in late 94 early 95 in most areas.

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Are you are saying that inflation goes through the roof but IRs stay low?

Through the roof? No. But it is possible to see for a period a situation in which the BoE resists raising IRs, which would be one way to allow the £ to devalue- as envisaged in the original post. Their argument would be that this is necessary to stimulate economic activity and devaluation is not their concern, or is even necessary to encourage exports. That would import inflation (adding to existing inflation through commodity price increases and money supply expansion). At that point the BoE would have to raise rates and, especially if they overdo it as CBs have been known to in these circumstances, turn faltering growth into recession and deflation.

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Through the roof? No. But it is possible to see for a period a situation in which the BoE resists raising IRs, which would be one way to allow the £ to devalue- as envisaged in the original post. Their argument would be that this is necessary to stimulate economic activity and devaluation is not their concern, or is even necessary to encourage exports. That would import inflation (adding to existing inflation through commodity price increases and money supply expansion). At that point the BoE would have to raise rates and, especially if they overdo it as CBs have been known to in these circumstances, turn faltering growth into recession and deflation.

This analysis is all very well.

Merv is waiting for Ben - his new best buddy - to help him decide what to do next.

Let's face it boys, the Yanks are going to get the blame one way or another. We can get away with blaming the Americans because - get this - they'll never know! They don't watch the news from foreign countries. Then we can look forward to 30 years of New Labour. Little old ladies will be talking on the bus "Ooooh, wasn't it terrible about the house price crash business, but at least nice Mr Blair and Brown did everything they could."

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The scenario depicted seems highly plausible to me. Unswervin Mervyn has been saying for years that he hopes exports will take up the inevitable burden of powering the economy once the consumers finally collapse under the burden of debt. A lower pound will obviously help boost exports and keep things ticking along for a while. Do eceonomists really look much further ahead than 3-4 years?

What's the best way to guard against the inflation that will surely follow? Cash seems a nnn-starter, shares are always risky, commodoties are at an all time high, property is seriously risky, where on earth does one turn?

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Sentiment must play a massive role. Look at last year. Going belly up it was until that rate cut! Maths matters not.

And if that rate cut of a quarter percent had picked up the market, it only goes to show how fragile it is!

I agree - Maths matters not and it goes to show what would happen if rates rose by a MASSIVE one percent

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And if that rate cut of a quarter percent had picked up the market, it only goes to show how fragile it is!

I agree - Maths matters not and it goes to show what would happen if rates rose by a MASSIVE one percent

Which is why it is unlikely to happen. I cannot see the BoE sitting on their hands when House Prices are falling through the floor. I'd love a crash, love it but I think the best we can hope for is stagnation/small drops punctuated by BoE inspired mini-booms (like what we're in now).

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The scenario depicted seems highly plausible to me. Unswervin Mervyn has been saying for years that he hopes exports will take up the inevitable burden of powering the economy once the consumers finally collapse under the burden of debt. A lower pound will obviously help boost exports and keep things ticking along for a while. Do eceonomists really look much further ahead than 3-4 years?

What's the best way to guard against the inflation that will surely follow? Cash seems a nnn-starter, shares are always risky, commodoties are at an all time high, property is seriously risky, where on earth does one turn?

I doubt that in fact a devaluing pound would make that much difference to UK exports - the manufacturing base is too weak, too under-invested and nowhere near matching the BRIC countries in labour costs.

Short of hyperinflation and if the burst of inflation does not go on too long, then cash is not an unreasonable place to be. Holding cash is a bet on eventual deflation but it seems wise to seek out some hedges against intervening inflation. Chasing the best savings rate, maximising tax free opportunities, searching out inflation linked opportunities - and, sorry got to say, gold is the traditional hedge against inflation and is relatively OK in deflation too (but you have to be ready for the volatility). Also possible - buy yen and, maybe, Euros. Whatever you do the present instability does not warrant invest and forget attitudes. Active awareness of risk seems to me to be more necessary than ever.

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Brainclamp you numpty try making a post that does not contain the words "massive immigration ". It is soooooo damn boring to hear you spout your fascist rubbish

Brainclamp may or may not be a fascist (sorry if you aren't BC), but in pointing to immigration as a contributor to high house prices he is not alone. On Monday I heard a couple of radio interviews, one of them on 5 Live, with a guy from Ernst & Young who had commissioned a report from some academics about the impact of the several hundred thousand recent immigrants from the new EU accession countries (Poland et al).

The conclusion was that this additional pool of labour had helped keep wages down. The way this works is that companies don't have to push up wages to get staff because there is a pool of labour willing to come in from abroad.

Lower wages = lower inflation = lower interest rates. Rising immigration = rising housing demand. Lower interest rates + rising housing demand = higher house prices. It's not difficult to work out, and you don't need to be a fascist to do the math ....

BA

Edited by bears all

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  • 302 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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