Saturday, December 13, 2008

I think this is the preferred option

Dollar Devaluation To Fix The Great Recession

World currencies should be devalued overnight. It can be done on a country-by-country basis, but a coordinated devaluation would work best. A devaluation of 30% would raise the dollar value of all assets by 43%. A $200,000 home with a $230,000 mortgage would become a $286,000 home with the same mortgage. Presto! The homeowner who was $30,000 upside-down now has $56,000 equity and a good reason to make his payments. Both the homeowner and the bank are immediately better-off.

Posted by gardeniadotnet @ 10:20 AM (2738 views)
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83 thoughts on “I think this is the preferred option

  • Um… great solution… unless you have been prudent and are a net saver hoping to buy a house one day!

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  • @1. Solo

    Point taken, but are you prepared for the alternative, ie Depression?

    Personally, I’m trying to prepare (both mentally and physically) for either eventuality.

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  • Already effectively happening to some extent with interest rate reductions. Anyway this assumes ‘a property value’ which of course is coming down anyway and so presents a worst case scenarioon a fixed price example. In all probability house prices would still drop significantly in comparison. Maybe just maybe even more so if they appear to rise initially.

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  • Still not sure about this deflation scenario. Sure people are slashing prices because they’re going out of business but when the dust settles there’ll be fewer goods & services and a lot more currency (ONS shows M4 growth at 16%+ in Nov and rising). I suspect this guy will get the devaluation he wants and maybe a bit more.

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  • dohousescrashinthewoods says:

    Presumably this is a good reason to hold “hard currency” such as gold or silver.

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  • I haven’t read the whole article but this scenario is what scares me.

    I wouldn’t put anything past this lot and seeing savings vanish by 30 over night terrifies me – especially when it would effectively push house prices up and reduce other peoples mortgages.

    If I went out now and got a 250k mortgage at 3.64% interest only, I’d have £750 per month repayments (less than I’m renting a 3 bed semi for). If a world wide devaluation took place I’d be feeling pretty smug as effectively I’d have just been handed 250k x 30% = £75k tax free.

    But as a saver I’d be initially raped for 75k in a reduction of savings and then potentially another 150k if house prices went up 30%.

    My example is perhaps a little extreme and I’m not clear how all currencies can devalue (surely one has to devalue against another ie the value of the other effectively increases).

    I better read the article.

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  • This (devaluation) is the only solution that will work within the terms of the current system.

    To look to depart from the current system which is based on credit/debt whatever your preferred term would to be to unlease chaos until a new order is achieved. The loss involved in reaching the new order is incalculable with wars being almost a certainity.

    There are nearing 7 Billion people on the planet, a population this aize and growing is ultimately the problem.

    [email protected] trying to prepare mentally and physically for the sort of depression that would be visited on us would be like trying to prepare for cancer, you will have no idea what it takes until it rips your world apart.

    [email protected] if you like but I absolutely wouldn’t bet on it.

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  • Ok read the article now.

    I need some help here from some of you more knowledgable types.

    Can they devalue a currency overnight – effectively saying ”right as of tomorrow everything for sale is 30% more expensive, you will put all prices and wages up 30% as of 1st January 2009”. for example.

    If it is possible I believe Gordon Brown will do this as it will please the electorate to have their house and wages go up 30% overnight.

    If this happens my ‘far out’ example above will become a reality and I will loose hundreds of thousands of pounds which will be handed to the over indebted.

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  • simple answer is yes, the us eg have done it before, the difficulty are the creditors nations who hold t bills and usd’s, they may well comply as the alternative is not looking so good for them, not yet big enough to go it alone so if the west collapses they collapse with it.

    The solution would only defer the problem. The hope i suppose is that we could incremently build a more reliable financial system having learned lessons – a lot shot at best

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  • This is pretty serious IMO opinion.

    TC if this happened you’d be better off with a house and a big mortgage than Gold. As they would literally be handing you tens of thousands tax free as far as I can see.

    Your Gold store would have to increase by 30% just to stand still – maybe they would include it in the basket of things for a compulsory price increase, maybe not.

    Fact is they’re trying to get debt down so anything with debt attached would be included so houses followed by cars would be top of the list.

    Where’s techieman, Japaese Uncle, mark wadsworth & 51ck when you need them ?

    Someone tell me this can’t happen and convince me quick.

