Thursday, Oct 01, 2009

According to the article, we have a choice: More QE or higher interest rates

Telegraph: Britain's £215bn-a-year funding gap the worst in the world, says IMF

Fortunately for HPC'ers, we have no choice. We will soon be forced to choose higher interest rates. The government desperately wants to keep interest rates low but the resulting loss of foreign investment will destroy us.
CATCH 22: More QE would ultimately lead to higher interest rates and the loss of foreign investment

Posted by flashman @ 07:42 AM (2595 views)
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47 Comments

1. flashman said...

There are two possible scenarios:

1. Unlikely: The world sinks back into a serious recession (complete with deflation) and interest rates stay at close to zero. In this situation unemployment would reach almost 4 million and house prices would sink by at least another 30%

2. More likely: The world limps into a recovery and our funding gap causes us to dramatically increase interest rates. In this situation repossessions would soar and house prices would fall by at least another 30%.

We’ve won. The game is over.

Thursday, October 1, 2009 08:41AM Report Comment
 

2. mrmickey said...

I cannot see any other option for this country apart from the hyperinflation route, how else are we going to meet our massive liabilities.

Thursday, October 1, 2009 09:07AM Report Comment
 

3. happy mondays said...

Nice positive attitude flash, i like the outcome of these scenarios (house price wise) What ever happens now, i have lost so much faith in this country, how we can be exploited & manipulated by Government & the money men..

"It's Just a Ride"

Thursday, October 1, 2009 09:08AM Report Comment
 

4. britishblue said...

The spring bounce will turn out to be one of the worst things to hit the estate agents market in its history.

Just as their customers (sellers) where getting used to taking advice on lower prices, the prices go up. The second leg downwards last time was 5 years and we were nowhere near in the mess we are in now.

I amtempted to agree with the Flashmans second scenario. What I am unsure is of how the old or incoming government will treat greedy banks who are widening the gap between what they borrow and lend at with mortages. Because we could see a rise in base rates to 5% which by historical standards isn't a nightmare, but with mortgages at 10%.

Thursday, October 1, 2009 09:10AM Report Comment
 

5. uncle tom said...

Flashman,

While many developed nations may struggle to maintain positive GDP over the next few years, it has to remembered that close to half of the world's population are living in countries were GDP is steaming ahead, and has only slowed, rather than reversed, during the current upset.

- Global rebalancing is finally on the cards, and global GDP will probably resume an upward path fairly soon.

This piece includes some interesting stats. While I knew the UK position was pretty dire, its significance depended to a large degree on our position relative to the US and EU.

That is much worse than I expected, especially relative to the US; and if accurate, paints a grim picture.

Either interest rates have to rise sharply, or the BoE's QE program may have to accelerate as funds are withdrawn. That, of course, is the Zimbabwe scenario..

Thursday, October 1, 2009 09:16AM Report Comment
 

6. smugdog said...

MrMickey, does your hyperinflation scenario include hyperinflation of house prices?

Thursday, October 1, 2009 09:17AM Report Comment
 

7. uncle tom said...

I think mortgage rates at 10% is a pretty modest outlook. But the number who would then find themselves unable to maintain payments would be immense.

Moreover, the willingness to take on heavy debt would simply evaporate..

Thursday, October 1, 2009 09:20AM Report Comment
 

8. uncle tom said...

Smugdog,

Your house might be worth ten times more in five years time - but it might cost two thousand quid to fill the tank of your car..

Thursday, October 1, 2009 09:24AM Report Comment
 

9. flashman said...

mrmickey @2: Same way we always meet them. Sell some assets, spend less. We've been here before. This time, it’s arguably not as bad (IMF being called in or in the aftermath of WW2), or arguably a little worse, depending on your calculation method.

There is an almost non-existent risk of hyperinflation for a thousand reasons I'm too lazy to list.

Thursday, October 1, 2009 09:27AM Report Comment
 

10. smugdog said...

I see UT, but hasn't that left one's savings to evaporate into a pittance. Perhaps buy a property to safeguard against?

Thursday, October 1, 2009 09:34AM Report Comment
 

11. flashman said...

Yes smugdog, we will all buy property come the glorious collapse. Uncle tom was not expressing a belief in hyperinflation as a likely outcome. He was pointing out that inflation only makes it appear than your assets have appreciated in value. Hyperinflation would be accompanied by massive unemployment and consequently house prices would collapse in real terms. It wouldn’t be much of a hedge if you couldn’t afford to eat or heat the place

Thursday, October 1, 2009 09:44AM Report Comment
 

12. uncle tom said...

