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Guest wrongmove

No Need To Exaggerate Broad Money Problems

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Guest wrongmove

More bearish than it sounds from the title..... See the concluding paragraph

No need to exaggerate broad money problems

"Sir, Martin Wolf ("The Bank's broad money headache", June 15) is correct that interpreting changes in broad money is "difficult", but there is no need to exaggerate the problems.

Mr Wolf notes that money in the financial sector is growing rapidly at present and asks, "who imagines that these [money balances] will not be spent?". But no money balance is finally "spent", in the sense that it is used to make a purchase (in shops, restaurants and so on) and then disappears from the economy. Instead money is used in transactions in assets as well as in transactions in goods and services, and circulates constantly.

Financial institutions are like other wealth-holders. They have constantly to balance their money balances against their non-money assets, as Keynes and Hicks explained in classic works of theory in the 1930s. A recurrent feature of the UK business cycle is that fluctuations in money growth are accompanied by more amplified fluctuations in the money holdings of financial institutions. If financial sector money increases at an annual rate of more than 20 per cent, that will tend to cause fast asset price inflation.

So another recurrent feature of the UK business cycle is that, while increases in money growth do not initially have much effect on "prices in the shops", they do drive up the prices of quoted equities, unquoted companies, commercial property, houses, antiques, fine wine and so on. Eventually a condition of "too much money chasing too few assets" becomes a condition of "too much money chasing too few goods". Consumer price inflation then takes off.

Mr Wolf may be right that the Bank of England has difficulty understanding these patterns, but that does not excuse the rest of us from remembering the lessons of history. While it is not certain that the current burst of high money growth will lead to much above-target inflation in 2008 and 2009, a reasonable view is that above-target inflation is very likely. What is certain is that the asset price increases of the past two or three years will need to be partly reversed if consumer inflation is to stay under reasonable control. I doubt that will happen if broad money growth remains at over 12 per cent a year.

Tim Congdon,

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Sounds like a real economist.

Why do we have to put up with the revisionist retards in the BOE?

Why? Because you-know-who is in charge of things financial. The BoE are muppets with no independent voice of their own. Merv is like poor old Geoff Howe--a decent man with as much bite as an docile sheep.

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BOE/govt. sponsored inflaiton is destroying the real economy. When the bubble economy implodes there will be NOTHING left significant enough to prop it up.

Companies have had enough, they are giving up and going. Examples like this are a daily occurence.

They ought to start worrying about whether they will have a market left for their products, both as a result of their actions and also the cuases of their actions.

http://icbirmingham.icnetwork.co.uk/birmin...-name_page.html

Media & Marketing | E-Business | Nevill Boyd Maunsell | Post Business email

250 jobs go as Ceramaspeed turns to Poland

Jun 19 2007

Almost 250 jobs are to be lost in Kidderminster with the announcement by insulation manufacturer Ceramaspeed that it is to switch its production operations to Poland.

The move will leave just 100 people at its offices in Oldington.

Edited by OnlyMe

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Guest wrongmove
Rather a misleading title for that article, don't you think?

Tes, as stated in my OP.

Congdon was referring to this article, even more concerned with M4, published in the FT a couple of days earlier:

The Bank’s broad money headache

" “With a paper currency, expectations that the future price level will remain stable are an article of faith.” Thus, has Mervyn King, governor of the Bank of England, recently defined the challenge of central banking.* Confidence hangs, in turn, on the probity and competence of a group of fallible human beings. For the first time since the establishment of the monetary policy committee a decade ago, that trust may be in question.

Mr King defined the challenge in the same speech: “Beyond the short-term forecasting horizon of up to around three years”, inflation is, “the result of too much money chasing too few goods”. It is, then, the result of an excess supply of money leading to soaring asset prices, excessive spending, a weakening currency and a burst of inflation.

The UK has been here several times before. Is it here again? “Quite possibly” is the answer. Two pieces of data are now screaming danger.

First, two years ago the spread between 10-year conventional and index-linked bonds was 2.7 percentage points (270 basis points). Since then this has risen steadily, to reach 370 basis points, implying an increase of 1 percentage point in the implied expected annual rate of inflation.

The second piece of information is the soaring growth of broad money. As Mr King noted only this week: “The quantities of broad money and bank lending are now around 14 per cent higher than a year ago – rates of growth last seen in 1990 when inflation was more than 8 per cent.”** ........"

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Guest Magrathea

It isn't BEO's fault. The only thing that could be done to help is to tax real estate properly; and that's a matter for the uk government not the BOE

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Guest wrongmove
It isn't BEO's fault. The only thing that could be done to help is to tax real estate properly; and that's a matter for the uk government not the BOE

Are you referring to house prices, or to money supply in general? It seems that the two are closely linked, anyway.

