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Inflationary Recession

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Read the wider economy webpages such as Financial Sense Online and you'll find that a key debate concerns whether the US and UK economies are heading for deflationary or inflationary recession.

As I understand it the difference is this:

In deflationary recession economic output falls and prices fall with it;

In inflationary recession economic output falls but prices keep going up.

The resolution of the debate seems to me to be tipping towards inflationary recession. The key arguments for this, put simply, are:

the Fed and BoE are continuing to increase the money supply and this will eventually find its way into rising prices;

at the the same time the interest rate brake on the economy is being applied (more by the Fed, less at the moment by the BoE but with a prospect of rises this year) - this is incredibly difficult to get right and one wrong move could result in either recession or even higher inflation;

commodity prices are in any case rising because of demand from China, India, Russia, Brazil etc;

the $ is devaluing and the £ is likley to follow, importing more inflation;

the US and UK have experienced consumption led growth fuelled by debt but this is running out of steam as the servicing of debt overwhelms consumer ability to borrow;

high labour costs and low investment are rendering the US and UK uncompetitive.

On HPC most reference is made to the house prices during 1989-96, when real rather than nominal prices fell.

But the housing crash of 1974-80 (or thereabouts) was different. It took place at a time of stagflation, which is similar to inflationary recession. Nominal house prices did not fall because the underlying rate of inflation kept them rising. There were real falls but these were masked. It was a time of great labour unrest, strikes etc as people attempted to maintain wage rates in line with inflation.

So my questions are these:

Are we heading for inflationary or deflationary recession?

If inflationary recession, what will happen to house prices?

What lessons can we learn about this from 1974-80?

What are the implications for FTB and STR savings and investment strategies?

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I think the only way out of the current situation is through inflation. Deflation would truly kill this country.

As a gold investor, I'm staking my savings on inflation, as in a deflationary environment cash is king. I just can't see the BoE allowing the country to spiral into deflation.

I think inflation is already here. When I think about the interest rate I receive on my savings compared to what REAL inflation is I'm probably bleeding cash on a daily basis. The government of course don't want me to know this, hence the ridiculous CPI stats.

What I am expecting to see over the next ten years is house prices fall, very gently in nominal terms, as salaries rise just behind rampant inflation, ending with that £300,000 house being worth one Krugerrand or 300 pesos.

So I think you're right.

Dammit, it's true - house prices don't ever go down!!!! :lol:

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I think the only way out of the current situation is through inflation. Deflation would truly kill this country.

As a gold investor, I'm staking my savings on inflation, as in a deflationary environment cash is king. I just can't see the BoE allowing the country to spiral into deflation.

I think inflation is already here. When I think about the interest rate I receive on my savings compared to what REAL inflation is I'm probably bleeding cash on a daily basis. The government of course don't want me to know this, hence the ridiculous CPI stats.

What I am expecting to see over the next ten years is house prices fall, very gently in nominal terms, as salaries rise just behind rampant inflation, ending with that £300,000 house being worth one Krugerrand or 300 pesos.

So I think you're right.

Dammit, it's true - house prices don't ever go down!!!! :lol:

I agree.

I dread to think what things would be like if a £300,000 house costs 1 krugerrand. Although it would mean I could almost buy up this whole street. :lol:

If they fell to 20 that would be good enough for me.

Do you think the government will still be expecting capital gains tax, with comical 1.8% cpi taper relief when hyperinflation kicks in?

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The problem with the inflationary environment is the BoE has promised not to let inflation get out of control. Yet, the real inflation that matters is wage inflation. Ok, inflation is measured by the CPI which is a totally inadequate measure, but I can't see a situation where every thing rises but consumer prices don't (or very little).

There's little point talking about increased money supply unless it has an impact on wage inflation.

It has been shown the economy is now running on empty [read DEBT] which cannot go on forever. The question is how will all this pan out? If wage demands go up, ultimately interest rates go up leading to house price deflation.

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Surely higher energy prices will lead to higher manufacturing costs, will lead to price inflation as companies become as 'efficient' (job losses) as they can possibly be, leaving only prices left to raise.

How many deflationary periods have we had to date? I bet inflationary times are far more frequent/likely although I don't rule out deflation, or indeed total collapse, in which case we're all fooked.

I'm betting on inflation, if I'm wrong, well that's the nature of betting - black or red, knowing my luck, green will come in and the house will take the lot.

Dr. D

Where does the statement in your footer come from? :

"The history of fiat currency shows that every single one in history eventually reaches its intrinsic value which is zero, and there's not one exception."

I'd like to know more!

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Dr. D

Where does the statement in your footer come from? :

"The history of fiat currency shows that every single one in history eventually reaches its intrinsic value which is zero, and there's not one exception."

I'd like to know more!

An interview with this guy called Dr. Bill Veith that was recorded last week.