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  • Is this a joke? Only banana republics can operate like this. I’m amazed that Forbes even gave space to this article. It’s absurd in so many ways that I don’t know where to start. But here’s a clue in simple words. If there was a way to devalue your currency overnight by 30%, that would mean that parties that had lent to that nation would have been robbed of 30%. Do you think that anybody would ever again make a loan to that nation? And believe me, the USA needs a lot of loans.

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  • I read an article like this some time ago and I’m sure the question was raised here. The consensus was that you can’t devalue all currencies at the same time as their value is based against eachother. The US$ is the one here and according to several academics is in for a big fall next year (probably the second half). That would effectively devalue the dollar and all hell will break loose!!!
    Happy Days titan……..!!!

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  • STR2007 you are missing the post, this is the only option that exists within the current financial system. The alternative would be to liquidate all the bad debt and while you see that as positive because you maybe have savings and no house – it would be the destructive cycle would take everyone down with it.

    There are only really 2 questions to ask, one, will it work, the other related to timing, if it works what assets might you want to hold and when.

    Long terms, cash is junk but right now with asset prices in free fall it is one of the better things to hold.

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  • @ str 2007

    – you could maybe consider the possibility that all this just scaremongering hype to encourage prudent people with savings to panic and go and buy a house/car/whatever and ‘kick start’ the economy…

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  • incidentally is anyone finding this site slower to respond over the past couple of days?

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  • Imagine being the IT support staff for a stock exchange system. Imagine having to give up your Bank holiday weekend to en-masse test the software for the manual change.
    And then could the end users crash the system with the volume of transactions which would take place immediately after change?
    Ooh.

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  • bellwether

    I didn’t think I missed the post, if this is the only option won’t they take it ? extreme circumstances and all that.

    Re: assests held, yes I think cash is best option presently. But, for a devaluation to work it would have to be a no notice situation wouldn’t it. IE announced on Christmas day to take effect 1st January for example, so there’d be a week of shock and a difficult January while everyone sorted out re-pricing etc. but essentially no time (between Christmas and New Year) for anyone to reallocate stuff other than go buy lots on credit for a week.

    In fact the more I think about it, it seems the perfect solution with the only loosers being the people that leant the money (and me/us of course).

    The people that leant the money (Banks) would get little sympathy, and other countries (Germay, Japan, China etc) need US & UK economies working for theirs to work, therefore may have to take it on the chin. And if they also out all pprices up by 30% would they be so badly off ?
    I’d say better off than they’re likely to be over the next 5 years than if we don’t do it.

    This for Gordon Brown is like playing Poker with a full house up his sleeve from another pack that still counts in the game.

    Cornishman

    Yes maybe scaremongering, but can you come up with a good reason as to why they wouldn’t do it. I hope you can, but I can’t ,?

    Someone slap me I’m getting histerical !

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  • bellwether

    A little slow to load from google, and yes I’ve waited for a few more seconds a couple of times when posting – I put it down to my broadband to be honest (O2). Nothing too serious though.

    mdmick
    Yes there would no doubt be a few teething problems etc, but we alter vat from 17.5% to 15% with a weeks notice, I can’t really see the implimentation being that much of an issue, I think everyone would just be thankful a solution had been found.
    Weren’t alot of IT bods on double/triple time for several months with the build up to the year 2000. They’d be glad of the extra money IMO.

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  • Apologies for all the typos and bad spelling ?

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  • This is yet another classic “if I stand on a soapbox, I’ll be able to see and everyone else will lose out” hare-brained scheme in terms of a *kinda-seems-to-make-sense-if-you’ve-got-loads-a-debt* kinda way.

    What happens the day before the planned devaluation? People buy gold or other assets (what economists call near monies) and then sell them the next day, or over the next few months, at the raised devalued dollar rate, and *bingo* your experient in devaluation just failed.

    Forbes is such a silly magazine – they are becoming more and more like a tabloid.

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  • mark wadsworth says:

    STR2007, I think this scenario is pie-in-the-sky.

    In the days of fixed exchange rates, a country could devalue its own currency, or peg it to the Euro or the dollar (as the Chinese do). So if the US reintroduced (or indeed still have) exchange controls they could I suppose devalue their own currency, but then the Chinese would automatically devalue their own. Further, it is all about relative values – it is impossible for all currencies to devalue against all the others. So much to external exchange rates.