There is an almost non-existent risk of hyperinflation for a thousand reasons I'm too lazy to list.

I'd say there is a significant risk of that happening, if govt attempts to keep interest rates too low for too long.

It centres on a cycle of cash withdrawal from overseas investors (due to loss of confidence) leading to a sterling crisis, a sudden need to raise interest rates to stem the flow - but failing to work, followed by a rush of debt defaults and write-downs.

The need to make dramatic and sudden cuts to public sector spending leading to further unemployment, QE running white hot as sterling implodes, and UK investors try to export their savings into other currencies.

Imports suddenly start costing ten times as much, food and fuel prices rocket and those left in employment strike for better pay..

..that's hyper-inflation for you - and it could happen quite easily..

Thursday, October 1, 2009 09:47AM Report Comment
 

13. uncle tom said...

Smugdog,

Right now, the last thing you want to spend your savings on is a house..

Thursday, October 1, 2009 09:50AM Report Comment
 

14. flashman said...

uncle tom: Your hyperinflation scenario hinges on our government keeping interest rates low for too long. Ultimately the markets will dictate higher interest rates. Japan was almost unique in its' ability to keep interest rates low ... but we are in no position to do so.

The BOE never says anything for no reason. Their recent "mock shock" at the increase in house prices was no accidental outburst. The path is being readied

Thursday, October 1, 2009 09:56AM Report Comment
 

15. timmy t said...

This hyperinflation/deflation scenario has divided many on this site for a long time. I am inclined to agree with Flashman on this, I just struggle to see how we are in a position to keep IR's down much longer, despite GB's desire to do so.

UT, your scenario also seems to rely on IR's being raised to stem the flow of cash leaving the country but this failing to work but you don't say why... could you expand?

Thursday, October 1, 2009 10:03AM Report Comment
 

16. uncle tom said...

flashman,

I'm a bit wary about the 'mock shock' reported by the Mail - the meeting was confidential, so those participating are unable to confirm or deny anything a journalist might invent.

The BoE does drop hints from time to time, when they think the markets are running wide of the mark; but they don't use the Daily Mail as their mouthpiece - FT maybe, a formal speech, or an appearance of Merv at a parliamentary committee - but not the tabloids...

Thursday, October 1, 2009 10:05AM Report Comment
 

17. uncle tom said...

timmy,

Just going on historical precedent - the sudden realisation by government that IR's are too low, and are causing a critical cash exodus. Interest rate rises can be made quickly - anything else is too slow in a crisis.

My point is that if they leave it too late, that remedy won't work.

Thursday, October 1, 2009 10:12AM Report Comment
 

18. timmy t said...

UT - they've been too low for twelve years so it shouldn't be too sudden a realisation! I take your point though - thanks.

Thursday, October 1, 2009 10:14AM Report Comment
 

19. timmy t said...

UT - why not use the tabloids to drop hints. Those that would be worst affected by an IR rise are more likely to read them than the FT. Perhaps they are encouraging people to remortgage and fix now before its too late. Put that message in the FT and it would miss those that need to read it the most.

Thursday, October 1, 2009 10:19AM Report Comment
 

20. uncle tom said...

When the BoE drop hints, the message is normally intended for the City. If it has significance to the wider community, the BoE might suggest to the BBC and other media that a speech or committee appearance is going to be newsworthy, but they wouldn't trust the tabloids to deliver the core message..

..they're not that stupid!

Thursday, October 1, 2009 10:26AM Report Comment
 

21. flashman said...

uncle tom: Spence Dale recently said in a public speech:

“The Bank's money-printing programme could lead to 'unwarranted increases in some asset prices that could prove costly to rectify'."

The above public comment renders the Daily Mails report (below), quite plausible:

"The Mail understands that chief economist Spencer Dale yesterday told economists the strength in property values had been surprising. Officials would start to get worried if the revival gets out of hand, he said, although we are not there yet”.


Spencer Dale has not issued a rebuttal, which he most certainly would if he had been misquoted as a result of a leak from a private meeting. That tells you all you need to know.

The world has moved on and officials no longer view the Times as their only outlet

Thursday, October 1, 2009 10:27AM Report Comment
 

22. refusetobuy said...

If QE continues then there is no reason to raise rates. BoE continues to buy government debt with printed money. That way lies hyperinflation.

Other than that, I can't see a hyperinflation scenario.

Thursday, October 1, 2009 10:29AM Report Comment
 

23. mrmickey said...

