Thursday, September 25, 2008

What planet are these people on!

Hopes of interest rate cut rise as Kate Barker acknowledges dangers facing economy

Too much to sum up in this one but its worth the read for the MPC members views including; there is a real danger that the latest developments in the financial market will result in a large undershoot of the inflation target, and if we enter a recession it will be less severe than the early Eighties and early Nineties ones!

Posted by enuii @ 10:43 PM (1261 views)
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9 thoughts on “What planet are these people on!

  • Has anyone noticed that the answer to everything these days (including the problems created by cheap money) is … more cheap money?

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  • little professor says:

    On the forums there is currently a poll running on inflation vs deflation as a likely outcome of the current situation. Currently deflation is way out ahead.
    I happen to agree – I’ve changed my mind on this recently. The time to raise rates was 2,3, 4 years ago, to prevent this problem starting in the first place. Now with credit and wealth being destroyed, raising rates would be suicidal.

    Increasing interest rates is supposed to control inflation by making it harder/more painful to borrow money. It’s already near-impossible for large segments of the population and the business world to borrow money, so it would just be pointless, and indeed counterproductive by raising manufacturing costs yet further.

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  • little professor says:

    Can’t believe I’m starting to support Danny-boy’s position…

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  • We have overnight LIBOR at about 1% below base rate, and 3 month LIBOR about 1.5% above both the base rate and the 3 month gilt rate. The overnight GILT rate is currently around 3%.

    This has never happened before. Effectively, we already have a 2% cut in base rate, but for the interest rates we actually pay and receive, it is as if the base rate was 1.5% higher than it actually is.

    In these circumstances, I don’t think the Bank of England actually can control interest rates in any meaningful way, so there is no point in discussing what rate they should try and control it at.

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  • planning4acrash says:

    Kate Barker should be eating her hat. She claimed that only the building of millions of houses could ever stablise house prices. She suggested scrapping local democracy by forcing local authorities to take into account fake economic forces (created by the bank of england) above any other material planning issue, when setting housing targets for a district or region,e.g. capacity, desires of local people, environmental restraints, fertility of the farming land to be lost, etc. If she dares say that the money supply has anything to do with house prices, she should be put up on the village stocks and be forced to take stock!

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  • planning4acrash says:

    Jonb, that’s amazing, I hadn’t noticed that. Clearly, this is manipulation caused by massive injections of liquidity that the public have not been made aware of. I for example filed a freedom of information request about whether a bank had been bailed out with our money, and the answer was that the public didn’t have a right to know. God knows who they’ve bailed and by how much. You think the Paulston proposals are bad? We are already there!! Expect inflation to roar ahead, sterling to plunge and jump onto the gold and silver train to freedom.

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  • LP – yes your changing view is indicative of what will happen here. Headline inflation rates will rise for a while but they will lag the real deflationary effects of the credit deflation. Jon is right – the time for the govn – sorry BofE to lead on this has gone, its too little too late (not that they could have done much else – see the various posts on here indicating “outrage” that the MPC were even contemplating cutting rates). The mandate for the BofE was flawed in my view – it should never have been just the control of current inflation through IRs and where does fiscal policy fit in? No it should have been a wider ranging health of the economy type remit. We are using historical views to fight a metamorphic monster. Since this crises has unfolded we have seen – within at the most 2 years – effectively, the complete demise of the investment banks in the US. Think about that, the weapons being used are not equipped to respond in the time frame needed, they lag. Its like we have a fight between Alien and Predator. Whichever wins will destroy us, but we are not helping each of them fight the other during their conflict.

    There are places to look for : 1. Oil prices and 2. How this bailout is received. I think for part 2 all this does is buy some time, as for part 1 – i think the Jurys out, although i have always said up to $170 per bbl, I will be pleased to be wrong.

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  • mark wadsworth says:

    What Paul says. And the answer to failed regulation is more regulation.

    What JonB says. Central banks have so little impact on interest rates and inflation rates that they might as well not bother. King Canute would have laughed at them.

    I think we’ll have deflation FWIW. The experts can’t agree so I have tossed a coin.

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  • last_days_of_disco says:

    Deflation is caused by a mood swing (triggered by the house price crash), that is the cause. Deflation is the result. The moment people start hoarding their cash, deflation results. The BOE has no power to stop this happening. Printing money isn’t so easy. The liquidity injections deal with past debt, not future lending, whatever BS gets pumped out over the airwaves. Banks are not going to lend money they don’t have anymore, its too risky.

    Banks aren’t liquid because their paper assets have become worthless and hence they can’t sell them to get cash. They don’t want to admit they are insolvent because then they will get roasted. So they go get “liquidity” injections from the BOE. Its a scam because they can then write down their “assets” and get their balance sheets in order.

    The bottom line is, do people believe they will be paid back? If the answer is no, then deflation just happened, pure and simple. Then tidal waves of deflation start pulsing through the entire system and you get these weird peaks and troughs in inflation and everything gets soooo confusing. Everyone is shouting different things, markets are crashing, others are booming. Basically the waves cause chaos and if you are in the middle of it, its very confusing. People don’t like dynamics, they want to hear its going up or down.

    The cause is the initial crash which then results in a mood swing that results in waves of deflation, as different institutions de-leverage, go bankrupt, etc, etc.

    Chain of events:

    Stupid credit binge -> Initial crash -> Mood swing -> Waves of deflation -> Chaos until the deflation waves stop.

    Dangerous times.

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