Monday, March 30, 2009

A timely warning

Simon Carr: How to save? Go deep into the red

Be responsible. Rebuild your balance sheet and pay off as much debt as you can. Be a sucker. Because when we look into the past, we can see how they're going to get out of this mess in the future. They're going to increase public debt massively, then they'll print money to service it and use inflation to run the debt down. So what we want is enormous debts ourselves that inflation will degrade over the next decade. That's how Alistair Darling is recommending we do it. True, he isn't putting it quite in those terms, but his meaning is perfectly clear to those of a sceptical bent.

Posted by quiet guy @ 07:48 AM (2785 views)
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23 thoughts on “A timely warning

  • Sad, but true (see caveat below). The only problem is that those with large debts who cannot print money will be bankrupted by the massive rise in interest rates that is likely to lie between now and devaluation of debt…especially as there are now no unions to fight for wage increases. A lot of the middle class is going to be “reclassified” by this…always a good thing to keep the social pyramid in balance, init?

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  • Remortgage, take the money, buy a villa in some tropical paradise, salt the extra away in gold. Leave the UK and default. That’s the new pension plan.

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  • mountain goat says:

    Article is depressing but true

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  • This is hardly good press for our country’s flagship industry – finance.

    Harsh but fair.

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  • 2. guiriduro

    Yep, you got it.
    I said this about 3 months ago. You are spot on because if you do it big style you will not need banks anymore.

    I am not advocating this but merely pointing out what mad times we are living in. FAILIER, THE NEW SUCESS.

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  • little professor says:

    I’m getting increasingly sure that my hard-earned savings are going to be wiped out by high inflation, in order to save the debtors, who are the majority in this country.I’m tempted to splurge out on a new car on finance – or even, god forbid, buy a house – buying real assets with borrowed money is the way to go when the value of that borrowed money is going to be driven down to the floor.

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  • Oopps! SUCCESS ££££££££££££££

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  • 6. little professor

    Don’t panic this whole mess, taken in it’s entirety is completely self destructive. I am standing on the sidelines with invested cash.

    Smart money will be the best investment when exploiting this chaos from the outside, therefor I think one needs to have fluid capital!

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  • I’m just hoping that house prices clearly crash, before inflation kills my savings. I’ve got a fair amount in gold so hopefully won’t be too affected, but really don’t know what to do with the rest of it – I’m ready to buy a house, but not until the things are reasonably priced!

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  • Can someone help me here. I can’t see how inflation can rip if wages are low or decreasing along with outgoings and interest rates on the rise. Surely the economy and wages will have to soar to make this viable, which would mean a miracle turnaround in the economy

    All I can see in this senerio before an election is a whole lot of pain and pressure to hike interest rates. I don’t get it!

    Can someone explain how inflation can soar without it causing a blood bath?

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  • sold 2 rent 1 says:

    Inflation will only soar in food and energy and many things we import from asia too.
    House prices and stocks are still in a secular bear,

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  • @10. inflation can happen as “cost push” and/or “demand pull”. If costs actually fall (as they are expected to) the only way to get positive inflation is that demand pulls to overcompensate – that’s the Darling/Brown theory in very short terms. If – as I think is possible – we end up in a very small phase of cost reduction but soon go to increases – especially in import-led (as we have no more meaningful UK manufacturing in the areas people want goods) due to the expensive foreign currency, we’ll soon end up with costs increasing. Just look at your council tax bills, Fords price increases, etc

    Take this cost push plus as well as all this money planned at G20 to be slopping around. —> basically a risk of much higher inflation than Darlings “planned” inflation.

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  • I think the inflationary route is extremely fraught.

    Firstly it erodes the value of savings, but by the same token, won’t make housing more affordable relative to wages.

    Wage increases always lag so there will be a catch up game being played where inflation increases, and workers will ask for wage increases even though the economy is in recession – good luck getting the inflation-beating pay rise under those circumstances.

    This will have the consequences of removing the incentive to save (thereby wrecking banks’ balance sheets even further) and making housing even less affordable and sending house prices plummeting further.