The BoE could have indirectly stemmed money supply by using higher rates - I'm not sure if they can also change the reserve requirement, but I don't think so.

However, since the demise of monetarism, they have been told to target inflation as measured by the CPI, not M4. They have been pretty sucessful in this - one letter in 10 years is much less than was expected when the BoE were given their remit.

However asset inflation (which of course includes houses) has been rampant. However, the BoE are not charged with controlling asset inflation, except where it impacts on "economic stability".

To cut a long story short, I agree with you that the Government is more to blame than the BoE. I'm not sure that taxation is the answer though - a small mortgage plus a massive tax bill is not much more attractive than a big mortgage to me.

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Guest Magrathea
To cut a long story short, I agree with you that the Government is more to blame than the BoE. I'm not sure that taxation is the answer though - a small mortgage plus a massive tax bill is not much more attractive than a big mortgage to me.

A lot of the present high *total* price in real estate (taxes plus price) is caused by the fact that, becauuse of the way real estate is taxed, a rapidly rising price means the holder can gain without effort. People will pay to hold that effortless advantage. If you tax the asset in such a way that speculation in rising price becomes pointless that the background risng price does not convert to an advantage to owners, there is no longer any point in real estate speculation and speculators leave the market to users. People will not be paying the same prices plus an exra tax bill they will be paying considerably lower exchange prices for real estate and the total cost of ownership (price + taxes) will come down. Though to offset this, there will no longer be any real estate free ride. We can have one of two things; a population that can easily afford to house themselves or we can have people becoming millionaires by doing nothing but sitting on houses; we can't have both

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Guest wrongmove
A lot of the present high *total* price in real estate (taxes plus price) is caused by the fact that, becauuse of the way real estate is taxed, a rapidly rising price means the holder can gain without effort. People will pay to hold that effortless advantage. If you tax the asset in such a way that speculation in rising price becomes pointless that the background risng price does not convert to an advantage to owners, there is no longer any point in real estate speculation and speculators leave the market to users. People will not be paying the same prices plus an exra tax bill they will be paying considerably lower exchange prices for real estate and the total cost of ownership (price + taxes) will come down.

This is an interesting idea. Could you give some outline of how this tax would work? At the moment, for example, BTLer pay 40% CGT, whereas owner occupiers do not.

Though to offset this, there will no longer be any real estate free ride. We can have one of two things; a population that can easily afford to house themselves or we can have people becoming millionaires by doing nothing but sitting on houses; we can't have both

I'm not sure we can can either unless we somehow produce a lot more "decent" housing. People will always compete for the best property. (Some) people will always choose to stretch themselves for that better house. I don't see how any government can control that aspect of human nature without being very authoritarian - i.e. allocating housing. i would say that loose monetary policy encorouges this, which is a bad thing, but people are never going to choose a second rate house voluntarily, and we don't have enough first rate housing to go round.

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Guest Magrathea
This is an interesting idea. Could you give some outline of how this tax would work? At the moment, for example, BTLer pay 40% CGT, whereas owner occupiers do not.

All owners of real estate are taxed (say monthly or yearly) on the pure location (not improveed) value of their holding regardless of whether they rent it out to another or occupy or use it themselves.

there are two points to make about this

1) The locational value is the value speculators are interested in, because it rises without any effort on the part of the owner

2) The owner does not earn or create the locational value of his real estate (see 1) and so removing part or all of this value from him does not reduce his incentive to produce.

From the point of view of someone buying the real estate in order to use it to live and work, the extra tax makes no difference to him, because any total in tax he must pay for holding the real estate will be discounted from the exchange price. However, someone who is buying the real estate in order to capture it's rising price can see no advantage in doing so, and so wont. The net effect is that the total 'cost' (erxchange price and taxes) of real estate falls and the government has a large source of revenue that can be used to reduce all other taxes.

I didn't dream this scheme up, this was first proposed by one Henry George at the end of the 19th century as a solution to what he observed as systemic pathology inherent in real estate

I'm not sure we can can either unless we somehow produce a lot more "decent" housing. People will always compete for the best property. (Some) people will always choose to stretch themselves for that better house. I don't see how any government can control that aspect of human nature without being very authoritarian - i.e. allocating housing. i would say that loose monetary policy encorouges this, which is a bad thing, but people are never going to choose a second rate house voluntarily, and we don't have enough first rate housing to go round.

No. The point is that people are not so much paying for the value of nice things they are paying for the rising value of the ability to hold those nice things from others. The bigest motivation is the fact that the price of those nice things is RISING. If you remove the advantage provided by the rising price to the holder most of reason to chase real estate goes. As an illustration, what happens during a price crash? The real estate is still as 'nice', but falling price obliterates most of the motivation to buy; the ability to hold the rising price.