Your all forgetting the government wants inflation it just doesn't want to much it's a fine balancing act which can go very wrong. Raising interest rates much higher than they are now will destroy the economy. At the same time it needs to meet it's massive liabilitys with more borrowing or more QE, it's a nasty very sharp knife edge.

Thursday, October 1, 2009 10:37AM Report Comment
 

24. flashman said...

refusetobuy: spot on as usual. It's an either/or scenario

Thursday, October 1, 2009 10:44AM Report Comment
 

25. uncle tom said...

Flashman,

When a paper uses the word 'understands' - it means they are guessing. It also means they can ignore any protests of having misquoted someone..

Dale's speech on Sept 24th was quite long, and the word 'property' is not used once. He does spend some time discussing various possible consequences of Bank policy (as he usually does) in an academic context.

I don't think he was packed off to Exeter to deliver a message to the nation..!

Thursday, October 1, 2009 10:48AM Report Comment
 

26. house said...

Thank you everyone, carry on the good work Inflation was a worry for me but the real worry was high inflation. I agree with the camp that says inflation may not be to much of a problem even though the QE is in full swing. The only way inflation becomes a problem is when the employers are happy paying higher wages as demanded by their employees. But many businesses will not be able to meet the employees demand as the businesses are not able to pass on the increase in wage costs.

Flashman please list the reasons, it would be very useful to all of us. By the way are you an economist or similar financial profession.

Thursday, October 1, 2009 11:06AM Report Comment
 

27. flashman said...

uncle tom: We'll have to agree to disagree on this one.

It's not my understanding that "understand" means fabricated guess in newspaper terms.

The BOE are always very quick to issue a rebuttal when they have been misquoted or misconstrued. They have not issued a rebuttal

From the public speech: "unwarranted increases in some asset prices that could prove costly to rectify'."

What assets do you suppose he was talking about? He can't rectify commodity prices because they are set globally. He can't rectify share prices because most of the FTSE members have global interests and local interest rates will not overly affect them. I can only think of one asset that would react to, and be rectified by, his interest rate tool.

He doesn’t want to increase interest rates so he is issuing coded messages to calm down any irrational purchases. It’s right out of the FED playbook

Thursday, October 1, 2009 11:13AM Report Comment
 

28. stillthinking said...

But they don't say specifically.
Is it a) that the global economy is so bad that the savings of the surplus countries won't be sufficient to cover US/UK borrowing requirements. or b) that our situation is so grim that although there are sufficient savings they are better placed investing in emerging countries.

The surplus countries have to sop up their savings somehow but there seems a big difference between a move to insufficient global saving for western government's spending plans and just a choice of investment destination.

Thursday, October 1, 2009 11:17AM Report Comment
 

29. flashman said...

house: I am an analyst and I work for a currency outfit in the city. I was bluffing with my thousand reasons. There are many other on this site who can more eloquently tell you why there will be no hyperinflation, so I will stick to a few reasons.

1. If we did not have QE, we would already be suffering from serious deflation. We can simply turn off the QE tap

2. There are many asset classes that are currently over-valued but are being propped up by QE. If we turned off the QE tap, these assets would fall in value and any fledgling inflation would be annihilated.

3. We currently have record low interest rates but despite this, inflation is under target. Imagine what would happen if we raised interest rates

4. There is no pressure on wages. If anything there is downward pressure on wages

Thursday, October 1, 2009 11:25AM Report Comment
 

30. Steve T said...

From the above, Options 1. You carry on printing money -> hyper inflation. 2. Jack up interest rates -> large scale repossessions, personal bankrupcies. There is a third option. The government takes steps to balance its budget. I.e. reduce public spending to affordable levels. The Irish having started this a year ago now appear to realise that you can't spend what you don't have. It is the only way out.

Thursday, October 1, 2009 11:32AM Report Comment
 

31. letthemfall said...

I'm not a student of hyperinflation but it seems to me it usually occurs in countries where there has been serious destruction to parts of the economy. So Germany, damaged by war and punitive reparations, and consequently flooding their economy with money, had hyperinflation. Zimbabwe has destroyed its means of production, especially agriculture, by terror. Nothing like is happening here. Even QE is not currently flooding our economy with money. It's staying with the banks.

Thursday, October 1, 2009 12:01PM Report Comment
 

32. mountain goat said...

