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whereverilaymyhat

Inflating Out Of The Problem?

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Ok heres the scenario,

Your 25 you currently have no savings but you plan to start saving for a mortgage, on your average salary of 25k you can save enough for a decent deposit in about 3 years,

Am i right in thinking if this bubble is inflated out of the idea is wages will go up, hpi will stall and therefore house prices will then be easier to buy?? however the people who have cash/savings/equity will also become richer and this will lead to hpi increasing further wont it???

The problem I see with this way out is that this will in no way change sentiment will it?? unless a price drop actually occurs in what people perceive in face value do you ever think people will stop speculating on property??

Im a firm beleiver that this BTL rubbish should be stopped but do you guys think that unless prices are actually seen to be dropping the perception of joe public will not change, so what im basically saying is more inflation, more money, more HPI???

without changing sentiment how can the bubble be inflated out of???? wont inflation just continue the bubble with inflation and hpi increaing in line with eachother???

BTW im not an economist (as you may have guessed)

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without changing sentiment how can the bubble be inflated out of???? wont inflation just continue the bubble with inflation and hpi increaing in line with eachother???

Yes, you are absolutely right. We cannot "inflate our way out of the bubble" (the bubble is a result of inflation!). A better way to put it would be to "inflate the debts away" which is what the Fed has started to do in the US with its recent 0.5% interest rate cut.

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Ok heres the scenario,

Your 25 you currently have no savings but you plan to start saving for a mortgage, on your average salary of 25k you can save enough for a decent deposit in about 3 years,

Am i right in thinking if this bubble is inflated out of the idea is wages will go up, hpi will stall and therefore house prices will then be easier to buy?? however the people who have cash/savings/equity will also become richer and this will lead to hpi increasing further wont it???

The problem I see with this way out is that this will in no way change sentiment will it?? unless a price drop actually occurs in what people perceive in face value do you ever think people will stop speculating on property??

Im a firm beleiver that this BTL rubbish should be stopped but do you guys think that unless prices are actually seen to be dropping the perception of joe public will not change, so what im basically saying is more inflation, more money, more HPI???

without changing sentiment how can the bubble be inflated out of???? wont inflation just continue the bubble with inflation and hpi increaing in line with eachother???

BTW im not an economist (as you may have guessed)

Your absolutely right – you are not an economist – but I like your thinking – I have thought up many scenarios – but give up on guess work – personally I believe in the economic cycle – we have had the good times – make way for the bad – still could be years off though

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Suspcet the following: Supressed CPI, lower interest rates, wages frozen/undercut etc, price inflation and HP stagnation, and somewhere in there a mechanism to make you spend/devalue your savings, this will be the governments adgenda. All of course at the expense of the economy long term. Outside influences may change this and we will have a proper crash all round, houses, jobs etc.

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Yes, you are absolutely right. We cannot "inflate our way out of the bubble" (the bubble is a result of inflation!). A better way to put it would be to "inflate the debts away" which is what the Fed has started to do in the US with its recent 0.5% interest rate cut.

Hang on, the US have not inflated the debts away. You can only inflate the debts away by inflating wages.

For government debt, that means more tax (or less tax wastage)

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however the people who have cash/savings/equity will also become richer and this will lead to hpi increasing further wont it???

No - savings are eroded.

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Hang on, the US have not inflated the debts away. You can only inflate the debts away by inflating wages.

For government debt, that means more tax (or less tax wastage)

Let's say we double the money supply. If you had a debt of £100 before, now that debt is effectively "worth" half what it was before (so it will be twice as easy to pay it off).

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Ok heres the scenario,

Your 25 you currently have no savings but you plan to start saving for a mortgage, on your average salary of 25k you can save enough for a decent deposit in about 3 years,

Am i right in thinking if this bubble is inflated out of the idea is wages will go up, hpi will stall and therefore house prices will then be easier to buy?? however the people who have cash/savings/equity will also become richer and this will lead to hpi increasing further wont it???

The problem I see with this way out is that this will in no way change sentiment will it?? unless a price drop actually occurs in what people perceive in face value do you ever think people will stop speculating on property??

Im a firm beleiver that this BTL rubbish should be stopped but do you guys think that unless prices are actually seen to be dropping the perception of joe public will not change, so what im basically saying is more inflation, more money, more HPI???

without changing sentiment how can the bubble be inflated out of???? wont inflation just continue the bubble with inflation and hpi increaing in line with eachother???

