Friday, November 19, 2010

High inflation unavoidable – duck now

Jailed counterfeiters aren't a patch on the Bank of England

The British and US governments are printing money to create inflation – to reduce their debts, says Jeff Randall. In his book Crisis Economics, Nouriel Roubini, professor of economics at New York University, predicts that inflation will return to advanced economies in 2012 if governments opt to monetise deficits (they have), or the glut of easy money fuels a fresh asset bubble (it has – just look at commodity prices), or the dollar continues to weaken (it has).

Posted by alan @ 10:38 PM (1996 views)
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36 thoughts on “High inflation unavoidable – duck now

  • general congreve says:

    Ducked already!

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  • …and for those who understand – It’s deflation.

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  • tenyearstogetmymoneyback says:

    People aren’t going to like this comment, but my first thought was

    My parents paid £5000 for their three bed semi back in 1967 – Will it be “worth” £18 million in 2053 ?
    Of course if everything else inflates at the same rate a loaf of bread will be £600.

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  • My parents paid £5000 for their three bed semi back in 1967 – Will it be “worth” £18 million in 2053 ?
    Of course if everything else inflates at the same rate a loaf of bread will be £600.

    Good point – but what will the £600 look like?

    It could be comprised of six £100 coins, that look more like today’s 10p pieces….

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  • It’s very difficult to find anything to pit savings into that doesn’t look like it’s in a bubble.

    Without out doubt Gold and Solver are in a bubble with prices about 5-6 times what they recently (5 years) were.
    There’s fairly serious talk of stock markets sliding again (the situation is mow arguably worse than in April this year as now Ireland has joined Greece in the bailout club) and yet prices are now pre Greek problems, So being long could potentially see you capital reduce by a significant amount.
    And we all know about savings accounts.

    It does appear that without doubt an attempt to inflate away the probls will be the route taken.

    Now for all HPCers I suggest you go out and test the mortgage Market to see where you currently stand.
    There’s alot of assumption that you can’t get hold of money.

    I have carried out the experiment this wee

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  • Sorry cont from last post

    Carried out an experiment this week and have found that you can essentially self cert from a high street lender at normal 3% repayment rates.

    Now whether you are able to or not or indeed whether you wish to or not, it’s worth doing the exercise to see where you currently stand.

    Now logic tells me that if this loophole closes prices will fall, but equally if they don’t want prices to fall then maybe this loophole won’t get closed.

    The dilemma faced is will they succeed in keeping the bubble inflated long enough for inflation to catch up where other countries have failed ?

    Also is now a good time to grab some (currently cheap) cash?

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  • CPI is 1.4% (once you strip out the VAT rise) and we’re facing spending cuts/rising unemployment/further VAT rise. I think inflation is somewhat unlikely in the near future.

    If one were being cynical, one might accuse the government of upping VAT to scare the population into thinking inflation is happening so they go out and buy houses, etc.

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  • Gc

    I don’t know what % of your money is in metal, (& not wishing to start a metal debate when we’re discussing inflation) but the markets are looking pretty tippy and if they were to take a dive I think the metals will go down with them – will you be able to get out quick enough if that happens ?

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  • If houses are overpriced by 30% and current wage inflation is 1.5% then it would take approximately 24 years to restore the long-term average house price to earnings ratio.

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  • Sarah f

    If the uk continue with a low interest policy long after others start to increase theirs (& they can) in the name of cheaper exports, then inflation will increase.

    Further you say CPI at 1.4%. , it,s over 3% isn’t it and we haven’t had the vat increase yet.

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  • Sarah f
    Not if you compound the 1.5% wage increases (which I think are over 2% this year).

    Also you need to stop looking at the long term ‘actual’ prices and look at the long term actual cost ie repayments.

    I’m not saying they’ll stay this low forever, they won’t, but Japan has been very low for 10-15 years.

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  • The current CPI figures include the VAT increase on the 1st Jan 2010. If VAT wasn’t being increased further (on 4th Jan 2011) then the CPI figure would drop back down in Jan 2011.

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  • “Also you need to stop looking at the long term ‘actual’ prices and look at the long term actual cost ie repayments.”

    Wage inflation over the term of a mortgage has more of a bearing on the proportion of the income devoted to servicing the mortgage than the interest rates. You can’t discuss mortgage costs without looking at how wage inflation erodes those costs. If wage inflation remains low for the next decade or two then it will inhibit the ability of people to pay their mortgages to a greater extent than the increased ability due to low interest rates.

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  • If the currect house price to earnings ratio is 5 and it need to drop to 3.5 – i.e. a 30% drop, then:

    5/(1*1.015^24)~=3.5

    24 years.

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  • Or 18 years at 2% wage inflation:

    5/(1*1.02^18)

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  • Sarah f
    Not sure your numbers add up as they originally didn’t se to account for compounding.

    But regardless that’s not the point I’m making. And btw I agree it will take along time now for repayments to reduce.
    Ie a big mortgage now will probably remain so as has been the case for the last 5-10 years.

