Monday, Dec 21, 2009

The sooner the better

Reuters: Rates set to rise early next year

LONDON (Reuters) - Britain faces a long road to recovery and growth will be modest in 2010, but that will not prevent the Bank of England from raising interest rates early next year, according to the Confederation of British Industry.
In its latest quarterly economic forecast, the lobby group said it reckoned the BoE will start raising interest rates from their record low of 0.5 percent from next spring to reach 2 percent by the end of the year.

Posted by waitingtobuy @ 09:30 PM (3073 views)
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44 Comments

1. devo said...

QE and ZIRP are proving to be an effective life-support mechanism.

Do you really think the global family will request it is turned off?

Monday, December 21, 2009 10:04PM Report Comment
 

2. devo said...

By the way, can anyone explain the implications of this extraordinary graph?



http://4.bp.blogspot.com/_nSTO-vZpSgc/Sy6yw1686XI/AAAAAAAAHes/xxZrKXS_DZ4/s1600-h/excess+reserves.png

Monday, December 21, 2009 10:15PM Report Comment
 

3. devo said...

also available here...



http://research.stlouisfed.org/fred2/data/WRESBAL_Max_630_378.png

Monday, December 21, 2009 10:21PM Report Comment
 

4. fallingbuzzard said...

I can explain it. Its wrong. The right data are available here: http://www.federalreserve.gov/releases/h41/

Monday, December 21, 2009 10:41PM Report Comment
 

5. devo said...

not quite the cutting edge analysis i was looking for

where are you 51ck?

Monday, December 21, 2009 10:48PM Report Comment
 

6. devo said...

fallingbuzzard,

where's the emotional intelligence?

where's the awareness of your audience?

what's wrong with above chart?

we want (need?) to know.

Monday, December 21, 2009 11:00PM Report Comment
 

7. devo said...

no one knows

Monday, December 21, 2009 11:12PM Report Comment
 

8. cynicalsoothsayer said...

Reserve balances with Federal Reserve Banks are the difference between "total factors supplying reserve funds" and "total factors, other than reserve balances, absorbing reserve funds." This item includes balances at the Federal Reserve of all depository institutions that are used to satisfy reserve requirements and balances held in excess of balance requirements. It excludes reserves held in the form of cash in bank vaults, and excludes service-related deposits

simples

Monday, December 21, 2009 11:21PM Report Comment
 

9. fallingbuzzard said...

Here is the relevant cutting analysis picture. Enjoy and act accordingly.

http://research.stlouisfed.org/fred2/data/REQRESNS_Max_630_378.png

Monday, December 21, 2009 11:25PM Report Comment
 

10. devo said...

cynicalsoothsayer,

not simples

why the obfuscation?

what are you afraid of?

can i not handle the truth?

try me...

Monday, December 21, 2009 11:27PM Report Comment
 

11. devo said...

9. fallingbuzzard said ..Enjoy and act accordingly

i'm afraid you're going to have to spell it out for us mate.

I smell bullsh!t

http://research.stlouisfed.org/fred2/data/REQRESNS_Max_630_378.png

Monday, December 21, 2009 11:33PM Report Comment
 

12. fallingbuzzard said...

I am sure you will offer your further opinion. Moo

Monday, December 21, 2009 11:52PM Report Comment
 

13. crunchy said...

11. devo

I think your right, There is so much going on behind the scenes right now and I would not trust any chart I see. Particularly one connected

to the Federal Reserve. The big hope is that Ron Paul gets that long overdue audit. This is the only way you will get an accurate answer

to your question methinks.

Tuesday, December 22, 2009 12:00AM Report Comment
 

14. devo said...

@ falling buzzard

you don't know

Tuesday, December 22, 2009 12:01AM Report Comment
 

15. fallingbuzzard said...

@devo, why do you care?

Tuesday, December 22, 2009 12:03AM Report Comment
 

16. devo said...

15. fallingbuzzard said... @devo, why do you care?

because i have kids

Tuesday, December 22, 2009 12:05AM Report Comment
 

17. fallingbuzzard said...