BTW im not an economist (as you may have guessed)

Therer are two real options to see a readjustement back to sustainable economic growth. The first is a devaluation of sterling via inflation - goods, services, wages etc all go up whilst assets do not go up. The big problem with this approach is that inflation is very difficult to control, and as soon as the rest of the world sees this happening there will be a run on sterling (seems to have started already) which will compound the problem - forcing inflation higher. Another difficulty with this approach is it makes debt extremely expensive, no one will lend money unless they will be repaid more in real terms, therefore interests will need to move above inflation, and well above to remain in control. Even in this case house values will most likely decline in nominal terms, as debt will be to expensive to service.

The other alternative is asset deflation, this means millions of people in negative equity and probably a 40-60% contraction in nominal average house prices, similiar to the Japanese situation for the last 15-20 years. The large difference between the UK and Japan is that the UK does not have cash, Japan had and has huge amounts of cash as well as a very strong balance of payments position. Thus I am not sure that UK and US will actually head into a long term deinflationary environment, Japan is not a perfect mirror of the UK situation.

It is never clear what will happen but one thing you can be pretty certain of is carrying large amounts of debt is going to be a lot more expensive then it has been in the past few years, probably a lot more expensive then it is now. The best route to folow would be the latter, but a sharp correction rather then a grim long term downward cycle. Danger is that this will invariably sow seeds for the next boom !

Matthew

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Ok heres the scenario,

Am i right in thinking if this bubble is inflated out of the idea is wages will go up, hpi will stall and therefore house prices will then be easier to buy?? however the people who have cash/savings/equity will also become richer and this will lead to hpi increasing further wont it???

In general, inflation punishes savers by reducing the buying power of their savings (as interest rates on savings after tax do not keep up with the inflation), whilst having the opposite effect on debt for more or less the same reason. The problem is that wages tend to lag the inflation, so highly leveraged people get into financial trouble, hence go bankrupt etc. If we have a recession at the same time (is this a necessary corollary) then workers have less bargaining power as jobs are harder to come by and so forth.

(But although your savings will be worth less in the strict sense, in terms of the ability to actually get a mortgage at a decent rate they will be invaluable, as banks will require higher percentage deposits, so don't go and blow it all now...)

One thing I would say is that if you are 25 you probably feel older and under more pressure to get on with buying a home etc. than you actually are. You have plenty of time to see this crash through to its bitter end and then step in. You are in a great position to time your entry into the housing market sometime over the next 3 to 10 years.

I , unfortunately, was a 25 year old junior academic at the bottom of the last crash - and no high street institution would give me a mortgage because I couldn't guarantee employment for 5 years as junior contracts are between 1 and 4 years long. This together with the fact that self certs. were thrown around willy nilly later on and that I will (indirectly) have to pay for this criminally loose credit policy of the last few years really does irritate me to the core though...

Edited by D'oh

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yep, inflation favours debtors, its bad for savers.

this is why any STR on here has a massive VI (vested interest) in low inflation, or even deflation as this increases their purchase power. On that note - be careful what you read on here because VI spin works both ways. Its sad to see the uneducated get carried away by own own VIs.

Generally, in the text book case (ive read a few) mortages always start out as more expensive than renting. This is because we all know mortgages in the long term are simply better. So why wouldnt we pay more. In the long term inflation erodes the debt - you borrow expensive money and pay back with cheap.

Here's a simplified example, but it makes the point.

You lend ya mate £1000, he agrees to pay back £1100 next year. Oh noes the government has increased money supply and we have 100% inflation. Your mate pays back £1100. Unfortunately that £1100 has half the purchase power. He has give you back the equivalent of £550.

Who got the better deal?

High inflation is bad cos people wont lend out money. Not lending out money means people cant invest in enterprise, human capital, or plasma TVs. Deflation is bad because people stop spending - why buy a car this week if its cheaper next week. Old people on fixed pensions like deflation because everything gets cheaper!

etc etc. Get a book, there are some nice easy reading intros out there :).

edit: typos etc as usual ;)

Edited by Orbital

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If you believe that the UK is about to enter a recession, expect stagflation (rising prices whilst output stagnates or falls). This is what traditionally occurs at this stage of the economic cycle.

This creates a policy dilemma - either allow a recession by increasing rates to control inflation, or try to prevent a recession by allowing inflation to spiral out of control.

The second option is restricted by the inflation target. Rates will have to rise to contain CPI (fiddled or not), or the inflation target must be abandoned.