    As to the internal value of a currency, of course any country could “do a Mugabe” and just print loads of notes and coins, as long as they can force banks to lend for less than the inflation rate, it would lead to the value of debts falling relative to e.g. house prices and be a bit of a b*mmer for savers and depositors. But money is credit and vice versa, they are the same thing. And in troubled times like now, there is little ‘credit’ (i.e. faith in borrowers that they can repay), so the total real value of ‘money’ in circulation stays the same.

    We also have seen over the past months that interest rates cuts don’t affect very much, house prices are still tanking.

    Finally, house prices are going to fall by nearly half (relative to wages) anyway (whatever the nominal change is) so for a young tenant with not much savings who’d like to buy a house it’s all neither here nor there.

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  • gardeniadotnet says:

    21. mark wadsworth said…As to the internal value of a currency, of course any country could “do a Mugabe” and just print loads of notes and coins

    This ties in with the ‘quantitative easing’ debate, which I expect to assume a higher profile in the near future.

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  • gardeniadotnet says:

    On Tuesday, Bank of England Monetary Policy Committee member Andrew Sentance would not be drawn on whether the bank is making plans to consider quantitative easing.
    He said policy makers need a “reasonable amount of time to see” what impact recent aggressive rate cuts have on the economy.

    FXStreet.com
    Wednesday 10th December

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  • gardeniadotnet says:

    ‘Quantitative easing’ has the stamp of failure

    So much for “saving the world”. It was, of course, not a Freudian slip but one of the tongue. The Prime Minister conflated two of his favourite soundbites – “saving the banking system” and the “leading the world” spin that New Labour assiduously peddles on bank recapitalisation. But try telling either to Germany’s Finance Minister, Peer Steinbruck, who openly ridicules Gordon Brown’s economic policies.

    Herr Steinbruck says the UK’s switch from financial prudence to heavy borrowing was “crass” and “breathtaking”. It will be interesting to note his views on our rapidly failing government’s next trick: quantitative easing. Now there’s a soundbite to conjure with.

    No, it is not a cure for constipation but a quack monetary nostrum that will send shivers down the spine of any German Finance Minister.
    advertisement

    Once Herr Steinbruck has received an acceptable translation, he will be apopleptic. Quantitative easing means, bluntly, the government printing money to boost economic activity as in the Weimar Republic after the First World War. One-time juvenile philatelists of a certain age will recall German postage stamps of the 1920s with face values of 10, 20, 50, 100 million marks.

    How many years after our own quantitative easing will we have to fork out £10m for a second-class stamp? At least homeowners languishing in negative equity might look forward to redeeming mortgages, in real terms, for a fraction of a farthing some years from now, provided they are on a fixed-rate deal.

    Thomas McLaughlin, Munro Road, Jordanhill, Glasgow.

    The Herald, December 13th

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  • @bellwether

    “incidentally is anyone finding this site slower to respond over the past couple of days?”

    I noticed too. I think there’s something wrong with the site.

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  • @bellwether
    The site’s been very slow to load for the last couple of days for me. The rest of the internet seems fine, so a problem with the site/host?

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  • no worries str2007 and thanks for your thoughts, I think a systematic devaluation of this sort is still away off, we (uk,us europe) will take interest rates to close to zero and continue tinkering with weakening currencies in other ways first.

    Funnily enough growth is really predicated on devaluation of currencies (ie inflation) – a system that clearly cannot continue indef

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  • Thanks for the input guys

    Paul
    What happens the day before a devaluation – people buy Gold etc to re-sell after the devaluation.

    I kind of covered this by saying that a devaluation would have to be ”no-notice” situation to void this happening. Added to that there will always be a few traders that make a killing from any situation – that’s what trading is. Some wise folk bought Gold 4-6 months ago and diversified their currencies.

    So if some did get out of cash and into Gold only to re-sell back – that wouldn’t fail the whole experiment wold it ?

    mark wadsworth
    Hope it is Pie in the Sky

    But countries have done this before (against other currencies) to clear down debt. Do it to often and all other countries loose complete faith in your currency. It is in my opinion a once only one off event and can’t be used again.

    Much like the combined Inerest rate cut last month, I can’t actually see a reason why all countries couldn’t increase the cost of everything by say 30% overnight including wages.

    That would in effect reduce house prices by 50% relative to wages (given an existing fall of 20%). OK it might not be as much as that as everything would cost 30% more but you get my drift.

