Saturday, February 7, 2009

Interesting analogy about pushing easy credit

Why Economic Deflation Despite Inflationary Government Intervention

There was an article and posts yesterday about a central bank policy goal of pushing easy credit, this article has some analogies relating to that.

Posted by stillthinking @ 12:30 PM (1094 views)
Please complete the required fields.



9 thoughts on “Interesting analogy about pushing easy credit

  • stillthinking says:

    However, this article does kind of imply that the easy credit policy fails when people don’t want any more credit. Personally, I don’t, but one common factor in the media is that people are crying out for credit which is unavailable. I think you could argue this demand away by type, in that people with existing credit facilities want to roll them over (keep going basically) because unable to repay, representing a kind of demand to maintain an existing level of credit, but probably demand for genuinely new (not existing before) credit has collapsed because people don’t want to start new companies at the moment, FTBs don’t want to buy at the moment, and people don’t want car loans and suchlike.
    So quite reasonable from that to say that demand for -additional- easy credit has collapsed.

    Reply
    Please complete the required fields.



  • This is the reason why quantitative easing printing money will not work.

    Reply
    Please complete the required fields.



  • stillthinking says:

    I just had another thought on this.

    As we know there was no government surplus built up during the boom, so there is no cash on hand to spend on a stimulus, but kind of we are told that borrowing the money is equivalent because we will pay the borrowing back during a “recovery”.

    But on this idea, there is a -complete break- between a surplus fiscal stimulus, and a borrowed fiscal stimulus, because the borrowed stimulus is really the very last possible use of easy credit, and as such buys more time but does nothing to fix the underlying problem.

    This seems to be a different way of putting borrowed too much, excess money supply argument. But a conclusion amongst different countries would be that the first to recover will be the governments that maintained surpluses over the boom. Also another conclusion is that there will be no inflation, and the future really is drawn out and deflationary unless the UK gov. moves to debasement through printing.

    Reply
    Please complete the required fields.



  • ST – just posted a similar article which is worth a read. I think at the extremes inflationary policies misapplied (as seems to be happening here) ultimately create an environment that is indistinguishable from the thing they are trying to avert. Enough of a collapse has to happen before there can be a moving on. Collapse cannot be avoided and can only be deferred for so long

    Reply
    Please complete the required fields.



  • stillthinking says:

    hello bellwether, I looked at that post and there does seem to be more of a consensus on the economic blogs that we are suffering and will continue to suffer from excess money supply, rather than the mainstream view that we are approaching deflation because of a lack. I still have some faith in King and I think thats what he means when he says the UK is obliged to move in a direction totally opposite from long term goals.

    Reply
    Please complete the required fields.



  • I’m thinking that excess money means that supply has reached limits that cannot be productively expanded (actually that limit was reached years ago) and credit is now utterly deatched from real underlying wealth and capacity to pay. I don’t think it is possible to expand credit further for a variety of reasons both economic and psychological. The UK seems to me uniquely placed in this and no intervention will avoid a severe depression and a long term decline in asset values on sterling terms and more severe measured against other currencies.

    The UK will recover from this but only in after a economically it will be in the future a smaller and poorer place in global terms.

    The Prudent Bear has a good article on commercial real estate in US, I think our economy will express itself most profoundly in the collapse of commercial real estate which unlike banks will not be saved. Incredibly in my view a large commercial property company has yet to go bust. It is however a matter of time. I think there is opportunity in this. There is a gross over supply of office and retail space based on not just how far the economy had artifically expanded but further than that to the point that speculators thought the economy would expand.

    “With virtually no demand, rental income is plunging. With cap rates eroding and operating expenses going up, a perfect storm will hit mall developers in 2009. The negative feedback loop will accelerate as the year progresses and will spiral out of control by late 2009 and early 2010. The negative feedback loop will lead to major developer bankruptcies and ultimately to Ghost Malls, particularly in the outer suburbs. The positive feedback loop that got us here made people feel wealthy, smart and overconfident. It was awesome! The negative feedback loop is going to suck. The collapse of developers will result in more major write-offs by regional banks that financed their expansion.”

    Reply
    Please complete the required fields.



  • Well stated, bellw.

    My thinking is that we ( as a country) have been tripping on easy credit for years, and the increase in HPI has meant that as the rungs of the ‘ladder’ got spaced out, people came to believe they were personally ‘worth’ their ‘fortune’ (having ‘worked hard’).
    There needs to be a pecieved failure in this Ponzi Scheme great enough to evoke a Dunkirk spirit – or the last ounce of humanity will drain from us.
    …I won’t hold my breath though.

    Reply
    Please complete the required fields.



  • I’m still wavering on the deflation/inflation fence. My experience tells me that if the govt spends as much as they propose, and get involved in QE, this will result in inflation (possibly hyperinflation) in 2-3 years time. More money chasing same amounts of goods. Plus if pound goes into freefall, extra inflation that way too.

    BUT. What we are experiencing is out of my and pretty much anyone else alive’s experience (who’s old enough to remember what was happening in the 1930s anyway). We have no point of reference. Has there been such destruction of ‘wealth’ that no amount of money creation can counter it? Will deflation conquer all attempts to defeat it?

    Fortunately for me I am covered either way – I own property and land which covers me for inflation, and I have cash in the bank, which covers deflation (as long as the bank holds good, which is a moot point obviously). But if I had to come down on a particular side it would be inflation. The govt can run the presses 24/7/365, and will if they think it neccessary.

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>