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Let's say we double the money supply. If you had a debt of £100 before, now that debt is effectively "worth" half what it was before (so it will be twice as easy to pay it off).

Only if wages are increased.

If I get paid £1000 a month and have a debt burden of paying £100 a month. That £100 is only worth half to me, if my wages double to £2000 a month!

Money Supply has to filter into wages!

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Only if wages are increased.

If I get paid £1000 a month and have a debt burden of paying £100 a month. That £100 is only worth half to me, if my wages double to £2000 a month!

Money Supply has to filter into wages!

Let's hope your rent doesn't go up at the same time!!

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Guest muttley
This creates a policy dilemma - either allow a recession by increasing rates to control inflation, or try to prevent a recession by allowing inflation to spiral out of control.

The second option is restricted by the inflation target. Rates will have to rise to contain CPI (fiddled or not), or the inflation target must be abandoned.

The second option is also restricted by wage inflation (or lack of it). If the inflation target is abandoned and wages go up, companies will either have to raise their prices or get rid of staff. Both of these are bad for the UK economy.

The government will do all it can to bring about a soft landing. Un fortunately the asset bubble is so large now it will be like trying to land a 747 in a freshly ploughed field.

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Let's say we double the money supply. If you had a debt of £100 before, now that debt is effectively "worth" half what it was before (so it will be twice as easy to pay it off).

*sighs*

The debt can only be be made easier to pay off if you 'yourself' have your money supply 'wages' increased.

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muttley: The second option is also restricted by wage inflation (or lack of it). If the inflation target is abandoned and wages go up, companies will either have to raise their prices or get rid of staff. Both of these are bad for the UK economy.

This is the typical wage-price spiral, which is why this option only works (badly) in the short term. The Fed is having a go, though.

The other option, raising interest rates, will eventually have to be used (we are already in the early stages of it). A pause in the middle to cut rates will only get the BoE even further behind the curve and will require larger rate increases later on.

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It wouldn't make any difference as a % of income.

...unlike the debt!

*sighs*

The debt can only be be made easier to pay off if you 'yourself' have your money supply 'wages' increased.

Is there a reason why wages won't increase?

Edited by the_austrian

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Let's hope your rent doesn't go up at the same time!!

That is also tied to wages rather than general inflation. If wages don't increase, where would the extra money come from to pay for a doubling in rents?

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...unlike the debt!

Is there a reason why wages won't increase?

- Imported cheap labour, it's worked well so far.

- Increased competition to a globalised workforce, if someone can do your job for a lot less, giving you more money is making it even more lucrative to offshore than it already is.

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...unlike the debt!

Is there a reason why wages won't increase?

Yes it's called globalisation.

If a company has to pay you substantially more money, they will have to increase their costs OR they can get rid of you and outsource (or offshore).

It's as easy as that!!!

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That is also tied to wages rather than general inflation. If wages don't increase, where would the extra money come from to pay for a doubling in rents?

Let's say you owe £100 and the money supply doubles. This means rents double, wages double, food costs double, everything doubles in price except your debt. Your debt is immune from money supply increases because it is denominated in money ie the price is not subject to speculation/market forces, it is fixed.

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Let's say you owe £100 and the money supply doubles. This means rents double, wages double, food costs double, everything doubles in price except your debt. Your debt is immune from money supply increases because it is denominated in money ie the price is not subject to speculation/market forces, it is fixed.

It doesn't work like that at all. The BOE doesn't ring you up saying, right we've increased the money supply by 50% so you all need to increase wages and the price of everything by 50%.

What you're saying was sort of true in the past, when wage inflation mirrored or at least tried to keep up with general inflation.

The problem now seems to be that although the BOE is running the printers like mad (inflating the money supply) wage inflation has other forces that hold it down. They could (and seem to be trying to inflate the money supply) but the effects will see things we compete for foreigners with go up in price (imported food, oil, etc) and the things we can compete with each other (e.g. rents, etc.) stay the same or keep parity with wage inflation (which is unlikely to follow the inflation levels of the former items.)

Edited by ChrisM

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Guest muttley
Let's say you owe £100 and the money supply doubles. This means rents double, wages double, food costs double, everything doubles in price except your debt. Your debt is immune from money supply increases because it is denominated in money ie the price is not subject to speculation/market forces, it is fixed.

So the solution for eternal prosperity would appear to be to give everyone a 100% pay rise every couple of years. What could possibly go wrong?

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