Wednesday, January 3, 2007

Recognition of the state of the UK’s economy.

Telegraph Online

Ha Ha Ha. Brown's pigeons are coming home to roost. Professor Smith, who chairs the independent Shadow Monetary Policy Committee and was formerly chief economist at Williams de Broe, believes IRs could be 6.25% by 2008. Ho Ho Ho. Hah Hah Hah.

Posted by talking rot @ 12:43 PM (552 views)
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39 thoughts on “Recognition of the state of the UK’s economy.

  • And he’s rightly pointed out that the mess is Brown’s own.

    The Brown-appointed MPC contains vested interests (has Blanchflower _ever_ voted for a raise?!) and the UK plc is reaping the rewards from a skewed electorage for IR changes. August 2005 exposed the MPC for the farce that it is – dropping rates at a time every sensible economist told them to do the opposite. They have created the current precarious position themselves and I would very very surprised if they can find a way out now.

    Incidentally, there’s another less able economist also called David Smith who believes Gordon’s been doing a fantastic job – he’ll be backpedalling as usual on this one for sure.

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  • tyrellcorporation says:

    Debt servicing is on a knife-edge for millions, I just can’t see IRs getting much above 5.5% with the whole house of cards being so finely balanced.

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  • I think I’m with tyrellcorporation on this one. Rampant inflation may be the lesser of two evils compared with the collapse of the debt-based economy.

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  • http://www.ncsu.edu/project/calscommblogs/economic/archives/2006/07/why_is_inflatio.html

    Not so sure with respect inflation, short term ( 5 years ) of higher IRs might well calm the waters better and get the pain over with quicker, there is no doubt and we will all see it on the BBc and ITV soon, pain is coming!

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  • But tyrell, rich you’re missing the point.

    The MPC’s hand will be forced – they of all people don’t want to raise rates – they just won’t have any choice!

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  • > I think I’m with tyrellcorporation on this one. Rampant inflation may be the lesser of two evils compared with the collapse of the debt-based economy.

    You think so?.
    I’d better go and get myself a wheelbarrow ready so that I can shop at my local Tesco’s in the future.

    From a goverments POV, there will not want to see inflation going rampant because ->.
    It would take away confidense in the fiat currency and people would revert to medieval bartering, this in turn kills taxation.
    Also worth pointing out the £ is the 3rd largest currency in the world, do you really think the goverment would want that to change?
    If hyperinflation was allowed, it would most likely be followed by depression anyway, so a bit pointless.

    So the lesser of the two evils is the collapse of the debt-based economy unfortunately.

    Inflation eroding debt is just Bull’s wishfull thinking.

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  • kpjcomp is mostly right I believe. If confidence in the pound is eroded because of runaway inflation, that’s very bad news for the pound and the MPC.

    It’s not a question of bartering I think – but if people started removing money from their accounts and buying gold to keep under the bed then the bank would be worried. If people started converting their savings into airmiles (or whatever) then the bank of england would be worried. Remember the pound is only a paper representation of a slice of the UK’s current wealth – its a promissory note and if people think that the promise isn’t worth the paper it’s written on – then it’s not!

    The Bank of England’s website say that their aim is:

    “… promoting and maintaining monetary and financial stability as its contribution to a healthy economy.”

    So price stability is its number one goal. BTW, the pound is not really the third “largest” currency. In terms of powerful currencies, I’d rank GBP well behind the USD, JPY and EUR and a number of other currencies in purchasing power parity. The measure is probably more complex. So if the MPC has its way, and its a contest between confidence in GBP and the housing market (along with the rest of the debt-based economy), the MPC would have no choice under its current remit I believe.

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  • sold 2 rent 1 says:

    The inflation v deflation debate goes on
    Here are some good comments
    http://www.bullnotbull.com/blog/?p=94

    This is one more factor that says this is a 1970’s style scenario

    The 3 billion extra workers (from China, India etc) will ensure that the commodities secular bull runs for another 10 years. This will cause inflation.