    However looking at long term average prices isn’t necessarily that accurate as they only used to lend against one wage or one times the second, where as now it’s fully counted. That makes a big difference to the ‘line’ you’re hoping prices (actual or repayment) will return to.
    By that I mean the line isn’t where youthink it is.

    Further, the fact wages won’t increase much in the future won’t stop people buying. It’s the buying now that maintains the prices.

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  • The numbers do add up and they do (and always did) account for compounding – I’ve given the equations I used above, unless they’re wrong – have I made a mistake?

    “Further, the fact wages won’t increase much in the future won’t stop people buying. It’s the buying now that maintains the prices.”

    Assuming nominal house prices remain the same then going forward, low wage inflation and interest rates inhibit the ability of FTBs to save for a sufficient deposit, so demand is suppressed, critically, at the end of the chains (most BTL junkies bought at the wrong time, so they’ll have no equity with which to expand). Current homeowners with little equity will still have little equity/savings with which to buy a bigger house if wage inflation remains low, so demand is suppressed (for the higher end of the market).

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  • “However looking at long term average prices isn’t necessarily that accurate as they only used to lend against one wage or one times the second, where as now it’s fully counted.”

    Things must be different this time for the banks to change the lending requirements?

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  • If house prices need to drop 30% to restore the ratio (with stagnant wages), then wages need to increase 42.9% to restore the ratio (with stagnant prices). Does that make it a bit clearer?

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  • Sarah f
    Sorry I haven’t got back, I got dragged away before I could work up the numbers and I’m about to get dragged away again, so will try and get back to this later today.

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  • general congreve says:

    @7 – About 66% metals, 33% cash now and can easily jump in the car and be somewhere where I can sell for a good price within the hour! That said I am in the fortunate position of owning my own (modest) house outright, so even if things go against me I have decent financial security. Not that I think they will in the long term, but I’ve got that added buffer to act bold on metals, just in case the worst happens. Personally I don’t think prices are in a bubble, it costs $600Oz just to mine the stuff, so prices at twice that level in the current environment don’t seem bubblicious to me. Obviouslty there’s many other points I could make, but we’ve gone over them before and just as you feel, don’t really want to get into that debate at the moment.

    As for getting your hands on some cheap bank money at the moment with a liar loan… Sure it’s possible, but you’ve then got to decide what to do with it, plus can you fix that liar loan at 3%? That’s the big question. It’s possible I could remortgage and use the cash to invest elsewhere for a potentially higher yield (buy more metals perhaps?), but I could make a loss on such a move if I was unlucky. The risk associated with loss isn’t as great with your own capital. But obviously if you play the game right and you have luck on your side, it’s something that could pay off, but personally I don’t see the point in taking that risk right now.

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  • str2007.
    Sorry if I’m really labouring the point, but if houses cost £5 and wages are £1 and the ratio needs to change to 3.5 then
    a 30% decrease in house prices gives 3.5/1 = 3.5
    a 42.9% increase in wages gives 5/1.429 = 3.5

    You can solve the equation using logs to give the number of years required for wages to increase by the 42.9% for different wage inflation rates:

    @1%: log10(1.4286)/log10(1.01) = 35.8475years
    @2%: log10(1.4286)/log10(1.02) = 18.0125years
    @3%: log10(1.4286)/log10(1.03) = 12.0673years
    @4%: log10(1.4286)/log10(1.04) = 9.0946years
    @5%: log10(1.4286)/log10(1.05) = 7.3108years
    @6%: log10(1.4286)/log10(1.06) = 6.1215years
    @7%: log10(1.4286)/log10(1.07) = 5.2720years
    @8%: log10(1.4286)/log10(1.08) 4.6347years
    @9%: log10(1.4286)/log10(1.09) = 4.1391years
    @10%: log10(1.4286)/log10(1.10) = 3.7425years

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  • Sarah f
    Sorry your post at 6 read to me like you meant +30% requiring -23%, I see you now meant +42% so yes you had included compounding.

    My point in this post as much as anything was to make the point that people can still get hold of mortgages on above average multiples.
    This in itself throws doubt on a significant hpc.

    My previous hpc ambitions (25% or so from here) all things being equal were largely based on lending criteria being hugely compromised, but it appears it isn’t.

    If people here therefore are basing their predictions on earning multiples etc. Then they perhaps should check out the Market to see if what we’re fed by the media is correct. I did and have concluded it isn’t.

    The big question is how long you continue to rent at say £800-£1000 per month when that amount will get you a £150-200k ‘repayment’ mortgage.

    If house prices were definately going down 25% say over the next 2 years then of course it’s worth waiting. But you should be able to negotiate 5% of that now, add to that piece of mind, better living conditions and 2 years of actually paying off a mortgage, you start getting closer to that fall which isn’t definately going to happen anyway.

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  • Sarah f
    We seem to have a habit of typing at the same time.

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  • Unfortunately I’m getting dragged away yet again, but will return later.

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  • Gc
    I’d got the impression you had every last penny in Gold while you were saving for your first house, I didn’t want you to get burned.

