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Inflating Out Of The Problem?


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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.)

You can pay off your mortgage with equity released from your home (house prices always go up).

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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.)

I think you're right about wage inflation - it's not going to be the same as before. Companies can outsource a lot of jobs to low wage economies if the clamour for wage rises gets too much. And unions don't have the presence they did back in the 70s, for instance. A couple of weeks ago there was a story in the Sunday Telegraph about Personal Assistants who work from India. The writer was emailing his Indian PA to get her to sort out mundane tasks such as finding out why his coal delivery (or somesuch - can't remember exact details) hadn't arrived.

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Is there a reason why wages won't increase?

This, I think, is very relevant, but you've not quite asked the right question. I think it is inevitable that wages will rise - they have done, save a few minor hiccups, since the abolishion of slavery. M0 - i.e. the amount of hard cash increases slowly year on year... so numerical wage inflation is almost inevitable... however, most of the time, interest rates are significantly higher than inflation rates for hard cash - so assets don't inflate in the long term.

I find it impossible to believe that wages will not have risen dramatically within 10 years... but I do not see any short-term scope for wage inflation... the money simply isn't there to pay... these corporations and businesses are not even slightly rich compared with their existing wage bill, and in a downturn they probably won't make a profit - tight credit conditions will prevent them taking a debt-backed binge to weather the recession. If the central bank expands money to allow looser credit conditions, or uses government spending to put more money "out there" the effect will be a plummeting value of Sterling on the international markets. We are a net importer of just about every essential commodity - clothes; food; energy (oil; gas; electricity); vehicles; electricals; plastics... the list is endless. When the value of Sterling drops relative to the currencies from which we import goods (and have exported jobs) - which it will faster than a stone if M0 expands too quickly - this will cause rampant inflation in the prices of essential commodities the expense of which will likely far outstrip the extra money. Our national debt is also crucial here - it causes a "double whammy"... the National debt (government foreign financial obligations) is gargantuan and needs to be serviced... and the cost of servicing this debt will expand significantly if Sterling devalues. For many years we've been told that the national debt is mitigated by double digit productivity growth (as recorded in GDP) - I don't know about you, but my after-tax take-home-pay purchasing power has fallen over the last decade... not trebled... yet, paradoxically, those I consider to be wealthy business owners and land owners - living in million-pound properties - seem envious of my position... which says something in itself. In a downturn, the inland revenue will take vastly reduced tax income - but dependence on state benefit will soar.

Expect interest rates advertised by the BOE to decline... but expect the cost of high street lending to rise significantly. I expect short term rising prices in essential commodities and a concurrent collapse in the prices of luxury goods and purchases that can be delayed (Plasma TVs; new cars; domestic hotels; jewellery; furniture etc. etc.) This will keep CPI low in the short term (since we've been buying lots of luxury goods in recent years and these have skewed the notional CPI basket... the basket weights are updated no more frequently than annually - some sources say every 5 years - to reflect consumer buying habits) while pushing vast numbers of people with debts (secured or unsecured - it matters not) to the brink of bankruptcy. Earlier this year I note that the weight applied to the cost of rent in the CPI adjusted abruptly upwards by an order of magnitude more than it has for any other year on record. If rents rise, so too will interest rates... this is *very* bad for BTL speculators.

Edited by A.steve
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UK wage inflation will be suicide for UK businesses.

With the pound now sliding against the euro, do you think euroland businesses will keep paying higher prices for British goods ? No, me neither. They will go elsewhere.

As the UK has > 60% of it's trade with it's EU partners, UK producers and service companies will be committing hari-kari if wages take off. Here in euroland, the talk is of belt-tightening and wage stability. If a full recession hits, there will be no wage inflation in EU, but costs will be driven down by more efficiency. Just like what happened in the last two recessions.

For me, globalisation means no wage inflation this time around. It will be belt-tightening all round or the dole. And in many cases, MD's and Captains of Industry will choose the latter if any of their "loyal workforce" has the cheek to ask for more.......... :o

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UK wage inflation will be suicide for UK businesses.

With the pound now sliding against the euro, do you think euroland businesses will keep paying higher prices for British goods ? No, me neither. They will go elsewhere.

As the UK has > 60% of it's trade with it's EU partners, UK producers and service companies will be committing hari-kari if wages take off. Here in euroland, the talk is of belt-tightening and wage stability. If a full recession hits, there will be no wage inflation in EU, but costs will be driven down by more efficiency. Just like what happened in the last two recessions.

For me, globalisation means no wage inflation this time around. It will be belt-tightening all round or the dole. And in many cases, MD's and Captains of Industry will choose the latter if any of their "loyal workforce" has the cheek to ask for more.......... :o

High unemployment means higher wages at the bottom and lower at the top, I thought everyone knew that?