    As the western economies go into a debt-led bust this will cause a huge slump in demand

    The end result is the worst possible scenario – stagflation

    This country has had 14 years to get in good shape for a recession and yet we are heading into one with the books in a right mess.

    Once the public workers get their wages squeezed, get ready for the strikes that will follow. 2009-2010 is going to be an ugly time in UK history

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  • But we’re talking about a government that put personal careers before national security, when declaring war on Iraq – who’s to say they wont follow Mugabe et al? Maybe the answer is that there is no personal mileage in doing so – the question we need to answer is ‘Which outcome best suits the personal career / sense of self-worth of Mr Brown?’ The problem is he’s screwed either way, so we might be looking at a desperate man with a machine gun…

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  • inflation is eating my savings says:

    The Torygraph have their own agenda, which is more in our camp than other rags. Unfortunately, the MPC will not listen.
    Check out Ocean Power Technologies (AIM). It may be worth a punt.

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  • > BTW, the pound is not really the third “largest” currency. In terms of powerful currencies,
    > I’d rank GBP well behind the USD, JPY and EUR and a number of other currencies in purchasing power parity. The measure is probably more complex.

    Paul, the Bank for International Settlements has is ranked slightly differently..

    http://www.easybourse.com/Website/dynamic/News.php?NewsID=53698&lang=fra&NewsRubrique=2

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  • Just got back from Shaftesbury in Dorset. The little town of 5000 inhabitants has at least 7 estate agents..one is having a 10% SALE!
    First time I have seen this. It was on houses in the 150k range.. houses above 350k seem to be selling well.
    Maybe country homes for city bonus types (did see some gaberdine coats on the hightstreet) down from London?
    Looks like the bottom is dropping out the market…

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  • kpj

    I’m not sure what that link was meant to point to – but it looks like some French economics commentary website front page.

    Purchasing Power Parity is one measure of the relative strengths of a currency, which ranks the GBP around 6th in the world. The best measure is probably the proportion of world trade for a particular currency, which is USD in 1st place hands down, with JPY EUR INR and CNY somewhere after it. The GBP would have to come after all of these on that measure too.

    Anyway. Stagflation I think is not likely for some time. Stagflation resulted in Japan when confidence was completely lost in the currency because of high profile bank failures. On the other hand, most of those banks’ assets were in property …

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  • devil's advocate says:

    Have I missed something over christmas, has the pound suddently collapsed or something, is there hyperinflation!!

    Your all just wishfull thinking, get real….

    Yes the economy will proably go through a bad patch but hyperinflation is a bit much…

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  • They are now in a real mess, they can ignore inflation if they like, but inflation is a rise in the cost of living. Whether that cost of living increase is due to higher IR’s or low IR’s but higher fuel, food clothing etc it is really irrelevant. The fact is that people will have less disposable income….
    Due to the Bank of Englands total stupidity they can not avoid the DO DO…

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  • devils advocate,

    yes you did miss something over christmas.

    Reality kicked in.

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  • Nice thread chaps, I am waiting for Gordons Samuria Sword to be rapidly thrust into Teflon Tony’s back so he can get some other mug/fall guy into the chancellors job ASAP.

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  • “Gordon Brown will this year inherit the worst public finances of any incoming prime minister for the past three decades, a leading economist has predicted.”

    Inherited, that’s a bit rich! It’s a mess he created. There is nothing skillfull about Brown’s tenure as chancellor. He is cut from the same cloth as the MEW generation he created. He is the Jose Mourinho of the financial world and by that I mean anybody given the charmed level of funding he has received would find it hard to screw up. Actually he is not like Mourinho because Mourinho is quite likely whereas Brown is simply revolting and to top it all he has started to doing that awful sneer with his mouth at the end of each sentence again.