    The main problem with the ‘system’ as I currently see it is there is too much debt out there and a combined 30% devaluation would effectively reduce this debt to a more manageable size. (IE would it be better for lenders to recover 70% than none atall).

    Finally like you I actually have some savings (being old and prudent) so I do care about this scenario – alot.

    Gardiniadotnet

    Perhaps this scenario is what they refer to when they mention quantative easing. They’re going to do something and Gordon Brown needs a quick fix. This would be an overnight fix, printing money wouldn’t be an overnight fix and other things could go wrong while the printing presses are getting up to speed.

    I remain unconvinced that this won’t happen or put another way very worried it might.

    I did

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  • No govt is going to take the route of openly devaluing the internal value of the currency, because there would be an outcry from the millions of savers. Far better to allow it to happen gradually via rising inflation (which they will publically condemn, and pretend to be trying to eradicate). The old fable of the frog in gradually heating water springs to mind. Just make sure you are not that frog!

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  • gardeniadotnet says:

    @30. str 2007

    I’m probably not saying anything new here, but FWIW here’s a summary of my current thinking:

    – the global financial system is broken – the central banks and governments know this but daren’t tell us the truth ( though an increasing number of us already know it).
    – something drastic will have to be done and fast, because the global economy is coming apart at the seams.
    – quantitative easing, ie turning on the printing presses, is the only immediate option open to us, the alternative being a devastating global Depression.

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  • Cornishman

    Your photos don’t show up on my screen, have I got to adjust a setting to see then (have tried right click – show picture – this didn’t work) or is it how you’ve posted them ?

    bellwether

    I understand they want to keep tinkering in the hope that works (a devaluation is last resort). However, if we know tinkering won’t work they must do aswell.

    Add to that phrases like ”combined effort”, ”quantitive easing”, ”getting ahead of the wave”. And the tinkering may get left for post devaluation adjustment.

    I am genuinely very worried about this potential outcome.

    I expected and wanted to get shot down in flames, but don’t feel I have been – yet.

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  • gardeniadotnet says:

    35. goweresque said…there would be an outcry from the millions of savers.

    An ‘outcry’? Big deal.

    The savers do have a surprising amount power however, as demonstrated by the orderly queues outside branches of Northern Rock not so long ago.

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  • goweresque

    ”No government is going to take this route” – but they have in the past in other countries.

    I don’t know if they could use the printing presses to effectively deposit +30% of anyones savings in their bank accounts as part of the combined measure. This would at least appease the savers to a degree and massively add to inflation – which is what they want.

    gardeniadotnet

    All your FWIW points add up to exactly what I’m saying.

    A devaluation would be an over night fix though, the printing presses could be used to cover savers shortfalls.

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  • Scarey as my oanda account has stopped working!!

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  • Nobody would trust any government again if they did that!

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  • Dazednconfused says:

    There is no mechanism for devaluing a free floating currency, other than printing money, which they are trying, but to no avail.

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  • The whole concept is tosh.
    Flawed by the same thinking from VI’s that said asset prices only go up.
    Huge wage rises/low production and a devalued pound just does not make any sense to me.
    What happens to asset value? It increases from where it is now.
    My computer says NO.

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  • Lets sink all currencies down to zero and all retire millionaires.
    Go figure.

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  • Alan
    I think the majority of Sheeple would be over the moon with a rescue plan that involved their houses going up 30% in value overnight and them getting a 30% wage rise.
    It would be very easy to sell to the general public.

    crunchy
    It may not make sense and your computer may say no but no-one has yet convinced me why it couldn’t happen.

    These are as we all know extroadinary times, I would not put anything past the powers that be.

    How about thinking of it as standing on a railway line with an express train heading towards you. Either side of you are canals that may or may not contain crocodiles. Do you jump. Of course you do. The Crocs may not be in their and if they are may not be hungry. It’s a gamble you would take when faced with the inevitable.

    In the Great Depression the option to jump wasn’t there. The feet were effectively tied to the rails as currencies were linked to Gold. They’re not now. Right or wrong anything I think can be done.

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  • 43
    Ok! let’s drop all currencies to 0 and retire all millionaires.

    I am guessing we jump and get eaten by the crocs.
    Some will survive and all the crocs will get fat.
    Fat enough to survive themselves.

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  • landofconfusion says:

    So far no one has explained exactly how they would inflate. This is important as (as far as I can see) some strategies would allow wealth preservation (in the short term) while diminishing the real ‘value’ of debt.