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Guest wrongmove

Thanks for the reply Magrathea. I'm certainly not disagreeing with you, I just don't think I fully understand, and I am interested in any non-authoritarian ways that the overall cost of housing could be reduced. Just a couple of questions

All owners of real estate are taxed (say monthly or yearly) on the pure location (not improveed) value of their holding regardless of whether they rent it out to another or occupy or use it themselves.

Do you basically mean a land tax?

there are two points to make about this

1) The locational value is the value speculators are interested in, because it rises without any effort on the part of the owner

2) The owner does not earn or create the locational value of his real estate (see 1) and so removing part or all of this value from him does not reduce his incentive to produce.

From the point of view of someone buying the real estate in order to use it to live and work, the extra tax makes no difference to him, because any total in tax he must pay for holding the real estate will be discounted from the exchange price. However, someone who is buying the real estate in order to capture it's rising price can see no advantage in doing so, and so wont. The net effect is that the total 'cost' (erxchange price and taxes) of real estate falls and the government has a large source of revenue that can be used to reduce all other taxes.

I didn't dream this scheme up, this was first proposed by one Henry George at the end of the 19th century as a solution to what he observed as systemic pathology inherent in real estate

I don't see how this is totally beneficial to the owner occupier.

Say they buy the house cash (or have finished paying off the mortgage). They still have the burden of tax to pay each month/year - they may as well rent (maybe this is where you are coming from?) What's more, the level of this tax is set by speculators profits, over which they have no control, and from which they gain no benefit. I agree the owner would see a cheaper purchase price, but they would continue to pay for HPI years after they have purchased their house.

No. The point is that people are not so much paying for the value of nice things they are paying for the rising value of the ability to hold those nice things from others. The bigest motivation is the fact that the price of those nice things is RISING. If you remove the advantage provided by the rising price to the holder most of reason to chase real estate goes. As an illustration, what happens during a price crash? The real estate is still as 'nice', but falling price obliterates most of the motivation to buy; the ability to hold the rising price.

I agree that the market has a speculative element. Especially at the moment, fueled by rising prices. This element vanishes when prices fall, or even stop rising quickly. However, most purchasers I know really just want a stable home they can modify to their purposes, and spend time (and money) on without the risk of a landlord getting all the benefit, and can live in rent free when they retire.

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Guest Magrathea
Thanks for the reply Magrathea. I'm certainly not disagreeing with you, I just don't think I fully understand, and I am interested in any non-authoritarian ways that the overall cost of housing could be reduced. Just a couple of questions

Do you basically mean a land tax?

Yes

This is the least authoritarian way to deal with notion of real estate ownership.

The present real estate schema is incredibly authoritarian. Presently, governmental power over other citizens is being traded in 'the real estate market'. The source of these governmental powers is actually the community at large not the owners of real estate, yet the community at large is hardly paid at all for these powers and so the owners of real estate get to trade community created value as though they themselves created it.

I don't see how this is totally beneficial to the owner occupier.

The benefit to the owner is the predictability of the total costs of ownership (exchange price and taxation)

Without real estate speculation, the exchange price of real estate will rise gently with the rise in the productive advantage of holding locations, as will any associated taxation.

The problem at the moment is that speculators are pushing the price higher because an advantage can be gained from a rising price. If no advantage can be gained they wont bother to compete for ownership and all competition for ownership is between prospective users. Once the price has settled and become non chaotic, the taxes become - from the perspective of the purchaser- part of the exchange price. At the moment this cannot happen for at least four reasons -

1) the taxes cannot be predicted because they are taxing the wrong aspects of real estate value and so the price (the basis of taxation) is chaotic and government is taxing real estate on an almost adhoc basis

2) the rising price is continualy acting to chaoticaly discount the likely net purchase costs, and this is pushing prices yet higher; this is a positive feedback loop

3) interest rates are pushed up by the inflation and increased risk, the rising price causes.

4) Highly speculated real estate prices increase costs for the productive economy and most people understand that such a situation is unsustainable because the base returns on real estate ownership rely entirely on the productive economy.

Nobody can make a rational evaluation regarding the actual likely costs or benefits of owning real estate, it's a total and unneccessary quagmire caused by several chaoticaly interacting factors- it is also a massive unpredictable quagmire right in the middle of most people's most fundamental needs for simple security and human liberty. Taxing away the motivation to gain real estate to hold it's price removes all four of the above factors. The present arrangement is only of benefit to those whose principle source of income is the rising price of locations, it is absolutely counter to the interests of anyone whose principle income comes from providing goods and services.

Say they buy the house cash (or have finished paying off the mortgage). They still have the burden of tax to pay each month/year - they may as well rent (maybe this is where you are coming from?)