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  • Just in case any of you guys are interested I found this over the Xmas hols

    http://en.wikipedia.org/wiki/Phillips_curve

    Nulab have been creating jobs in the last few years and claim low unemloyment

    See what you make of it

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  • You’ve hit the nail on the head, as the Philips Curve is based on Historical Data from what were major manufacturing nations they cannot properly relate to an economy that is heavily weighted by State Created Jobs and increasing levels of low-paid migrant labour.

    All the ingredients for an economic accident are already in the pot.

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  • The economy will collapse long before interest rates reach 6% so I think this is very unlikely.

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  • My definition (from my rudimentary economics A level lessons) is negative inflation (not just falling, but negative growth) and rising unemployment.

    What it means is that investment stops because the future price of currently produced goods will be _lower_ than today. Western economics is based on the idea prices for goods produced now to be sold in the future will be _higher_. Investment, employment and spending comes to dead stop.

    That’s my understanding of stagflation.

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  • Guys, when debts are at this level, both here and the US, there is only one out-come: DEFLATION. Get set for a Super Depression that will make the 1930s a walk in the park! The longer this bull goes on the bigger the bear! Look at the graphs people!

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  • Sold 2 Rent 1 says:

    There are 2 periods that you could compare the current time to:

    1970’s and 1930’s

    Both these times fit into the 33-36 year cycle

    The mappings of the DJ stock market peaks are such:

    Big peak —- pre-recession peak
    1929 ========> 1937
    1966 ========> 1973
    2000 ========> 2007

    http://home.xtra.co.nz/hosts/cwwebsite/history_dow_jones_index.htm

    After 1937 and 1973 stocks fell by 50% within 2 years

    IMHO if we were in for a deflationary depression then it would have been after 2000.
    The Fed dropped rates and avoided this.

    We are now poised at the same time as 1937 and 1973, a pre-recession peak 7 years into a secular stock market bear.

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  • sold 2 rent 1 says:

    There are 2 periods that you could compare the current time to:

    1970’s and 1930’s

    Both these times fit into the 33-36 year cycle

    The mappings of the DJ stock market peaks are such:

    Big peak —- pre-recession peak
    1929 ========> 1937
    1966 ========> 1973
    2000 ========> 2007

    http://home.xtra.co.nz/hosts/cwwebsite/history_dow_jones_index.htm

    After 1937 and 1973 stocks fell by 50% within 2 years

    IMHO if we were in for a deflationary depression then it would have been after 2000.
    The Fed dropped rates and avoided this.

    We are now poised at the same time as 1937 and 1973, a pre-recession peak 7 years into a secular stock market bear.

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  • sold 2 rent 1 says:

    Would be grateful for any feedback on the above ideas

    1974-5 and 1938-9 were ragged times economically and for world tensions and wars.
    Is this a sign of things to come. Middle East, China, Russia and USA all in the melting pot

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  • If all the other European countries put up interest rates, we will have to to prevent capital flight. Why would you keep money here, when you could earn more in another European economy.

    Let us be real what we are talking about here; Nothing less than the collapse of the US and UK currencies.

    And our complete delusional idea that we could fool the rest of the world into sending us food and materials for a worthless fiat currency.

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  • devil’s advocate:

    Q. What do you call a situation where house prices rise to 6x median salaries.
    A. Hyperinflation.

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  • @disciple:

    You are spot on. The 1930s are going to be nothing compared to the financial armageddon coming here.

    Thank you Crash Gordon – f**king idiot.

    Recommended reading for some here.

    “The Power of Gold” byPeter L. Bernstein.

    Also, sign up for the Von Mises Daily Article.

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  • tyrellcorporation says:

    Sold 2 Rent… I’m always very sceptical about the validity of proposed uber cycles. It’s like these nuts who try and tie in obscure celestial angles and measurements with distances between Easter Island heads, etc. Utter bollox in my mind.

    I still agree that there will be a big downturn in the next few years but I feel it can’t really be attributed to an orderly, pre-determined cycle of events.

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  • Sold 2 Rent, you are very keen on this 33 year cycle.

    It is said that once you understand the golden ratio, you can see it in everything from the crucifixion to mollusc shells to galaxy spirals.