    Also, what exactly happens to pensions? Do we inflate those away as well?

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  • So long as we have the consequence of Inflation v Deflation these concepts are pure fantasy and wishful thinking.
    My computer says YES.

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  • Wasn’t there a rumour going round not so long ago about a surprise announcement on 22 jan concerning the economy?

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  • crunchy

    Now your just being silly, I was looking for answers, hopefully, as to why they couldn’t/wouldn’t simply devalue all currencies overnight in a co-ordinated effort to get debt under control and things moving again (but this time with reigns).

    landofconfusion
    I’m not sure how exactly, what if all countries said right from 1st Jan 2009 all prices will go up 30% and we will print money to top up bank accounts and pension funds by 30% to compensate. And announced this on Christmas day world wide.

    As far as I can see it would ease the debt problem and ‘overnight’ do what otherwise may take 2-3years.

    My point is couldn’t this be co-ordinated, if it could it might be.

    It could also be possible that I’m missing some huge reason why it absolutely couldn’t happen. But no-one here today has come up with the reason.

    If the above were implemented, everyone on here would likely be worse off.

    That’s why I’m trying to find out if it could be implemented or not.

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  • wrt savings. I read a similar post here on hpc a month ago that said all assets would be inflated by 30% or whatever. i.e. that means savings too.

    The value of doing this devaluation is that the quantative easing approach will lead to all sorts of panic over a longer period. This is short and sharp, no Zimbabwe/Weimar Rep worries of how far hyperinflation will go. We all know where we stand 30% inflation…

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  • MG

    I think you’re agreeing with me.

    Where we’d loose is that house prices would also inflate by 30% as well as our savings and that is the bit I’m worried about.

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  • gardeniadotnet says:

    45. landofconfusion said… So far no one has explained exactly how they would inflate.

    Perhaps the Government will lend directly to anyone who asks, via one of the banks it now owns.

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  • I don’t understand what this article is about, and I’m not sure the author does either, given the lack of explanation. As far as I understand, currency devaluation only has meaning relative to other currencies, and this is done mainly by lowering interest rates and/or selling reserves. (Lamont in the 90s tried to support sterling by doing the opposite). Or in the current situation ramp up the money supply and induce inflation. That’ll devalue the dollar sooner or later, although not overnight.

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  • 47. str 2007 said…
    crunchy

    Now your just being silly, I was looking for answers, hopefully, as to why they couldn’t/wouldn’t simply devalue all currencies overnight in a co-ordinated effort to get debt under control and things moving again (but this time with reigns).

    I will just sit back next year and remind you what I have said. It’s not silly.
    Cut and paste my comments and remind me if I am wrong.
    With respect.

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  • landofconfusion says:

    50. gardeniadotnet said…

    Perhaps the Government will lend directly to anyone who asks, via one of the banks it now owns.

    Isn’t this what happened in Japan – stuff the banks with extra cash in the hope that they’ll lend? And in any case, pensions would still be negatively affected.

    From where I’m standing, the idea of inflating away the debt is to reduce it – not harm savers or pensioners. Perhaps Liebour will just offer tax rebates to everyone? Or some kind of bank deposit doubling scheme?

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  • str2007. I’m with Prof Wadsworth on this. It’s a wonderful idea in principle for the government to make their debts vanish in a puff of macrofinance terminology and deft accounting, but in the end we’re in debt because someone (China, Japan, Middle East) are in credit.

    Note – creditors set the terms, not the debtor.

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  • gardeniadotnet says:

    53. landofconfusion said.. stuff the banks with extra cash in the hope that they’ll lend?

    This is what’s happening already – with little if any success. When the direct lending starts, there’ll be no ‘hope’ about it.

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  • Devaluation in this way is inflating anything that is an asset, i.e. it is basically a debt amnesty.

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  • Crunchy

    I hope you’re right that this doesn’t happen, but saying ”as long as deflation v inflation has consequences this is pure fantasy and wishful thinking” isn’t really providing an answer as to why a co-ordinated world wide devaluation of 30% couldn’t happen.

    In fact if it was co-ordinated and worldwide it wouldn’t be a currency devaluation as such, just a debt devaluation – I think.

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  • Paul
    Note – creditors set the terms, not the debtor.

    It depends how much they owe really. Does that addage about owing the bank a grand and your in trouble, owe then 10million and they’re in trouble count here.