The file is about 160mb, which I can gladly send you if you want.

PM me.

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Surely higher energy prices will lead to higher manufacturing costs, will lead to price inflation as companies become as 'efficient' (job losses) as they can possibly be, leaving only prices left to raise.

How many deflationary periods have we had to date? I bet inflationary times are far more frequent/likely although I don't rule out deflation, or indeed total collapse, in which case we're all fooked.

I'm betting on inflation, if I'm wrong, well that's the nature of betting - black or red, knowing my luck, green will come in and the house will take the lot.

I think its right to say that in the UK and US there has been no prolonged period of price deflation since the 1950s - and that was very short. For some that means we're due for it - as we reach the end of a long cycle. For others it shows that Keynesianism works, after a fashion, and that the threat of deflation must be fought at all costs - Berkanke for example.

The thirties show that not everyone suffers in a deflationary slump. I believe it's true that for those who remained in employment the slump was not too bad. For some living standards improved as prices fell. Cash was king. The ones who suffered were the unemployed but their plight remained unseen by many in affluent areas. The hunger marches were in part an attempt to draw attention to the vast disparities that opened up.

Under a an inflationary recession there are also victims. They are: those with cash savings (who see their value eroded), those, like pensioners, living on fixed incomes; and those who cannot get wage increase to keep up. My guess is that the biggest group now is probably pensioners, followed by those whose labour value is declining under international competition. Those with debts, including mortgages, will do relatively better as inflation will erodes the value of what they owe.

This difference is crucial to FTBs and STRs. If we get deflation then, assuming you stay in employment, cash savings will suddenly be back in fashion and will allow the purchase of a nice house. If we get inflation they will be eroded and investments like precious metals, index linked certificates and even equities will probably do better.

BTW I more and more agree with the suspicion of fiat currencies. Or more particularly the £ and $. However, there is a sort of guarantee behind fiats. It is that the government will tax it's citizens to pay of the debt that they entail. It's a bet on the toughness of governments to carry that through - and therein lies its weakness.

Edited by New Bear

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There is no evidence that serious inflation is coming.

If you believe that raw material costs are the biggest influence on the finished cost of goods, then the inflationary argument seems sensible.

However, you have to weigh this against the costs of labour and thanks to Globalisation this will not rise (notwithstanding countries like France that try, Canute like, to resist its labour effects)

As there is an unlimited potential source of cheap labour in the Global economy this will offset the inflationary effects of commodities as it has done for some time. Similarly the deflationary effects of labour migration into the UK.

"Intellectual Property is the oil of the 21st Century" said Mark Getty. This effect works in many different areas, but one of the most significant effects is that with Silicon chips where todays latest Pentium contains the same commodity content as the first version made many years ago. This hedonic effect can't be ignored.

We *do* live in a globalising world, powered by computers which deliver more power at lower costs, with powerful networks enabling the globalisation of Labour.

People, and economies have not adjusted to what this means, and one undesirable side effect has been the asset bubbles of recent years.

The decreasing costs of products has given people more disposable income to spend on property. Low interest rates also resulting from these deflationary effects, have also allowed property prices to rise to a higher level.

The question is... are we to see deflation with a recession, or deflation with growth. If the latter, then I expect house prices (regrettably) to continue rising as people shift expenditure from other classes of goods into the emotionally driven housing bubble.

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BTW I more and more agree with the suspicion of fiat currencies. Or more particularly the £ and $. However, there is a sort of guarantee behind fiats. It is that the government will tax it's citizens to pay of the debt that they entail. It's a bet on the toughness of governments to carry that through - and therein lies its weakness.

It's really quite impressive the smoke and mirrors that has been created around this system so that nobody quite understands what a complete fraud it is. The "debt" that the government entails is generated by the government issuing bonds, which it then sells to the central bank. The central bank creates the money out of nothing to buy these bonds.

This is also one way of expanding the money supply. So when you hear that bush has just borrowed another 200 billion to fight wars. What it usually in fact means is the money supply has been expanded / diluted by a further 200 billion.

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It's really quite impressive the smoke and mirrors that has been created around this system so that nobody quite understands what a complete fraud it is. The "debt" that the government entails is generated by the government issuing bonds, which it then sells to the central bank. The central bank creates the money out of nothing to buy these bonds.

It certainly is impressive. I am now halfway through "The Mystery of Banking" by Murray Rothbard. My aim was to get to the nub of how it all works.

This is also one way of expanding the money supply. So when you hear that bush has just borrowed another 200 billion to fight wars. What it usually in fact means is the money supply has been expanded / diluted by a further 200 billion.

Yes, but only if those new bonds were bought by the central bank in the currency jurisdiction where the bond was issued. What happens if the bond was bought by the ECB, Bank of Japan or China's central bank, as has been the case for the last few years?