    Could you be interpreting the results so to fit this conclusion about a 33 year cycle?

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  • Dohousescrashinthewoods says:

    I think there is intuitive validity to cycles in terms of broad generational moves. 30-something years may just be the average size for major cycles.

    For example, if one generation is hit by negative equity, then there will be an average time for most people to recover (perhaps a normal distribution, where 95% will recover within a few years of each other).

    Those who weren’t in that cohort will take a different tack, creating a different “generation” whith perhaps broadly similar behaviour (e.g. appetite for debt). The consequences of that cohort’s “fashion” (if you like) may shake out with similar distribution, albeit perhaps a different timescale.

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  • DA – hyper inflation? I think prices are going up fast and have been, basically because of the oil price. I can understand the arguements behind the doom mongering, its all very sound, but I do think its easy to forget there is ALOT of money out there! BTL’s probably have big salaries, gradutes a blue chips are starting on £32k a year? After 2 years they are on £42k a year, this leaves a lot of spare cash after day to day expenditure.

    Sold 2 Rent, Ive read the same books as you and they are very convincing – does history repeat itself? I think glorious sunshine might have a word or two on that. Are we looking for arguements that fit our desire?

    Ive always said the government would take inflation over IR, but you raise a good point, that would damage the UK economy and they would have to support the currency with high IR so who knows.

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  • Interesting feedback

    I don’t think these cycles are pre-determined to happen in exact years.

    The pattern of human consumption, investment and speculation seems to repeat itself when a population acts as a group.

    These cycles are probably determined by factors such as the time it takes to pay off a mortgage and the time it takes to raise a family. Add into this equation the secular speculation of property, stocks and commodities and their respective hangovers

    Fact: stock PE ratios peaked in years 1929, 1966 and 2000 in their own secular bull markets

    It seems 7-8 years after the secular peaks we have re-bounding share prices followed by a big recession and crashing stock market.

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  • Nice Dow history s2r1 – I’ve not seen that one before. What I’ve heard about the Dow recently is that it is in for a bashing in the near future although this may be delayed by a pre-election boost. This was an opinion expressed by commodities bulls so one has to take it from whence it comes.

    I think there is a danger of extrapolating what is happening in the US economy directly onto the UK. The UK economy will obviously be influenced by what happens across the pond but not necessarily mirror it. The US Fed has stated many times over that it will never again trigger deflation by rapidly restricting credit. Only time will tell if this remains true and whether or not the BoE plays by the same rules.

    Cycles are a nice way of seeing history repeat itself but like most economic models they don’t work very well when it comes to prediction and IMHO require far too much shoe-horning to fit any given situation. There are just far too many global variables – wars, emerging markets, oil shortages, aging baby boomers and policy differences for any situation to manifest exactly the same way it did 33 years ago. The fundamentals don’t change – supply and demand, credit fuelled asset booms and bad government decisions.

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  • The Power of Gold” byPeter L. Bernstein.

    I will 2nd. that. An excellent read indeed.

    I think the 33yr. cycle that is mentioned is K-wave theory isn’t it? And whatever peoples views of cycle theories, it is difficult to deny the key trends highlighted.

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  • miniftse,

    I think that inflation may have more to do with excessive credit expansion, excessive money supply growth, and stupidly low IRs (engineered by leaving HPI out of official inflation calculations) than the ‘high’ price of oil. (which isnt ‘high’ at all YET in real terms)

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  • I like “dohousescrash…” idea about cycles being formed by generations or cohorts of people who choose to do the same thing (ie buy a house or have a family) at about the same time. Perhaps the difficulty of using cycles for prognosis is the poor definition of the generation.

    Regardless, I was in two minds whether or not to post this article as I wasn’t sure if it would attract much interest. I’m glad I did.

    Looking through The Telegraph today, this article was very difficult to find. This article, and ones of a similar vein, are not head line news and tend to be hidden in the less well thumbed pages of the paper. Or is it just me?

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