But the total cost is lower, because of the lack of speculation. Look at it this way (for simplicity), instead of paying interest to a bank for a vast loan that beats speculators, you pay interest to a bank for a very much smaller loan and instead pay taxation; but, in all this, your total costs are actually reduced because speculators are no longer competing to hold the real estate and so they are no longer competeing with you on the basis of total cost (price plus taxation)..This is tricky to understand, because we are conditioned through our experience to consider the holding of real estate to be an advantage simply in itself. When real estate has no advantage to confer beyond the advantage it gives a user to produce; the total 'cost to hold' (exchange price and taxes) will reduce and stabilise.

You can't avoid the taxe by renting, of course, because you are still paying for the location in te rent..it is just that an intermediary holds the deeds

The above line is an important point, because presently people who rent effectively pay for public services twice..once to their landlord in a market rent which includes a premium added by public services to his real estate price, and again in taxes.

What's more, the level of this tax is set by speculators profits, over which they have no control, and from which they gain no benefit. I agree the owner would see a cheaper purchase price, but they would continue to pay for HPI years after they have purchased their house.

Firstly, HPI would stabilise and become predictable and so be discounted in purchase price, because it represents a predictable cost in ownership to the owner rather than a chaotic, unpredictable benefit..and so, in effect, no they wouldn't, because it would be discounted in their purchase price.

Secondly, of course, they pay for HPI now already; in interest rate rises and an economy that is periodically destroyed by HPI.

I agree that the market has a speculative element. Especially at the moment, fueled by rising prices. This element vanishes when prices fall, or even stop rising quickly.

It is a huge element..and this is why crashes in house values can be so sudden. Once the price stops rising, any motivation to buy at that price vanishes entirely. If the price were to look likely to continue to rise, the motivation is still there..despite any price. To real estate speculator the level of prices is entirely irrelevant; all he cares about is the direction of prices; to those buying real estsate to use for production the price is nearly everything, a high price can make his production unviable.

However, most purchasers I know really just want a stable home they can modify to their purposes, and spend time (and money) on without the risk of a landlord getting all the benefit, and can live in rent free when they retire.

Yes absolutely..most of us would be far happier with low, stable house prices, because we make money by using real estate to produce wealth. However, there is at the bottom of this coercion..If you want to produce anywhere you have to beat the speculators to the real estate..this continually raises people's productive costs up and makes it harder and harder to do anything at all but be real estate speculators. With present real estate system, producers are continually squeezed so that real estate speculators can make money for doing absolutely nothing of any value at all.

Edited by Magrathea

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However, most purchasers I know really just want a stable home they can modify to their purposes, and spend time (and money) on without the risk of a landlord getting all the benefit, and can live in rent free when they retire.

Bingo!

The Bank of England is charged with the task of maintaining price stability in the economy - that is, the change in the price level of everyday purchases, of average wages, of taxes, of everything money can buy - remains fairly constant from year to year. The overall trend tends to be inflationary, but if it's slow enough - say <2% per annum - then prices are deemed to be stable.

What this means is that people can get away without factoring inflation into their calculations when doing their day-to-day budgets. They can assume that a loaf of bread will cost approximately the same this time next year as it does right now. It takes a massive burden of work off the general public.

My Utopian dream right now is of price stability in the UK housing market. A world in which you can be guaranteed that the home you live in will not suddenly drop in price and leave you owing more on your mortgage than your house is worth, but similarly will not suddenly spiral away in price and make it harder to sell. Rents and house prices, at a sensible, sustainable proportion of income, increasing in line with broader inflation. No booms, no busts, everyone knows where they are, everyone can stop obsessing about property prices, and get on with lifting the UK economy out of the hole it's dug for itself over the last decade.

I just wish I could think of any way in which this could possibly be brought about.

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Wow! Who is this masked Magrathea? (And why do I assume she is a woman? The name, perhaps - Margaret something?). I have never read so much condensed sense since Hayek finished all the Babychams and offered Ludwig outside for a fistfight.

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Guest casaloco

Google Magrathea. It's a planet in Hitchhikers Guide To The Galaxy.

The BEST thing about land tax is it results in lower house prices. People who DON'T own a house think ts is great.

The WORST thing about land tax is it results in lower house prices. People wh DO own a house think this is HORRIFIC.

ConservoLabour are terrified of this concept... it would narrow the gap between rich and poor... the last thing they want.

The best way to look at it is that the concept results in massive tax cuts for all normal people, with tax massive increases for the mega-rich landlords.

The concept of land tax might be generally acceptable it the HPC is big enough... if the homeowners find their land is worth bugger-all they might accept it, or maybe the ConservoLabour sociopaths might be able to convince them that prices will boom again in a few years and their NE will be erased....

Edited by casaloco

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Guest casaloco
how about a debt tax? that would discourage excessive lending ? or it that IRs?

That's a great idea... lets tax poor people...

What's the Irony HTML Tag again???

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