Assuming that inflation is caused by monetary expansion, the critical thing is to know how much the central bank is engaging in these open market operations. The more I think about it, the more I believe that interest rates are a bit of a red herring.

frugalista

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What I cannot understand is how all of the world's other central banks are raising interest rates in order to combat inflation, and yet we hear nothing about an inflationary threat to the UK economy, and interest rates remain the same. I simply cannot believe that we are immune. The only logical conclusion is that our CPI basket is masking the true picture, and even we will feel the effects of inlfation imminently.

Rises in the price of oil must have an effect on inflation in due course.

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The question is... are we to see deflation with a recession, or deflation with growth. If the latter, then I expect house prices (regrettably) to continue rising as people shift expenditure from other classes of goods into the emotionally driven housing bubble.

That's one of the saddest, most disheartening outcomes of the current economic cycle I've ever heard predicted :(

I'm now hedging with 15% Gold and I'm not sure what to do...

Currency devaluation would surely be the saviour of UK PLC - cheaper exports and so on. I guess if it's done gradually there will be wage-push inflation to offset energy costs and houses would just gently stagnate against a high-ish rate of background inflation and interest rates.

Maybe it's a matter of timing... so maybe a depression, initially deflationary but turning inflationary as they turn the wick up on the printing presses. From that point of view, there's no one investment class that is a safe best for the next 5 years is there? It's going to be cash followed by commodities if it's deflation followed by inflation. Those that are hedging with 50% cash / gold will be caught out as they may ironically be "economically neutral" and not benefit from the c**p that's about to befall the masses.

Is Gold always a bad bet during deflation? :huh:

I wonder if someone should post a poll to see what we all think. I'd like it to contain timing information as well, so something like:

1. Broadly, 2 years deflation, 4 years inflation.

2. 7-14 years deflation.

3. 7 years moderate inflation.

etc etc.

Maybe someone with a little more financial knowledge could structure one. :)

AF

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The Japanese central bank tried to fight deflation and failed. The other central banks chortle at this and say they would do things differently. I think deflation is still the biggest threat facing the UK.

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Yes, but only if those new bonds were bought by the central bank in the currency jurisdiction where the bond was issued. What happens if the bond was bought by the ECB, Bank of Japan or China's central bank, as has been the case for the last few years?

Assuming that inflation is caused by monetary expansion, the critical thing is to know how much the central bank is engaging in these open market operations. The more I think about it, the more I believe that interest rates are a bit of a red herring.

frugalista

Imagine you own a central bank, or even a whole chain of central banks.

You have the power to print as much money as you want, legally.

What would be your motivation to get out of bed in the morning. It wouldn't be earning enough money to afford the next widget. The only thing left is power.

The mind-boggling thing is that the same people that control european central banks and the american central banks, probably also control china and japan's central banks. They have engineered a situation that is going to result in an american / world-wide financial crisis.

"What happens if the bond was bought by the ECB, Bank of Japan or China's central bank, as has been the case for the last few years?"

So that when China does eventually sell its bonds, and causes hyperinflation in the US.

It can be scapegoated, rather than anyone pointing the finger at an inherently corrupt global money system.

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There is no evidence that serious inflation is coming.

If you believe that raw material costs are the biggest influence on the finished cost of goods, then the inflationary argument seems sensible.

However, you have to weigh this against the costs of labour and thanks to Globalisation this will not rise (notwithstanding countries like France that try, Canute like, to resist its labour effects)

As there is an unlimited potential source of cheap labour in the Global economy this will offset the inflationary effects of commodities as it has done for some time. Similarly the deflationary effects of labour migration into the UK.

"Intellectual Property is the oil of the 21st Century" said Mark Getty. This effect works in many different areas, but one of the most significant effects is that with Silicon chips where todays latest Pentium contains the same commodity content as the first version made many years ago. This hedonic effect can't be ignored.

We *do* live in a globalising world, powered by computers which deliver more power at lower costs, with powerful networks enabling the globalisation of Labour.

People, and economies have not adjusted to what this means, and one undesirable side effect has been the asset bubbles of recent years.

The decreasing costs of products has given people more disposable income to spend on property. Low interest rates also resulting from these deflationary effects, have also allowed property prices to rise to a higher level.

The question is... are we to see deflation with a recession, or deflation with growth. If the latter, then I expect house prices (regrettably) to continue rising as people shift expenditure from other classes of goods into the emotionally driven housing bubble.

Maybe this will be the long-term, big picture historians look back - assuming our planet can take all this growth without serious consequences.

But the short and medium term are very important. What you paint is a picture of globalisation without any short or medium term imbalances occuring - as if it were a smooth, continuous process without any bumps or shocks. In fact global imbalances are there, getting worse and creating problems for individual economies.