I see, me too. The chart in post 3 is but one chart and the one that the bullsh1tters always present. I never would but have on many occasions been called that. The one on the link below is more to the point since its tells us how fast money in the US economy is moving, far more relevant than pointing to the volume of money out there, and shows just how futile QE is - not that Japan hasn't already demonstrated that conclusively. Over the boom years 1.6 to 1.8, then the crash, no-one wanted to lend, down to 0.9. Then the trend downwards during 2009 as the volume of money increased and even as the US exits recession. There is a train of thought that increasing volume slows velocity.

Then the BSers say that "when" velocity comes back, there will be high inflation or hyperinflation? What they never explain is why high velocity will come back. I think its "if" and "how much" not "when". I hold the view that it won't come back until interest rates rise and thats all I care about really because until it does come back corporate America and Britain is in real trouble because its businesses are underinvesting. The longer they hold down interest rates after the economies turn upwards, the more there will be underinvestment at the bottom of the cycle which kills long term growth. Something I am also interested in. And when it comes back, where will it go to? 1, 2, 3, I don't know but my suspicion is that at best it will be reined in if it gets to the 1.6 to 1.8 range because everyone now knows that this was unsustainable. I even have a colleague who says trend should put it just above 1 in a real world (1985-2000 run forward, with 2000-2008 being a bubble) although I don't trust anyone that talks about long term trend lines.

http://research.stlouisfed.org/fred2/series/MULT

I believe that the problem central banks face is that they can't influence velocity, only volume, so the system that they believe they are in control of actually makes its own decisions. They just react to it, by creating money or by increasing/decreasing the price.

What do you think? Do you think volume of money is more important or the speed it moves?

Tuesday, December 22, 2009 12:59AM Report Comment
 

18. devo said...

@ fallingbuzzard said...

thanks

i find it hard to get my head round the volume and velocity of money

i guess that's how it's supposed to be

It seems to me that financial knowledge is the new paradigm

I'm a late adopter, it would appear

Tuesday, December 22, 2009 01:18AM Report Comment
 

19. devo said...

@ fallingbuzzard

So, you think interest rates will rise.

I think they won't.

I think QE will continue.

You think it won't.

How much would you be prepared to bet on it, at what odds and over what timescale?

Tuesday, December 22, 2009 01:33AM Report Comment
 

20. fallingbuzzard said...

Two million over 3 years, maybe 5 years. I know institutions more than happy to put billions on a low growth, high interest rate outcome for 10 years and their liabilities are inflation linked! Maybe they are fools but they are also the ones that have quite a big say in the velocity of money. I also know a government that pays 4% interest on its debt, a quarter of which is inflation linked, and with all its hidden liabilities being inflation linked. Now they almost certainly are fools but they also have a path for future inflation in mind.

It is simple. There is "money" out there and it can be recycled so money times, so long as everyone makes payments on time or with the expected default rate. Under those circumstances the system remains stable. When the circumstances change (people don't make repayments), the lender doesn't want to recycle the remainder. Thats what has happened. Have things changed? No, not here, not in the US, but we have become fearful based on empirical proof - it (inflation) happened last time so will happen again.

I do think QE might continue post election for the simple reason that velocity is so low and there is no lever to increase it so one could push up volume instead. In fact, the DT yesterday is Osborne's first suggestion that he will continue QE - surprised me. A question to ask at the election debates? Answer: well that's up to the BOE. Follow-up: Who's in charge? Mervyn King?

QE continuing does not mean that the value of money is eroded but it does store up the potential for future inflation, interest rate rises and real terms asset depreciation, but potential is not always realised. Its equally possible that radical public sector debt reduction will get lending going at low interest rates or that higher interest rates with high PS borrowing will be enough to get lending going. I suspect the latter would work but not be pursued. Either way, there will be a big time lag until lending actually gets going, not months but years "if" it gets going again.

As far as I can see, and I might be blind, we're tied into a low inflation future, meaning low investment, low salary inflation. A higher tax future meaning lower income. Higher interest rates on debt meaning lower disposable income and living standards. Probably a comparable value currency in my view. Unless the rule book is smashed. Unlikely but possible.

Tuesday, December 22, 2009 02:38AM Report Comment
 

21. devo said...

20. fallingbuzzard said... Unless the rule book is smashed. Unlikely but possible.

Unlikely?... it has happened, my friend.

Alas, I lack the financial terminology.

I will leave it for others to explain.

