Tuesday 11 December 2007

Poll Result; Happy Days for 2008

The poll for last week has been somewhat affected by the fact that the Bank of England reduced rates halfway through the poll.

The Question was where would rates be in a year's time and below are the votes as cast:

Higher than they are now
8 (33%)
Lower than they are now
11 (45%)
The same as now
2 (8%)
At 0%, fighting economic depression...
3 (12%)

Showing my sheepish rather than bold side, I voted for lower than they are now with 45% of you.

My thoughts are; Even though it seems we are headed for a bout of stagflation next year, it seems unlikely that input prices will remain so high as the economy slows. Other factors such as wage inflation will act as a dampener on core inflation.

However, those who voted higher or the same may have the last laugh; any major global event that kept oil high or over $100 and inflation will be here to stay with rates having to stay high even as the economy nosedives.

Finally, the nihilists who voted 0% and staving off a depression...wow would that do my mortgage repayments some good!


Wolfie said...

I agree with your stagflation synopsis however if the BOE or the ECB try to stem inflation by raising rates I think they will face failure and actually make matters worse as the sources for these inflationary pressures are external to our markets. We are slowly sailing into uncharted waters; the globalisation hangover.

Currency pressures are more likely to be on the minds of the governors of the ECB over this period, so I'd wager lower rates and inflation be damned in 2008.

Anonymous said...

"Other factors such as wage inflation will act as a dampener on core inflation."

Seems that you are the victim of the myth prevalent in the anglosphere that inflation is casued by businesses and employees pushing up prices. This is not the case. Inflation (when spread throughout the economy) is caused by increases in fiat money supply that are greater than the increases in productivity. In other words, prices rise because the money is available to allow them to rise.

Anonymous said...

If we followed my idea of personal debt relief - ie abolishing all personal debt in the UK over night - then the interest rate would be irrelevant..

Mark Wadsworth said...

Why "sheepish"? It was a fair question, and last week's events show that 45% of us appear to be on the right track. But of course one swallow doth not ... er ... empty a pint of beer, or something.

Anonymous said...


I've got a better idea. Modify the currency so it becomes a store of "labour worked" instead of the mysterious and unmeasurable commodity "value". Then see how long it takes before the public realise that printing money and expanding credit is actually immoral.

@Wolfie. You are probably right about the BoE but not the ECB. The ECB has no growth target, so it is forced to engage in a policy that ensures inflation is kept down. So in theory we now have an ideal investment opportunity opening up. If the UK is embarked on a policy which is inhrently inflationary and the ECB is legally prohibited from embarking on such a policy, then the pound must weaken appreciably against the Euro. By the simple expedient of swapping pounds for Euros we can make big profits at low risk.

CityUnslicker said...

Anon - your second point is well made. There is a good chance of an inflationary condition setting in to the UK and therefore it is very likely the pound will weaked, as it has been doing recently.

I am quietly quite pleased at my skills of predicting the pound movements. Such as shame I don't have the millions of pounds that are needed to make a decent profit at arbitrage.

As for the first comment about fractional reserve, I humbly disagree that wage inflation is not a key indicator. It is one of the larger factors outside of commodity and energy prices. Paying people more directly leads to more spending and tighter demand; it would lead potentially to saving but that just does not happen in our economy....

Interestingly I am quite surprised to see that official BoE M4 money supply has remained fairly steady all year despite all the changes in the financial world.

Anonymous said...

"Paying people more directly leads to more spending and tighter demand"

How do you pay 30million people more without increasing the money supply?

I think we can agree there is always demand for more (fiat) money - but inflation only occurs if there is also SUPPLY of more (fiat) money.

During the 70s the Labour government tried wage restraint to control inflation. It was a total failure and led to massive strikes all over the country. Inflation was only brought under control when Geoffrey Howe brought money supply under control utilising the principles of Austrian School economics.

M4 money supply has been running at 13% pretty much ever since 1997. The amount of (M4) money in the system is now 3x what it was a decade ago. Now, if we had increased the amount of "stuff" we had to spend that money on due to being incredibly efficient and productive people with a rapidly growing population, then this would not be a big issue - but of course we can't grow at this rate. In fact there has to be some doubt as to whether we have grown in real physical output at all, since the balance of trade has been negative for the whole time and government jobs have increased at the expense of private sector jobs. Therefore UK PLC has probably lower physical output. Sure, in money terms we have seen "growth" but with M4 money supply growing at 13% p.a. that is hardly surprising!

So where has all this extra fiat money gone? It has gone in creating inflation. Inflation in property prices. All our wealth as individuals has been taken up in paying for the electronically created credit taken up by huge mortgages by the magic of fractional reserve lending and credit derivatives. But now the money that can be taken up by housing can find no outlet this way. Money supply continues to grow at 13%. So now it finds new outlets in more general inflation.

The currency is debased, inflation will grow, the pound will weaken, "growth" when measured in money terms looks good but unemployment will start to rise as real physical output declines, the trade deficit will worsen.

Mark Wadsworth said...

Anon, yes, but the good news is ...?

Anonymous said...

The good news is - that after the rain comes sunshine. At this time of year it is important to remember - the meek shall inherit the earth (but only if they keep their wits about them and look out for the best opportunities for making a fast buck out of the greedy and profligate when the time comes).

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