    The like of China and Japan will go down with UK and USA as they rely on making stuff for us. I suspect they could be convinced that getting back 70% of debt and keeping trading levels up is better than trading levels plummeting and still not being assured of getting their money back.

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  • Personally I think devaluation of currencies with sigificant imbalance of trade is inevitable, through persuit of a devaluation strategy (lower interest rates, increased selling by financial authorities, reducing market confidence in the currency, increasing of currency supply by printing), which seems to be happening rapidly already. The effect of this is to devalue savings and debt equally, so I expect this policy to accelerate in the coming year.

    When sterling was floated back in the 70s the fiscal authorities stopped managing it’s value, so it’s value is now determined by the market, not by the BoE or govt.

    http://books.google.co.uk/books?id=8y03Iq8GAV8C&pg=PA405&lpg=PA405&dq=sterling+float&source=web&ots=fDaXpaWOeB&sig=UtbbD41rGtslv1_e9OX1haU4PI0&hl=en&sa=X&oi=book_result&resnum=1&ct=result

    To devalue overnight, authorities would need to repeg currencies to the market value of some other asset. Currencies cannot be ‘devalued’ against gold as no currency has a gold standard any more (they are all floating). To achieve an overnight devaluation they would basically need to abolish the pound and replace it overnight with the ‘pound2’, which was pegged to another asset class. Which, I guess, would be the end of fiat currency.

    I think I need to debate these possibilities offline with some treasury sources, and report back!

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  • 57. str 2007 said…

    If this happens it will lead to hyperinflation.
    Wages will not rise but everything else will.
    Back to square one but further down the line and much more fantasy money to lose.

    I have been waiting for a dead cat bounce and if this devauation passes that will be it.
    IT WON’T LAST. economics is just not that simple.

    Do this and this will happen!
    It’s more like do this and five conflicting things will happen.
    The moment people come to terms with the fact that this is going to hurt the better.

    What ever happened to COMMON sense and what has happened to UNCOMMON sense?

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  • The idea that governments will overnight increased asset prices by 30% is pretty ludicrous – but considering the lunatics in charge, who knows what could happen.

    The logistics of implementing something like this should not be underestimated. Ordering businesses who don’t have any cash to increase salaries overnight by 30%?! Like that’s going to work. Stable businesses with cash in the bank will suddenly become unstable as they have to find this cash – causing even more businesses to go bust.

    Plus, in this country at least, those with net savings outnumber those with debts (according to the banks). The impact of such a strategy would be politically explosive. It might just shake the apathetic Brits into violence.

    Far more likely is slow but steady “quantitive easing” or printing money, which will keep seeing the pound’s and possibly dollar’s value erode bit by bit. House price values will be higher than they would otherwise have been – but not because people will be buying but because of a slight of hand. In other words, more smoke and mirrors that is a hallmark of this government.

    I don’t remember last time there was a house price crash that there was this desperate an attempt to keep house prices propped up? Asset devaluation is an inevitable and necessary adjustment after a boom. This government really has to be the worst in living memory.

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  • Dibble – Dibble @15 Australia, New Zealand and the US all did this in the 1930s by either going off the gold standard or devaluing overnight. Not only banana republics do this.

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  • Doom&Gloom

    Thanks for that post.

    My thought was that if they were all done together it would negate the need for repegging against some other asset – it would be a world wide gentlemans agreement if you like.

    re: your last sentence – I didn’t realise you were so well connected. You’re not Gordon Brown are you ? !

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  • Dibble Dibble

    Only just seen your post @15

    Yes that’s right the lenders of money would effectively loose 30% of what was leant. But at present those same lenders are also faced with a huge recession/depression that we are heading for because they manufacture for us and they may not get all their money back.

    The 30% devaluation would have to be a once only event and yes tight control would have to be placed on future spending.

    But pound for pound over a 10-20 year period those lenders may end up getting more money than if things were left and the UK/USA actually default and/or a fresh currency is started etc.

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  • 57. str 2007 said…
    ”as long as deflation v inflation has consequences this is pure fantasy and wishful thinking”

    This devalueing will lead to unconrolled Hyperinflation therefor negating the devaluation.
    The average Joe will be no better off in real terms.

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  • TRY AGAIN.
    57. str 2007
    Crunchy said ”as long as deflation v inflation has consequences this is pure fantasy and wishful thinking”

    This devalueing will lead to unconrolled Hyperinflation therefor negating the devaluation.
    The average Joe will be no better off in real terms.