(It won't be here, I suspect)

Tuesday, December 22, 2009 02:46AM Report Comment
 

22. devo said...

I've had to crack another bottle for this, and I doubt it's worth it...

From a UK perspective...

We are between a rock and a hard place (excuse the cliché)...

the government has nothing left to give
the public sector has nothing left to give
the private sector has nothing left to give
the consumer has nothing left to give.

tell me; where does the growth come from?

Tuesday, December 22, 2009 02:57AM Report Comment
 

23. fallingbuzzard said...

The growth comes from nowhere. Why do you need growth?

Tuesday, December 22, 2009 03:02AM Report Comment
 

24. fallingbuzzard said...

Or you make a war, but they don't even seem capable of orchestrating a proper war requiring the level of stimulus that would create the inflation, expecially when you just got the Nobel peace prize

Tuesday, December 22, 2009 03:05AM Report Comment
 

25. devo said...

23. fallingbuzzard said... Why do you need growth?

have you thought that through?

Tuesday, December 22, 2009 03:08AM Report Comment
 

26. devo said...

24. fallingbuzzard said.. especially when you just got the Nobel peace prize

Who did?

Do you know anybody who took that seriously?

Tuesday, December 22, 2009 03:10AM Report Comment
 

27. devo said...

24. fallingbuzzard said... Or you make a war, but they don't even seem capable of orchestrating a proper war...

Can you point out, as a fellow parent, that you meant that as an ironic comment?

Tuesday, December 22, 2009 03:23AM Report Comment
 

28. fallingbuzzard said...

Yes, I have thought the why do you need growth through very thoroughly and either way, inflation or not, the country won't get real growth because its less productive than other countries and you only change that through private sector investment but you can't invest without lending. The public sector may not be cut but it never yields productive growth so it has eventually to wither or to be transferred to the private sector. I don't believe that the UK will see any real terms growth at all for the next Parliamentary period. Thats well down on other views but I have not found a view with any substance so far. Faith is the only rationale out there because faith and the ingenuity of British people will override all other economic and social factors. Yes, about 30-50 years ago.

Someone took it. I don't take the Nobel seriously but I do know people who do take it seriously and really believe it. Even a war could be considered to be a humanitarian act nowadays.

Tuesday, December 22, 2009 03:25AM Report Comment
 

29. fallingbuzzard said...

No irony, thats straight.

Tuesday, December 22, 2009 03:31AM Report Comment
 

30. devo said...

Faith is the only rationale out there because faith and the ingenuity of British people will override all other economic and social factors.

Faith in what?

Don't look for leadership from our politicians; from our religious leaders; from our monarchy; they are all tarred with the the same corporate brush.

We need change: and we will get get change, whether we want it or not.

Tuesday, December 22, 2009 03:35AM Report Comment
 

31. devo said...

just imagine for a second.....

your future as you would like it to be..

NOW THINK

who wants that future that you imagine for yourself ?

Gordon Brown and the Labour Party.... Nooooo........
David Cameron and the Conservative Party?.. Nooooo

Any other party you care to mention?.... Nooooo..

Vote shipbuilder.

I'm serious.

Tuesday, December 22, 2009 04:04AM Report Comment
 

32. hpwatcher said...

(QE and ZIRP are proving to be an effective life-support mechanism.

Do you really think the global family will request it is turned off?)i

Interest rates SHOULD rise, but I just don't think anybody has got the balls to do it. The public simply don't like high interest rates............

Tuesday, December 22, 2009 06:02AM Report Comment
 

33. drewster said...

Devo,

In response to your question at #2, read this:

Mish's: Fictional Reserve Lending And The Myth Of Excess Reserves
Here is a current chart that shows what everyone is concerned about: [Your graph, devo, from post #3]
The chart shows an unprecedented amount of excess reserves, almost $1.2 trillion.
According to Money Multiplier Theory (MMT) and Fractional Reserve Lending, this amount may be lent out as much as 10 times over and when it does, massive inflation will result.
However, Money Multiplier Theory Is Wrong. Here are five reasons why: ......

Tuesday, December 22, 2009 06:55AM Report Comment
 

34. hpwatcher said...