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Is Gold always a bad bet during deflation? :huh:

I believe so. Deflation means each pounds becomes more valuable, thus the price of gold should fall against the pound. I'm an armchair investor (people always need to sit down on hearing bad news :lol:), and no expert, but it seems simple enough to me.

Edited by Adam

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I think the only way out of the current situation is through inflation.

Inflation will bankrupt the indebted, because they'll have no money left over to pay off their debts after they've paid five pounds a liter for petrol.

Deflation will at least allow them to continue to pay the interest on the mortgage, even if their 300k 'executive apartment' is now only valued at 30k.

Of course in either situation the smart debtors would go bankrupt, so inflation would just screw the savers while deflation would reward them.

What I am expecting to see over the next ten years is house prices fall, very gently in nominal terms, as salaries rise just behind rampant inflation, ending with that £300,000 house being worth one Krugerrand or 300 pesos.

Now you just need to explain where rampant wage inflation is coming from.

Edited by MarkG

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Now you just need to explain where rampant wage inflation is coming from.

Search me. I'm assuming that price inflation forces wage inflation as our wages disappear in a puff of exhaust smoke. I'm uncertain of what will happen, I just hope the people with some power to influence the situation will act - and I also hope they like inflation.

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Inflation will bankrupt the indebted, because they'll have no money left over to pay off their debts after they've paid five pounds a liter for petrol.

Inflation will erode the value of the debt. As long as they can manage the interest payments, inflation would benefit those with debts.

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Guest

Inflation will erode the value of the debt. As long as they can manage the interest payments, inflation would benefit those with debts.

Wage inflation will. Inflating the money supply and it getting priced into everything else (er, like houses) won't.

Edited by megaflop

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Guest Baffled_by_it_all

Are companies in a position to increase wages? Surely rather than pay higher wages they'll ship everything they can out to India resulting in skyrocketing unemployment.

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Read the wider economy webpages such as Financial Sense Online and you'll find that a key debate concerns whether the US and UK economies are heading for deflationary or inflationary recession.

As I understand it the difference is this:

In deflationary recession economic output falls and prices fall with it;

In inflationary recession economic output falls but prices keep going up.

The resolution of the debate seems to me to be tipping towards inflationary recession. The key arguments for this, put simply, are:

the Fed and BoE are continuing to increase the money supply and this will eventually find its way into rising prices;

at the the same time the interest rate brake on the economy is being applied (more by the Fed, less at the moment by the BoE but with a prospect of rises this year) - this is incredibly difficult to get right and one wrong move could result in either recession or even higher inflation;

commodity prices are in any case rising because of demand from China, India, Russia, Brazil etc;

the $ is devaluing and the £ is likley to follow, importing more inflation;

the US and UK have experienced consumption led growth fuelled by debt but this is running out of steam as the servicing of debt overwhelms consumer ability to borrow;

high labour costs and low investment are rendering the US and UK uncompetitive.

On HPC most reference is made to the house prices during 1989-96, when real rather than nominal prices fell.

But the housing crash of 1974-80 (or thereabouts) was different. It took place at a time of stagflation, which is similar to inflationary recession. Nominal house prices did not fall because the underlying rate of inflation kept them rising. There were real falls but these were masked. It was a time of great labour unrest, strikes etc as people attempted to maintain wage rates in line with inflation.

So my questions are these:

Are we heading for inflationary or deflationary recession?

If inflationary recession, what will happen to house prices?

What lessons can we learn about this from 1974-80?

What are the implications for FTB and STR savings and investment strategies?

this time IS different!!!!...it's looking like an inflationary recession worldwide but DE-flationary for the west because of overloaded consumers and the inability to increase wages in line with staple spending.

...in short...east is fooked as they have to absorb the commodity price rise in full

...west is fooked because the spending power is being driven down.

funnily enough was I not one who originally called this as a 1973-1989 style cycle?????

Edited by oracle

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It would seem companies have been showing much interest in downsizing their wage outgoings, notably since the internet crash.

A friend of mine brought in 60 eastern europeans to drive lorries. I consider this to be reasonable, however, since it's unlikely such high-skilled workers are available here.

:unsure:

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Inflation will bankrupt the indebted, because they'll have no money left over to pay off their debts after they've paid five pounds a liter for petrol.

Deflation will at least allow them to continue to pay the interest on the mortgage, even if their 300k 'executive apartment' is now only valued at 30k.

Of course in either situation the smart debtors would go bankrupt, so inflation would just screw the savers while deflation would reward them.

Now you just need to explain where rampant wage inflation is coming from.

Doesn't this come with the general price inflation?

If inflation rises then you have to pay more £££ to give the workers the same 'value' for their effort.

The currency is devalued so people want more £££ to make up for this.

Of course. the down side (for those taking on new debts) will be increased interest rates.

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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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