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Bis Admits CPI Figures Are Fudged, Interest Rates Will Rise Higher

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Are central banks across the world suddenly waking up to the fact that artificially low interest rates have been storing up trouble for us all?

Just a couple of weeks ago, Bank of England governor Mervyn King admitted that “monetary policy around the world may have been too accommodative.”

And now the Bank for International Settlements – also known as the central bankers’ central bank – has suggested that the massive financial imbalances in the global economy might just have something to do with the easy credit conditions of recent years...

The Bank for International Settlements has warned that central banks might have to hike interest rates more sharply than anyone currently suspects. Inflationary pressures are "now seen to be greater than they have been for some time", while soaring prices of assets from stocks to property across the globe have suddenly got the bankers worried.

As Paul McCulley of bond investment specialists Pimco points out, and central banks now seem to be realising, "too much focus...[on] stabilising goods and services inflation on one-to-two-year horizons is a prescription for boom and bust in asset prices".

Of course, it’s debatable whether central banks have even done a decent job of targeting goods and services inflation. Low inflation owes a lot more to Chinese factory workers and statistical sleight-of-hand than it does to central bankers.

Even the BIS admits that consumer price inflation figures have been fudged. “The concept of ‘core’ inflation is based on the exclusion of volatile price components, but the price of excluded energy has been trending upwards for over three years. It is the reality of consumers facing higher costs for energy and housing services that could still pass through to wage settlements.”

General manager Malcolm Knight said banks would have to be “pragmatic” when raising rates and consider the consequences for financial markets. But he broadly welcomed the recent pullback in global stock markets and commodity prices.

“It appears to me that what we are seeing is a generalised increase in the risk aversion of asset holders. That in and of itself is not an unhealthy phenomenon because we have been saying for some time that there was an underpricing of risk.”

It's nice to know that the central banks have been warning us that this was going to happen all along. But who, exactly, was responsible for the “underpricing of risk” in the first place? Who was it that reassured markets that any time asset prices looked set to take a dive, interest rates would be slashed to cushion the fall?

That’s right – central bankers. Or more accurately, the central banker’s central banker - former Federal Reserve chief Alan Greenspan.

The “Greenspan put” as it is known, refers to the faith that Wall Street (and by extension, investors across the rest of the world) has that the Fed will protect them from falling asset prices. It stems from Mr Greenspan’s habit of slashing interest rates whenever an economic crisis loomed, thus inflating a series of asset bubbles which culminated in the US housing bubble (for more on this topic, click here: Alan Greenspan - the savings saboteur (http://www.moneyweek.com/file/7410/alan-greenspan---the-savings-saboteur.html)).

The trouble with the “Greenspan put” is that it lulls investors into a false sense of security. Edward Chancellor on Breakingviews.com cites economist Hyman Minsky, who argued that "during periods of calm...borrowers take on more risk and lenders accommodate them. As a result, the margin of safety in the financial system is diminished".

It's not hard to see this in effect across the globe. Investors have been merrily snapping up the debt of emerging market economies, so that yields (at least, until recently) have hit record low levels compared to similar US and UK government bonds.

And its effects are also visible in domestic markets, like the UK property market. Banks might be reining in lending criteria for credit cards and personal loans, but they're still falling over themselves to dish out 'sub-prime' mortgages and 'consolidation' loans.

But now money is getting tighter across the globe. The main reason that investors have stopped “underpricing risk”, as Mr Knight puts it, in the last few weeks is because all that money flooding the system is drying up.

The threat of rising interest rates in Japan, in particular, has speculative investors on the run. We published a piece from Martin Spring on this topic in yesterday’s Money Morning – if you missed it, you can read it here: The truth behind the stock market slump? (http://www.moneyweek.com/file/14534/the-truth-behind-the-stock-market-slump.html)

So the BIS has admitted that central banks have taken their eyes off the ball of asset prices. So what's the solution? Simple of course - give central banks the powers to fiddle with more economic levers.

“The BIS called for the use of weapons such as regulatory powers to curb the build-up of ‘credit-financed imbalances’ shown by bubbles in the prices of assets such as houses,” reports The Times.

This doesn't sound like a great idea to us. Not only would we have a layer of politicians interfering in markets, we would also gain a layer of bankers conducting economic experiments as well. Given the amount of trouble central banks have caused with the few tools they already have, wouldn’t it be better to reduce their powers, rather than increase them?

Earlier this year we posted a piece questioning whether we need central banks at all. You may not agree with its conclusions – but it’s certainly thought-provoking. You can read it by clicking here: Do we really need central banks? (http://www.moneyweek.com/file/8986/do-we-really-need-central-banks.html)

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Any bets on Gordon shifting the goalposts to say 3% is the new paradigm for inflation?

Im sure he will - I mentioned this a few weeks ago

The infaltion target will be 'adjusted' to move it in line with 'new global inflation levels' - blame it on the rest of the world - all's perfect here in Broon's inflation Neverland

Broon is far more a schemer and liar than Blair, and will do anything to get into no 10

Edited by jp1

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Im sure he will - I mentioned this a few weeks ago

The infaltion target will be 'adjusted' to move it in line with 'new global inflation levels' - blame it on the rest of the world - all's perfect here in Broon's inflation Neverland

Broon is far more a schemer and liar than Blair, and will do anything to get into no 10

I have read the recommendations that are now being put forward, by central bankers and economists like Paul McCulley. His recent article which can be viewed in the pimco website is interesting in the treatment of the S=I identity and on why he is a Keaysean, (printing money - the same thing as low interest rates below real inflation, lowers risk and raises animal spirits for investment and thus adds to the pool of the stock of savings).