Mish's: Fictional Reserve Lending And The Myth Of Excess Reserves
Here is a current chart that shows what everyone is concerned about: [Your graph, devo, from post #3]
The chart shows an unprecedented amount of excess reserves, almost $1.2 trillion.
According to Money Multiplier Theory (MMT) and Fractional Reserve Lending, this amount may be lent out as much as 10 times over and when it does, massive inflation will result.
However, Money Multiplier Theory Is Wrong. Here are five reasons why: ......


Maybe in parts of the UK, but in the UK prices aren't declining, things are just getting more expensive......

Tuesday, December 22, 2009 08:11AM Report Comment
 

35. another alan said...

I just wrote a long post that got lost: basically devo's comment that financial knowledge is a new paradigm and he's a late adopter above struck a chord.

Basically, can anyone recommend a good book that details with the financial aspects of the current crisis/situation (and a little less of the underlying macro causes which I already know a bit about)? Or perhaps blogs etc to read? (The more comprehensive the better, so I'd prefer books.)

Tuesday, December 22, 2009 09:47AM Report Comment
 

36. nickb said...

Here's why you don't need growth - it will take us over ecological tipping points. What's the doubling time of world real GDP anyone? Well assume real global GDP grows at 3.5% p.a. Then we double physical consumption and production every 20 years. That would mean in the next 20 years we consume more than we have in the entire total previous industrial time. You are concerned about your children - then I would be concerned about climate change, peak oil, problems with world food supply and so on, not about the economy not growing enough. "It's the ecosystem, stupid".

Tuesday, December 22, 2009 10:32AM Report Comment
 

37. Happy Mondays said...

Don't worry nickyb the government will make us all a sky ark & zip us off to find another planet to rape & pillage..

Tuesday, December 22, 2009 10:40AM Report Comment
 

38. happy mondays said...

Don't worry nickyb i 'm sure the government will make themselves a skyark & zip off to find another planet to Rape & Pillage..

Tuesday, December 22, 2009 10:43AM Report Comment
 

39. nickb said...

@alan at 35. A good book on the way banking and finance work and their relation to the real economy is Richard Werner "new paradigm in macroeconomics". I'm munching my way through at the moment, it's crunchy. Looks at the previous Japanese experience of credit crunch, housing crash, QE, zero interest rates, in detail, explodes some myths about the relationship between "reserves" and credit creation along the way.

Tuesday, December 22, 2009 10:44AM Report Comment
 

40. nickb said...

@Happy
It worries me that they don't have your or any other plan to deal with this.

Tuesday, December 22, 2009 10:46AM Report Comment
 

41. cynicalsoothsayer said...

Anyway, back to the real world. Banks don't want to lend to small & medium business because they think some of them will go bust, which is making some of them go bust. The employees of these businesses are nervous that they'll get laid off, and I think a lot will in Jan/Feb unless there is a huge upturn in business sentiment with new orders flooding in. Meanwhile they get real pay cuts (including myself) which reduces taxes for the government and spending in the shops. Houses though are bought with ready cash and/or on tick.

Therefore, the amount of money going around the system reduces. QE isn't doing what the politicians said it would do, increasing lending to business, instead it has resulted in gilts being bought, propping up government borrowing and spending. This is still effectively dilution of the currency, and unwinding it could cause some nasty effects, so they probably won't.

Most of these graphs are pretty meaningless to the real world outside of government finance. They reflect the shift from borrowing from investors to just electronically printing what they are spending.

We all know that the bust will end at some point, and the boom will start again, generating increasing tax receipts, but the government is hoping that that will occur before they, the government, effectively go bust. Meanwhile we have an election coming...

Tuesday, December 22, 2009 11:30AM Report Comment
 

42. nickb said...

@cynic
Yes that's all very 'real' so far as it goes, but what is 'realistic' about ignoring the effects of the economy on the physical world and vice versa?

Tuesday, December 22, 2009 12:55PM Report Comment
 

43. another alan said...

@nickb at 38. Many thanks. It looks good: I particularly like the fact that it is not a cash in due to the upswing in interest re: the macroeconomy

Tuesday, December 22, 2009 02:09PM Report Comment
 

44. cynicalsoothsayer said...

QE is disconnecting the government economy from the real world. It's painless to create, but it could hurt eventually. Ultimately I think it will make asset prices, including houses, even less stable.

Tuesday, December 22, 2009 02:16PM Report Comment
 

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