    Sounds like it’s all under control.

    You say though, drive one hour to get rid of it. You’re literally keeping physical then ?

    I’d have thought physical in a vault was a bit safer and quicker to dispose of should the need arise.

    But of course more hassle to get your hands on should the need arise.

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  • str2007
    Sorry, I probably didn’t make it clear at the beginning (about the 30%).
    Just to get back to the original discussion! – I don’t think current wage inflation (and it’s immediate outlook) is going to do much to dent the affordability of house prices (if they stagnate), or erode the debt of current mortgage holders. I can see how the whole issue is a problem for someone renting, i.e. wanting to know how fast prices are likely to decline. I’m pleased I’m not in that position (by living in a small house mortgage free, waiting to trade up)

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  • tenyearstogetmymoneyback says:

    str 2007 re your post at 5 what sort of deposit were you talking about ?

    Personally I wouldn’t need Self Cert although I am in the annoying position of having lots of
    savings (e.g Halifax 6% 3 year fixed rate ISA and a £22Kish endowment) which don’t mature until next year.
    By the end of 2011 I don’t think I would need a mortgage although with the rent increase I don’t think I will be
    saving much in the next year.

    My attempt to wind up Smugdog backfired on me when I received a letter from the lettings agency saying that the
    proposed £150 increase will actually be £250 ouch.

    p.s Did you see my reply to your post in the other thread.

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  • Sarah f
    Yes, my deposit would get me a small house mortgage free (I’ve been fully short the housing Market). That’s one of my dilemmas (a nice one I guess), what I may gain by taking a half way step could mostly get eroded by another set of stamp duty and moving expenses.

    Ten years
    That sounds like a significant increase to me, do you have other renting options nearby ?

    ‘re the house that’s falling apart, careful if you go for it as it could be only worth plot value less the cost of demolition and removal.

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  • Sorry didn’t finish answering on that last post (working from an I phone and can’t easily see what I’ve written until I’ve posted it).

    Sarah f
    Agreed on wage inflation meaning no upward pressure on house prices. I just don’t think on their own the lack of increase will have much (enough for me) downward pressure.
    Downward pressure I believe will come from increasing interest rates and increased unemployment.
    Obviously new build levels will also have an influence. At present these are all but non existent in my area, but maybe the new bonus scheme will boost things along, but I’m not inclined to wait for that.

    Ten years
    LTV was about 55% so to be fair the lenders are taking no risk whatsoever, if I wasn’t concerned about my real details being bandied about credit checking agencies I would have done the same experiment but also at 30%, 20% and 10% levels to get a better idea how much money was available throughout the various levels of the Market.
    Maybe a few in here could do there own various eposit levels and report back to get a better picture.
    If I’d done all the levels myself I probably wouldn’t even qualify for a mortgage by now !

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  • tenyearstogetmymoneyback says:

    str 2007 asked do you have other renting options nearby ?

    At the revised price lots, although the lettings agency I am currently with have only got flats.
    Having already had one a landlord who was a complete Tw*t, and who the lettings agency
    was excellent in handling (they found me this place then told him what he could do with his house !)
    I am a bit loath to go elsewhere. Only last night I was talking to another renter who said wher she is
    renting the Fridge Freezer broke a fortnight ago and nothing had been done. As it is part of the fixtures
    it isn’t even as if she could replace it herself.

    As for the house that is falling apart it is nothing like that bad, but might only be worth £30K more
    if you spent £30K doing it up. It shows the current state of the market. Four years ago it would
    have been snapped up by a Properdee developer who could probably have doubled their 30K in six
    months.

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  • tenyearstogetmymoneyback says:

    p.s. Onbviously a full survey would be essential.

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  • Ten years

    Good luck with that one, personally I wouldn’t take on a refurb unless I could build in some margin in doing so 10-20% of the final value in a static Market.

    That is for 2 reasons, firstly you may uncover something unexpected, and/or your budget may over run. And secondly you should get some return for your own risk and hassle, otherwise why bother.
    Why not get a mate to view and offer 40% off asking price, you’re offer of 25%off asking price will seem quite good a couple of weeks later.

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  • What the Telegraph seems to miss, is the money issued by the BoE maybe worth less than nothing and actually be a burden, if it includes any debt, so ironically, the counterfeit money may actually be less of a burden if made well enough to be undetectable 🙂

    Having a debt-based currency is crazy because it inverts all financial logic, money is supposed to have value, it is absurd for it to be a burden!

    The national debt is completely bogus, the government should not have any debt, period, all the government spent money should be debt free money!

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  • An effective way to flip the UK financial system, the right way up, would be to gradually replace debt-based money via taxes with new debt-free money issued via public controlled government spending and debt repayment, and require that all loans on debt-free money must be at a 100% reserve ratio. The BoE would also have to phase out lending to or purchasing from banks, to remove this subsidy.

    The above would gradually phase out fractional reserve banking, and thus gradually knock the supports away from under bank gambling and its excessive bonuses, and as a bonus remove banker influence over government, so politicians start listening to us again, rather than the bankers!

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