Start randomly firing people because you think you have all the power and you get an identical factory or business just down the road that is undercutting you due to lower wages in both management and shop floor but the same other costs. Not only that but you have a very disloyal workforce who will turn on you when you are down. Anyone with anything about them will leave such a place and you get left with all the duck eggs.

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UK wage inflation will be suicide for UK businesses.

With the pound now sliding against the euro, do you think euroland businesses will keep paying higher prices for British goods ?

They must have been doing so up till now :)

The falling pound will actually make it cheaper for Europe to buy our goods., helping our export business.

The problem will be that raw materials (and all other goods, in fact) imported from Europe etc will conversely become more expensive, which will drive up the base manufacturing costs.

Thus imported goods (to the UK) will become more expensive, and home manufactured products also!

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UK wage inflation will be suicide for UK businesses.

With the pound now sliding against the euro, do you think euroland businesses will keep paying higher prices for British goods ? No, me neither. They will go elsewhere.

As the UK has > 60% of it's trade with it's EU partners, UK producers and service companies will be committing hari-kari if wages take off. Here in euroland, the talk is of belt-tightening and wage stability. If a full recession hits, there will be no wage inflation in EU, but costs will be driven down by more efficiency. Just like what happened in the last two recessions.

For me, globalisation means no wage inflation this time around. It will be belt-tightening all round or the dole. And in many cases, MD's and Captains of Industry will choose the latter if any of their "loyal workforce" has the cheek to ask for more.......... :o

Say sterling loses value against the Euro - we engage in a competitve currency devaluation like China or the US;

Then British goods get cheaper in Euroland -> people in the UK can get paid more pounds, but their wage in Euros can stay the same.

The problem with this is that we are a net importer and it would increase inflation (although it would also decrease imports). But the UK gubmint isn't exactly known for the honesty of it's real cost of living inflation indicators.

edit: pretty much what Control Freak just posted above, but if you make sterling worth less, you can pay Uk workers more of them

Edited by LargelyIgnorant
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Yes, LargelyIgnorant and Control Freak - agree that a devaluing pound is good for exports, no so good for imports. Got my economic mix round the wrong way earlier :rolleyes:

Thanks for the clarification.

I still think the devaluation game is a risky one for HM Govt to play. Not sure that the euro countries will accept a large trading partner on their doorsteps devalue without replying. One for the govts and bankers to sort out maybe ?

As for wage inflation, I still don't see this spiraling. UK businesses would use this as a reason to outsource/offshore. I know that India and other offshore countries have had their wage inflations recently, but they start from a lower base. If the UK allows the gap to grow again, I'd expect more jobs to go abroad.Also, for inward investment, this may be negative. Large multinationals like wage and price stability.

The devaluation might also hit other sectors like the travel industry. More expensive euros might mean less of those 2-3 day short breaks so trumpted by the low-cost airlines, with the obvious knock-on effects. Imagine if you were only getting 1.25€ to a £.

Anyway, as I keep saying. Interesting times ahead in the next 12-18 months. ;)

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Will we join the Euro while Sterling is over valued?

Is there a way this can happen without a popular vote?

Would a popular vote get a "yes" as foolish people think it will make holidays easier?

Is there a way that the Euro can be adopted by the back door?

Can joining the Euro be sold to the British public if OPEC cite that they would then sell oil in Euros not USD?

Is it plausible that the USD might collapse?

Would a USD collapse cripple Asian economies?

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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

This, IMHO, for someone reading who's not sh1t hot with economics is a quality informative post. I was completely understanding you till you said 'deinflationary'. Was that a typo or is that the phrase you meant to use? If so, please could you expand on this (difference between Japan and UK/US economies.

Thanks.

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If you doubled the money supply you wouldn't halve it's value - you'd decimate it, Northern Rock style. You'd also have huge interest rates to go with it which would probably offer more protection to the value of your savings than to the value of your house.

I read The Times a couple of weeks ago, and read the Paul McKenna "I Can Make You Rich" article. Rather oddly he believes that money is infinite. To me that means infinite money supply and people burning money in their hearths to keep warm, rather than being wealthy.

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No, no, no, no, no. It doesn't work like that. If it was that simple we'd have done it all ready.

Do you really think that if we doubled the money supply like that, foreign holders of pounds would just continue to hold them. Of course they wouldn't. They'd dump them en-masse.

If you doubled the money supply you wouldn't halve it's value - you'd decimate it, Northern Rock style. You'd also have huge interest rates to go with it which would probably offer more protection to the value of your savings than to the value of your house.

We would only have high interest rates if the government wanted to do something about house price inflation... but don't forget that at the present rate of growth, the money supply will double within five-and-a-half years and increase ten-fold within the next 18 years.

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  • 442 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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