UT and Flashman thanks for the quality debate above. I agree with the points made on global rebalancing and the unlikelihood of sterling collapse and hyperinflation. I heard the global bailouts so far for the past 12 months amount to $2000 per person on the planet. Imagine the deflation we would be in without this. This support for the ailing global economy can be withdrawn slowly or quickly if inflation rises rapidly. We in the UK are set to get a smaller piece of the global wealth pie as the years go by. Is this due to financial malpractice or just the unavoidable result of youthful developing nations being able to out-compete us for wages since they are starting with so much less than we take for granted? Still, right now, would you rather live in the UK or China/India/Brazil?

Thursday, October 1, 2009 12:51PM Report Comment
 

33. house said...

@29, Flashman, thank you very much. You must see the reaction on the currency market with regards to QE. At present it would appear that the currency market is happy to let QE ride as the bank is buying the "Toxic Assets" from the banks' and replacing them with liquid currency. How much of the toxic asset is classed as ir-recoverable will determine the actual cost of QE. Do you agree or am I making simple assumptions ?

Thursday, October 1, 2009 12:56PM Report Comment
 

34. stillthinking said...

surely the system isn't being flooded with money, because the banks are not extending loans from qe. The only increased debt reflation that is currently being run up is from government and that comes to an end next year, which is directed to consumption not healthy investment anyway. which just comes back to why would interest rates rise from a funding crunch. i.e. do the IMF expect the global economy to shrink sufficient that global savings no longer match global government borrowing demands ? or just that specifically the UK is so written off that despite savings being available we have to match expected returns from emerging countries with higher domestic interest rates?

Chinese et al savings must go somewhere after all. I think the second is most likely. The UK suffers from a comparative investment problem, there is relatively little gain investing in industry when the economy is going down, and should the economy bottom out, there is comparatively little gain investing in industry when returns from property investment will be much higher. Hence nobody will invest in the UK real economy and the savings are more profitably directed to emerging countries with growing demand, as opposed to the UK which must shrink demand as part of rebalancing. Toyota after all did not base car manufacturing in the UK to access European markets, although that was certainly a bonus, they did so because of the high demand for cars in the UK. Now of necessity there is less demand and less reason to base in the UK.

So the future looks like internal deflation with higher interest rates on a collapsed pound, essentially decoupling from the global economy, until UK production finds an acceptable price abroad.

Thursday, October 1, 2009 01:55PM Report Comment
 

35. crunchy said...

I will keep it short and sweet.

HYPERINFLATION, FOOD SHORTAGES.

I have never changed my stance and await the day coming soon when I can say I told you so!

Thursday, October 1, 2009 02:27PM Report Comment
 

36. This comment has been removed as it was found to be in breach of our Blog Policies.

 

37. This comment has been removed as it was found to be in breach of our Blog Policies.

 

38. str 2007 said...

What's this thread got to do with me Crunchy ?

Thursday, October 1, 2009 03:34PM Report Comment
 

39. crunchy said...

Titanic I thought you were bigger than str 2007. Oh well!

What will be will be.

You could not have made sense of this bubble and placed all the reasons into neat little boxes before it happened.

Hyperinflation will be no different. Buying tinned food now I see akin almost to buying a house years ago.

I hope it is not GM you are buying. That would be defeating the point.

On another note. Rather a spelling mistake in a sentence of truth than perfectly written BullShip.

Thursday, October 1, 2009 03:36PM Report Comment
 

40. str 2007 said...

That's impossible, how did I reply to a post you'd already made Crunchy and end up above it ?

Thursday, October 1, 2009 03:45PM Report Comment
 

41. str 2007 said...

Maybe, just maybe I'm psychic.

Thursday, October 1, 2009 03:47PM Report Comment
 

42. This comment has been removed as it was found to be in breach of our Blog Policies.

 

43. Vacuouspolitician said...

"I am an analyst and I work for a currency outfit in the city. I was bluffing with my thousand reasons."

Yep sums you up perfectly. A W






lol. Sums you up perfectly. Is it no wonder

Thursday, October 1, 2009 10:28PM Report Comment
 

44. Vacuouspolitician said...

Oh thanks to all who PM me a while back. Yes I fully understand why you don't post here anymore or don't feel inclined to express your views. I feel exactly the same as you.

Thursday, October 1, 2009 10:39PM Report Comment
 

45. Vacuouspolitician said...

There is also a foul stench of greed and schadenfraude that pervades certain people's views on this site.

Thursday, October 1, 2009 10:46PM Report Comment
 

46. mr g said...

TC @ 36

Have you an alternative strategy for when your tins reach their use by date?

Thursday, October 1, 2009 11:32PM Report Comment
 

47. Tins said...

Last 50 years

Monday, October 5, 2009 06:47PM Report Comment
 

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