Tuesday, Oct 20, 2009

Irish comparison

Telegraph: Irish house prices to fall 45pc as debt spiral looms

Price deflation in Ireland is running at 6.5%. If you were to assume that Ireland had a similar situation with us, similar enough to be comparable i.e. if the UK were in the Eurozone then we would also have 6.5% price deflation, and you also accept that the government cannot create real wealth. Then for ZIRP and QE to hold prices steady in the UK at a time of massive demand destruction must be equivalent to an annual 93.5 -> 100 rate of inflation, which is 7%. If you also guess this happened from 2008 then should the economy recover in late 2010 to 2011, prices will need to compensate by around 21% up. The government cannot hold to 2%, so the currency markets look reasonably accurate (around 20% devaluation).

Posted by stillthinking @ 09:56 AM (1287 views)
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1. stillthinking said...

The government cannot hold to a 2% inflation target if the underlying rate of inflation is 7%, because the required interest rates would collapse every mortgage in the country, quite aside from their own debt. Neatly, this will also remove the vast majority of negative equity.
As the exchange rate is already at this level, in comparison with the sound money policies of the Eurozone, then there is no possible anticipatory escape left. This is a fait accompli.

How much longer deflation will last who can know? I very much doubt that deflation will last as long as Japan's, as the UK runs twin deficits, and is pretty much entirely different.

Tuesday, October 20, 2009 10:06AM Report Comment

2. stillthinking said...

Unfortunately I made a basic error that 7% inflation overy three years equals 7+7+7 but it doesn't. Should be 1.07*1.07*1.07 but anyway.

Tuesday, October 20, 2009 10:24AM Report Comment

3. jack c said...

stillthinking - I think people will get the theme of your message - ties in nicely with the latest UK's public sector net borrowing figures.

Tuesday, October 20, 2009 10:26AM Report Comment

4. uncle tom said...

Ireland is becoming a bit of a test bed..

..deflation of -6.5% means that wages are falling much faster than people are paying off their mortgages, which in turn are showing massive levels of negative equity.

How long before there are mass defaults on mortgage payments?

Then there is the issue of tax revenues, which will continue to dwindle while the deficit balloons..

They voted for Lisbon against an implied, but un-written promise that the rest of europe will bail them out. Maybe europe could find a little help for a small country like Ireland, but how is that going to be squared with the other members of the PIIGS ?

Many questions, few answers.

- Is Ireland a foretaste of problems to come elsewhere..?

Tuesday, October 20, 2009 10:57AM Report Comment

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