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  • 😉 @s2r2007! The values of floating/fiat currencies is only relative to other curencies. The financial authorities can only influence value of one against the others via their policies – they couldn’t ‘devalue all currencies together’ as the value is set by the market. The only way to revalue would be to repeg.

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  • On the plus side, it won’t make much difference to house prices in terms of wages, because if devaluation goes through then the main losers will be the about to retire with savings house owning group, but their savings will have gone.
    Moving money from savers to debtors isn’t much of a fix considering the main problem is a collapse of activity in the real economy. Nobody mentioned the “paradox of thrift” in this thread, but savings based on another’s debt doesn’t work if the debtors can’t work it off.
    Personally I agree with the “use it or lose it” arguments. Stop hoarding your savings people !

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  • The basic conclusion is that this devaluation strategy won’t work. If it were that simple, it would be done every year by governments resetting their budgets.

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  • You cannot devalue all currencies at the same time because they are all measured in terms of each other. It’s zero sum. If a pound is worth a euro and you devalue them both by 30% then you still end up with a pound being worth a euro.

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  • Crunchy @ 64

    I know the average Joe would be no better off, but the average Joe would not care if they got a quick fix now of 30% wage rise and 30% house price increase. This maybe hyperthetical as it looks as though doom&gloom has come up with the answer.

    doom&gloom
    So the ‘gentlemans agreement’ to increase everything is a non starter then, and all currencies couldn’t be ‘repegged’?

    Stillthinking
    ”stop hoarding your savings”

    I’ll do a deal with you – halve house prices and I won’t !

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  • Paul

    I had stressed this would have to be a one off event.

    It couldn’t be done regularly as obviously that would create a total loss of faith in all currencies.

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  • @doom&gloom

    Was going to add my tuppence on this after thinking about it this afternoon. I was trying to work out how anyone could devalue when currencies aren’t pegged to anything and it was starting to hurt my little brain. The irony, or so it seems to me (with my limited economic knowledge), is that the pound has already depreciated by 30% against a basketful of currencies.

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  • phd

    my heads beginning to throb aswell now.

    I think our devaluation will effectively lead to alot of inflation although this may manifest itself as negating deflation if you like. ie cancelling each other out to a large extent.

    However I think the recent 30% devaluation against other currencies only helps our exporters. Due to the weight of deflation it doesn’t actually help with the debt level as wages and assett prices would need to increase to effectively reduce the percentage level of debt.

    I think we’ve overcooked it on the debt level front which is why I think an ‘overnight’ remedy such as this (if it were possible) could be implemented. I’m not sure a slower longer term solution will get us out of the mire.

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  • @str2007
    An increase in inflation would be my dubious guess at what’s going to happen – Darling said the other the day that he wasn’t concerned about deflation – so why the IR cuts? – other than to try and prevent house prices falling any further for a short period and calling a snap-election. I think the government’s obsession with protecting homeowners is foolish (not just for the fact that they don’t deserve special treatment) as they forget about the very large and significant proportion of the electorate who are being damaged by the IR policy – potential FTBs in their twenties and thirties (there must be a lot of them(us) around), anyone who’s redeemed their mortgage and resents seeing their savings eroded, ex-pats seeing their sterling pensions declining at a rapid rate. If inflation starts to spiral upwards there must be pressure to increase IRs (they can’t exactly get much lower) and how many BTLers would be in trouble with 10-15% rates (proper interest rates like I remember them)? The only thing I predict with any confidence is house prices falling a lot lower – I’m just confused about everything else – other than the fact we seem to be f*cked.

    Is there anyone left exporting anything these days?

    I’m pleased nobody’s mentioned stagflation otherwise my head would be really sore.

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  • phd

    Yes I expect house prices to still drop. That in itself will get BTLers into trouble (margin calls etc) never mind high interest rates.

    I hope the government don’t manage to take us lot down with the sinking ship. I’d like to think our actions of getting out of/staying out of the housing market should stand us in good stead. I have been surprised by recent events and such a large devaluation of sterling.

    What’s difficult about this whole thing (as you say) is that more intelligent people than I can’t make their minds up about the right stratergy. Gold for example – there is a completely split view on this site. Even Gold experts seem to disagree.