If you read the article properly - the solution, as ever, differs from the bearish spin here about moneytary tightening causing asset deflation and recession.

The implications of the article - to prevent any recession through higher IRs, which are needed as business costs rise, i.e. to bail out of a inflationary slump and (eventual) asset deflation, is to RAISE the inflation target, from 3% to make 5-6% as the new acceptable level of inflation (with interest rates just above this).

This will ensure incomes rise in nominal terms, bailing out any asset-deflation problems that over-leveraged landlords might have suffered from due to high IRs, and will ensure thier cashflows are raised (rents). Assets would be prevented from spiralling higher by cutting off credit through regulation and curbs on certain assets like houses.

This 'solution' would be a disaster in many other ways as it has very important macro implications for the long term financial health and wellbeing of the society. This is just a postulation, and not any form of policy - I am pretty certain that interest rates will be used to curb inflation as expected, to ensure the long term viability of business and industry in a global world. Its interesting though to see what these 'masters of the universe' are thinking.

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If we raise our inflation target to 3% and other countries levels are 2%, don't we risk more jobs being outsourced to other countries as wage rises are increased here?

Edited by OzzMosiz

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If we raise our inflation target to 3% and other countries levels are 2%, don't we risk more jobs being outsourced to other countries as wage rises are increased here?

I thought immigration and outsourcing where keeping a lid on wage inflation already?

Edited by dnd

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I thought immigration and outsourcing where keeping a lid on wage inflation already?

Well if inflation level is increased to 3% (assume real inflation will be allowed to increase too) and wage inflation

is kept low, sooner or later this country will be living in extreme poverty?

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UK policy blamed for soaring debt levels

By Edmund Conway, Economics Editor (Filed: 20/02/2006)

The world's top central banking authority has warned that the Bank of England's inflation-busting tactics are largely responsible for the dangerous pile-up of household debt, which last year passed £1,158 billion, £30 billion more than the country's total economic output.

Gordon Brown, the Chancellor, made inflation targeting the cornerstone of an independent Bank of England in 1997. But the powerful Bank for International Settlements (BIS) has now voiced grave doubts about the policy and called on politicians to begin debating an overhaul of the current global economic system.

In another radical move it has also suggested ditching many national currencies in favour of a small number of formal currency blocks based on the dollar, euro and renminbi or yen.

The BIS, which is controlled by a coalition of central banks and helps oversee the global financial system, warned that by pushing interest rates so low, inflation targeting has encouraged the public to take on more debt and has accelerated a flow of money out of the world's major economies.

http://www.telegraph.co.uk/money/main.jhtm...20/cndebt20.xml

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I thought immigration and outsourcing where keeping a lid on wage inflation already?

How long will the immigration argument last? Immigrants are already wising up to the fact that the cost of living in this country and the cost of housing is hardly worth the effort of coming over. High cost of housing takes money out of the economy because it is all being spent on mortages and rents instead. So our economy grows at a slower rate. These emerging economies are not stupid. The cost of housing in countries like Poland are much lower. In countries where housing costs are lower their economy grows faster because of the spare capacity available to spend within it. How long will it be before their growth outstrips ours? So will the government master plan of replacing our diminishing skill base and population with immigrants actually come to fruition?

After 2010 our workforce will drop at an alarming rate (can't recall figures or reference offhand) and the government are relying on immigrants coming in to fill the gap left by these baby boomers retiring. Every edition of the IET publications I get through the post bangs on about skills shortage in the UK and how there is nobody coming behind to replace them. Because of the housing boom birth rates are dropping off. It's all very well bulls arguing that you now need two incomes to purchase a property but if that is the case then you can't have children. If the birth rate drops off this sharply and there are no immigrants (the sort we want anyway) who will be left behind to support the mass of retired baby boomers on final salary pensions? Not to mention the housing market. Prices can't stay this high if there simply aren't enough people around to live in the properties. The social consequences of high house prices are astronomical. High house prices hurt everybody in the long run.

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How long will the immigration argument last? Immigrants are already wising up to the fact that the cost of living in this country and the cost of housing is hardly worth the effort of coming over. High cost of housing takes money out of the economy because it is all being spent on mortages and rents instead. So our economy grows at a slower rate. These emerging economies are not stupid. The cost of housing in countries like Poland are much lower. In countries where housing costs are lower their economy grows faster because of the spare capacity available to spend within it. How long will it be before their growth outstrips ours? So will the government master plan of replacing our diminishing skill base and population with immigrants actually come to fruition?

After 2010 our workforce will drop at an alarming rate (can't recall figures or reference offhand) and the government are relying on immigrants coming in to fill the gap left by these baby boomers retiring. Every edition of the IET publications I get through the post bangs on about skills shortage in the UK and how there is nobody coming behind to replace them. Because of the housing boom birth rates are dropping off. It's all very well bulls arguing that you now need two incomes to purchase a property but if that is the case then you can't have children. If the birth rate drops off this sharply and there are no immigrants (the sort we want anyway) who will be left behind to support the mass of retired baby boomers on final salary pensions? Not to mention the housing market. Prices can't stay this high if there simply aren't enough people around to live in the properties. The social consequences of high house prices are astronomical. High house prices hurt everybody in the long run.

well the reason for any shortages is all the employment is congregated around london and the south east.

so we have a shortage of workers in those areas.

the midlands has high unemployment (so too many workers)

the north I would guess isnt much better.

so instead of immigration why dont they make business relocate to where there is workers. Or perhaps a few million should upsticks and move to the south east.

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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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