Tuesday, August 7, 2012

Warner looks forward to an inflationary endgame

Negative interest rates spell final defeat for beleaguered savers

"The Bank of England won’t admit that it is targeting nominal GDP growth, but this is in essence what’s going on. Growth which is predominately or wholly made up of inflation seems preferable to no growth at all. Eventually, the Bank will need to go rapidly into reverse to prevent more serious inflation, a la 1970s. The velocity of money will rise, and all that freshly minted cash will suddenly start chasing goods, wages, assets and commodities, instead of sitting in bonds. Unfortunately, that point still looks some distance off." This scenario appears to be years away yet. If and when it happens, that'll be game over for HPC.

Posted by quiet guy @ 01:05 PM (2880 views)
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13 thoughts on “Warner looks forward to an inflationary endgame

  • general congreve says:

    Calm down everyone! No need to worry. Unlike some other assets, savings accounts and bonds do pay interest, that’s the important thing, even if it is negative, it’s still interest.

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  • It’s a better plan than printing money, because as you rightly pointed out the printed money is not going to the people who will buy goods and create inflation with the money.

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  • stillthinking says:

    This is an excellent post.

    Right OK first off, why does everybody think that real rates should be positive? Imagine a world where the entire population tries to save because nobody wants to work the next summertime. That is, nobody wants to work the next summertime, but everybody wants to buy food with their savings.
    In this case surely its clear that you would have to pay through the nose for the privilege of being able to save, but currently at the moment we are in denial about a negative savings rate.

    So on the gold standard, everybody tries saving, what happens to mining and gold extraction (remember the gold from seawater attempted by the fuhrer (no joke )) all of it goes through the roof all the gold gets pulled from the ground all resources are directed to extracting precious metals. But when you try and sell them, when that demographic has shifted and gone through, guess what, they sell for less. = negative real interest rate.

    The problem for the UK is taxation to the extent the idea of trade breaks down, ie. VAT and income tax for somebody painting your kitchen is so excessive that vastly cheaper to do yourself. A collapse in trade because of the government sitting heavily on private enterprise, causing us to go back to growing our own vegetables and doing our own painting. The surge in DIY in the UK is a simple response to excess taxation currently at 50% for the average (but broke ) earner. Imagine the guy with a family who has lost his house to repossession because of unemployment, he didn’t make the housing bubble, he didn’t crash the economy, but even at this point, when he goes to buy mainly flour tomato taste soup at the supermarket he is charged 20% tax! This is the chronic stupidity of the british, who imagine that integration with mass immigration will occur when attempting to integrate is enough to warrant an honour killing. How insane and unbelievable.

    I am starting to believe that there will be no deflationary outcome, that prices will not clear, and that the UK is a dead zone. I am a bit phished though at the momnet.

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  • general congreve says:

    @3 – A bit rambling and incoherent. Have you been drinking it the day time again? 😉

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  • stillthinking says:

    Ha. Yes indeed but not during the day, abroad at the moment so this was a midnight rant. Some good points though as I look over it.

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  • @5 (Wednesday, August 8, 2012 06:50AM) you could ask the moderators to temporarily change your name to stilldrinking !

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  • Still Thinking @3, some good points, or at least some original ones! The need to constantly think that you might be wrong seems pretty important if you’re going to have anything of value to say.

    I’m convinced the UK is screwed but then the Olympics have me wondering if I’m being too pessimistic. The UK is 3rd on the medal table and an absolute mile ahead of fourth place. Only the China and the US head it, and despite my wish to be negative, this seems to say something about our country which I’d probably be advised not to completely ignore.

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  • general congreve says:

    @7 – I agree, our performance does create a swell of pride in even the General’s most cynical heart. He was also heartened to learn that he’d once broken an Olympic record himself!

    To be fair it was from the 1896 Olympics, the 100m record of 12s. I once did it in 11.92s, at the tender age of 14.

    Unfortunately my optimism isn’t boundless. Not when I look at what its cost and the likelihood of ever getting our money back. Even the medals we’ve won aren’t gold, and even though the gold and silver are mainly silver and should appreciate very nicely, I don’t think pawning them will make much of a difference to the debt, especially considering we paid to manufacture them in the first place.

    I also expect the Greeks felt unbeatable after Athens 2004, in fact they did, because they went on a spending spree, the future was there’s for the taking!

    But enough misery from me, let’s savour the moment. The good times don’t last forever.

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  • general congreve says:

    @8 – I would also like to point out that if house prices were the topic, the attitude would be very different on this thread. Something a long the lines of:

    “Yeah, well when the olympics has left town and the optimism has faded we’ll see the real crash, bring it on!”

    You can’t have both, not an economic miracle and a house prices crash. No man can paddle two canoes.

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  • Even though I hate the notion of the sensible, and responsible losing the value of their assets, perhaps inflation is not such a bad thing. It increases the value of the only asset most of us have and that is our labour.

    I’m not entirely convinced, that inflation is the common mans enemy. Maybe we are encouraged to think so in order to protect the rich man’s assets that are likely sitting in bonds etc.

    It would wipe out the savings of the middle class, but surely it would decrease the difference between rich and poor. If that is so , then the creation of a new middle class should be easier.

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  • Real interest rates are important because saving money is a loan to someone else, a loan which should be used productively (in theory – exclude all the speculation that has put us in this position) and therefore earns a real return (or should).

    Inflation is necessary to 1) avoid deflation (pretty difficult to have exactly zero inflation) and 2) reduce, in combination with growth, the impact of govt debt over time. Obviously high inflation is not good (why we have a 2% official target).

    As for gold medals, these are no more than the result of the productivity of the sports industry (all that training, concentration on marginal benefits, etc). Don’t think it counts towards GDP though. Also makes for a somewhat blander Olympics in my view.

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  • general congreve says:

    @10 – Nonsense. My old man has got a few quid, when I talk to him he says he doesn’t care if petrol is up from 80p a litre to £1.35, no biggy to him. Now go tell a single mum raising a family what you’ve just told me and then count the seconds until she gives you a black eye. Inflation is the biggest enemy of the poorest in society.

    You think wiping out the middle class, by turning everyone into serfs while a select few lord it over everyone is good? Really? Who are you? A banker?

    @11- Inflation is good to pay debt. It is. But it has side effects. And if you are always paying debt with interest, whether you do that by actually paying it, or by robbing the value of your currency (it amounts to costing the same) then you are always going to be behind the curve and ultimately it will catch up with you. There is only one sustainable way to live, both environmentally, i.e. you can’t have endless growth to fuel endless debt, and financially and that is within your means. All else leads to failure.

    Keep kidding yourselves if you wish, I’m alright jack.

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  • Call the reduction in debt a side effect if you prefer: a small amount of inflation is necessary to avoid deflation, as I’ve said. There has never been a policy of “endless debt”; borrowing makes sense at certain times, for govts and individuals. It makes a lot of sense for govt now in my view, but we are getting brutal austerity instead – and that’s the biggest enemy of the poor. The “living within one’s means” argument does not appreciate the function of govt debt. Consider the debt following the War, and the economic growth that followed.

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