    I am rather hoping that my observations of the bubble and prudence would reward me rather better than not just having the worry of a huge mortgage. It appears at times that those with a big mortgage don’t bother worrying and in addition they have the full weight of the government behind them.

    Just hope the above doesn’t unfold.

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  • Alan, dazednconfused, spencer234, bill

    Not sure if you guys have passwords as I seemed to miss your posts and they’ve only recently appeared to me.

    If you don’t have passwords you can get them from the webmaster and post in real time, without a delay.

    Anyway thanks for the feedback.

    Hopefully the government can’t get this organised and our savings will be safe from that mode of attack.

    Keep an open mind though I’m sure the next stunt isn’t far away.

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  • No way am I spending my savings. I will not be conned or scared into spending cash which has been and always will be king. IN THE END!!
    Think about it. If houses were lets say 30% higher and savers hit, when will FTB’s be able to enter the market?
    BTL has ran it’s course now. It has no more room to move.

    What ever happens in the event to try and escape the mess we are in will end in tears.
    I am keeping my REAL money buying some oil putting my feet up and watching this comedy act unfold.

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  • str 2007 – To be clear, I do think this government will erode savings values because they are struggling to pay their own debt, foreign investors aren’t interested, and they have a huge spending splurge planned. So they will print money, and signs are they are going to get pretty desperate next year. There could be political motives for this too – rescue-Euro package before the next election.

    I’d consider putting some cash into gold as a hedge, but only if you can afford to see it’s value go down too. But the reason gold is a good hedge is because you can use it as a currency hedge as well because it’s priced in dollars. I’m up 30% in pounds even though gold isn’t that much higher than when I bought it – because sterling has tanked. And remember you get almost £10k in capital gains tax-free each year.

    I think this government doesn’t realise – yet – that savers are worth protecting. Probably because they all have very flash homes and losing half the value of them would be far more painful than protecting what they have in the bank. Call me cynical. Doesn’t mean they can keep property prices propped up – that’s about confidence.

    As someone else said, everything they’re doing is just going to make the pain deeper and longer.

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  • landofconfusion says:

    58. gardeniadotnet said…

    This is what’s happening already – with little if any success. When the direct lending starts, there’ll will be no ‘hope’ about it.

    But can they force banks (to which they hold a significant stake in) to lend out money? If they were to try I’m sure the EU would have something to say about it.

    Also the Japanese government didn’t do this, instead they spent on behalf of their populace by investing in government projects. That didn’t work and if “direct lending” would have, why did they not try it?

    I get the feeling we’re not seeing the whole picture here.

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  • Crunchy

    I am also working on the basis that Cash is King. (at least until house prices come off 1/3rd.)

    Agree BTL has run its course – in fact its totally overshot its course and is under attack from every angle now :- falling capital values, falling rents, lack of lending, (poss increased mortgage rates to this sector), priced out ftb’s able to afford own homes in a year or 2., economic migrants heading home, clamp down by HMRC, Wirting most definately on the wall

    Interesting to see you buying oil, that could be a good move, unlikely to go much lower I’d of thought.

    How do you buy oil as a matter of interest ?

    landof confusion

    Difficult to tell banks to fix balance sheets then say they must lend out at 2007 levels. Big mixed message going out there.

    If banks reduce LTV’s it has the self fulfilling effect of reducing house prices. Therefore they’re not interested in lending unless a significant deposit is in place, to cover the inevitable drop in house prices.

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  • 84. str 2007 said…

    Most local Brokers trade oil. I figure oil will go to around $80 barrel some time next year. I will set my profit target at $78.
    Oil as with gold I feel is not reflecting their true value. For an entry oil is much less risky. OPEC and russian supply tightening will win through I think.
    Owing to the low deposit returns offered by banks even if I am in oil longer it should still be worthwhile.

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  • This thread could go on and on and on ….. go though.

    I think I might look into that, just seen the new Honda on Top Gear tonight.

    Guess this was the Honda S2R1 has been on about (with the free energy thing).

    Seriously could have a big effect, don’t know if you saw it.

    The car runs on Hydrogen and creates it’s own electricity. Normal car with 136 bhp and will go for 200 miles between hydrogen fill ups which are done at a normal garage. The hydrogen is being sold at same price as petrol (you don’t say). Only bi-product is water.

    Could push oil down significantly.

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  • …. good though.

    Oh and the car has only 1 main moving part – so no real servicing,

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