    Couple this with the Bank of England’s typically pollyannaish attitude towards inflation where they continue to make excuses for not raising rates, and you get even further massive currency flight and bond yields plummeting, which will have the UK running to the IMF for a bailout quicker than you can say ‘stagflation’.

    Lastly, if the Bank of England lets inflation rip as a consequence of QE, their credibility will be forever destroyed – the BoE will never be able to pass off inflation as an unavoidable side-effect of capitalist democracy ever again. Because they will have deliberately created it and everyone will know it.

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  • @10. crunchy:

    s2r1 is correct see this article:
    http://www.moneyweek.com/news-and-charts/economics/its-inflation-you-should-fear-not-deflation-14684.aspx

    Debasing sterling will make all imports and staples expensive but anything requiring finance “cheap” to cash buyers as interest rates are going to soar. It isn’t a miracle turnaround in the economy that will cause inflation it will be a run on sterling and the increase in interest rates required for gilts to sell (as stirling’s value falls) to finance the massive deficit spending the government has planned.

    Buy gold.

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  • @13: Well said. But referring to “This will have the consequences of removing the incentive to save ”

    I’d add: “in this country”.

    I expect banks in other countries that are not running the UK plans to find a flight of capital to them. This will help cause a currency crisis as people bale out of Sterling —> IMF.

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  • The article is spot on and so are many of the comments here. Labour, the BoE and their propagandists in the media have deliberately talked up the possibility of deflation (the only deflation they are worried about is in house prices) in order to justify quantitative easing the purpose of which is to produce so much new money that inflation will erode the debts away. When Mervyn King said recently that savers were going to be sacrificed I don’t think he was meaning low interest rates but referring to printing vast amounts of money and trashing the currency. Maybe the Queen was worried about her cash when she called him in to see her.

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  • This article is correct – However seen it before myself we will have a 2 or 3 year run of pain – by that i see IRs at 8 or 9% ( with inflation ) before settling probaly still quite high at say 7-8% – disaster if you have a big mortgage etc but by then all the smart money will have moved back to shares leaving the small man to suffer and worry about his job.

    Long term it will be ok but short term clossal pain

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  • happy mondays says:

    Will they not devalue the pound by doing this? And was nt one of the G20 issue’s, no purposly devaluing currencies?

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  • At the end of the day the government is trying to pass all the banking losses on to holders of Sterling this includes foreigners. If the government continues with this policy without raising interest rates there will be a run on the pound end of story.

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  • george monsoon says:

    I just wish I understood what you lot are talking about, it sounds like a rather important issue.

    Myself I am in the position where I have a fairly secure job (as far a secure goes these days, and no I am not a civil servant)
    but my chances of a wage increase in the near future are extremely remote, so I will see my earnings fall against the spiralling inflation, with no chance of saving, not much chance of borrowing and almost no chance of continuing to pay my bills, so it sounds Like I am up the creek without a paddle. I and the Millions like it will not sit back and let this happen, so I can see some extreme demonstrations of our disgust manifesting in marches, rioting and general civil unrest. What I ask are the government going to do when this happens, because if what you are saying comes true, then this is a natural consequence.

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  • letthemfall says:

    I don’t think we are going to see inflation – at least not for a while. For this to happen either people have to start buying again, unlikely in the face of rising unemployment, or the pound has to fall against the currencies of our main sources of imports, which I don’t think is by any means certain. Prices overall will tend to decline, though as we’ve seen this will be uneven, and might not happen with food and utilities. House prices will surely continue to fall. Even if we get inflation, house prices will fall, perhaps more rapidly given what higher interest rates will do.

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  • shipbuilder says:

    Whether inflation can happen or not without rising wages, it cannot erode debt away without those rising wages.

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  • “I just wish I understood what you lot are talking about”

    You’re in good company George. Personally, I believe that currency devaluation will lead to inflation but I don’t expect this to be acknowledegd in the official CPI/RPI figures. The deflation/inflation debate seems to attract many conflicting views and I’m happy to acknowledge that I may be wrong. Basically, in order to start saving and balance personal and national budgest, we will be required to cut our standard of living – not a popular position for politicians.

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