Is it time to load up on debt?

von Neumann

Is now the moment to buy property / physical assests.

If we are heading into a period of run away inflation, with goverments printing money to cover losses, (where else is this money going to come from?)

With world central banks aggressive cutting interest rates.

Is it not time to get out of Cash? is Cash no longer king?

Surely any debt taken on now would be massively erroded in a very short period of time?

While it sounds rediculous, is it time to load up on debt?

asdasd

The coming situation is far more likely to be deflationary, not inflationary. Cheap money will not matter that much if the banking system is stalled, and regulated to the extent that it cant give the same loans as before. Commodities are falling in price. Real Interest rates will be high in a deflationary spiral even if they tend towards zero ( which I think is madness, anyway). And property. No. Not for a year or two.

Pgibson

von Neumann wrote: »

While it sounds rediculous, is it time to load up on debt?

Bingo Von Neumann !

Great minds think alike...you'd make a truly Great Mathematician Von Neumann.

I did just that last year.

Re-mortgaged for 170k and got 60k loan....that's me Maxed Out.

I wouldn't be given it today!

I smelled a rat!

.

daheff

gotta say that I agree. I cant see how else the market will get back.

I'd say we are looking at inflation running circa 5% for the next 4-5 years...this means that the debts that are out there become less of an issue...and easier to repay

silverharp

dangerous position to take, deflations can last for years and the inflation may only happen after you have been repossessed .

Minder

von Neumann wrote: »

Surely any debt taken on now would be massively erroded in a very short period of time?

Can you service that debt for a prolonged period - just as the debt may be eroded over time, so your ability to repay may also be eroded. I'm thinking job security, higher taxes, variable rate debt, price inflation etc.

von Neumann

Minder wrote: »

Can you service that debt for a prolonged period - just as the debt may be eroded over time, so your ability to repay may also be eroded. I'm thinking job security, higher taxes, variable rate debt, price inflation etc.

I take your point, but there are risks with both options,

Deflation caused by weakening demand / ablity to pay.....this will / is happening eg. used car prices.

But world goverments have assumed truely massive debts, so higher taxes / devaluation / or borrowing (from where?)......politically devaluation would be more palitable.

I'm no economist, I'm just trying to work out if I should get a car loan / mortatage or not .

Clytus

Japan is a good example..deflation crippled the economy for near on a decade. Even with interest rates at near 0% the Goverment could do nothing to stimulate economic activity.

maninasia

daheff wrote: »

gotta say that I agree. I cant see how else the market will get back.

I'd say we are looking at inflation running circa 5% for the next 4-5 years...this means that the debts that are out there become less of an issue...and easier to repay

I don't agree there's no money for wage increases and unemployment will inevitably increase. People are buying cheaper stuff and rents are coming down as landlords offer cheaper places. Less credit so less money around to push up demand versus supply.
I can see this situation going on for 5 years at least.

fricatus

It looks like we're heading for deflation in the short term. Look at the amount of discounting going on in shops, car forecourt prices, the recent sudden cut in interest rates, etc.

The danger now though is that all the worlds major economies are putting themselves massively in debt so as to guarantee bank deposits and/or recapitalise said banks. Once the world's governments have been forced to increase taxation for a year or two so as to service these debts, they will begin to cave to political pressure from their populations to print more money. This will inevitably lead to inflation.

Deflation followed by (possibly massive) inflation. I can't see this working out any other way. Anyone agree/disagree?

leninbenjamin

fricatus wrote: »

Deflation followed by (possibly massive) inflation. I can't see this working out any other way. Anyone agree/disagree?

why would there be massive inflation? this isn't a supply side issue like the oil crises of the 70s and 80s.

fricatus

leninbenjamin wrote: »

why would there be massive inflation? this isn't a supply side issue like the oil crises of the 70s and 80s.

Governments take on huge public debts bailing out the banks, then come under political pressure to devalue their currencies. They increase the money supply and inflation becomes entrenched.

I'm sure I'm missing something in the chain of logic here, but that seems to be the way governments "manage" their way out of large debts, doesn't it?

leninbenjamin

fricatus wrote: »

Governments take on huge public debts bailing out the banks, then come under political pressure to devalue their currencies. They increase the money supply and inflation becomes entrenched.

I'm sure I'm missing something in the chain of logic here, but that seems to be the way governments "manage" their way out of large debts, doesn't it?

maybe in the 1930s...

fricatus

leninbenjamin wrote: »

maybe in the 1930s...

Fair enough... but the effect of all these bank bail-outs could be to saddle governments with huge debts. What are the options available to governments in that situation?

Printing money is not the wisest course of action, but we've seen how conventional wisdom can be torn up and binned when political circumstances dictate, (Bush & co. going on a solo run and invading Iraq). Add in a situation where the public is fearful and you could see how politicians could do the unthinkable.

Économiste Monétaire

No member of the Euro system are financing their general government deficits by printing large quantities of currency.

von Neumann

UCD_Econ wrote: »

No member of the Euro system are financing their general government deficits by printing large quantities of currency.

If they're not going to devalue are they going to tax the bejesus out of us to pay for this mess? :mad: .

Where is the all money coming from? or is there a reserve they use for this kind of situation?

Won't all these new taxes lead to deflation?

Économiste Monétaire

To pay for what? It's a deficit of around 14 billion, which isn't particularly large in nominal terms. Out debt to GDP will rise to about 45%. The Irish government neither chooses to devalue the currency, nor does it decide on the increase in the money supply. In case people forgot, the ESCB is the entity that implements monetary policy. You're confusing monetary policy and fiscal policy.

The deflation that occurred in the 1930s was because of an inability to see the difference between the money supply and the monetary base. I have no idea where you're coming up with a deflation hypothesis. The Irish Government cannot direct the Central Bank to fund their general government deficit by printing currency.

von Neumann

UCD_Econ wrote: »

To pay for what? It's a deficit of around 14 billion, which isn't particularly large in nominal terms. Out debt to GDP will rise to about 45%. The Irish government neither chooses to devalue the currency, nor does it decide on the increase in the money supply. In case people forgot, the ESCB is the entity that implements monetary policy. You're confusing monetary policy and fiscal policy.

The deflation that occurred in the 1930s was because of an inability to see the difference between the money supply and the monetary base. I have no idea where you're coming up with a deflation hypothesis. The Irish Government cannot direct the Central Bank to fund their general government deficit by printing currency.

UCD_Econ, good points above. I'll try and be a little clearer.

Looking at the UK.

The UK has invested 37 Billion in it's banks.

I am going to assumed they didn't have this in some sort of reserve.

So they have sorced the money from borrowings which will have to be repaid via taxes? This is assuming their investments don't work out as planned

Apologies for mudding the water by using the UK but it's the clearest example I can think of. But is this not the case for Germany as well.


Ok looking at Ireland.

No money has been invested in our bank by the goverment yet.

But the goverment has give an under taking on all their liablities (should they go bust) and hence exposed itself to risk, which I assuming is reflected in the risk premium lender apply when lending to the Irish goverment. this inturn leads to higher interest and hence higher repayments, therefore higher taxes?

Higher taxes (Non performing i.e. not spent on infurstructure) - would mean people would not be able to pay as much for goods, resulting in deflation?

Économiste Monétaire

von Neumann wrote: »

UCD_Econ, good points above. I'll try and be a little clearer.

Looking at the UK.

The UK has invested 37 Billion in it's banks.

I am going to assumed they didn't have this in some sort of reserve.

So they have sorced the money from borrowings which will have to be repaid via taxes? This is assuming there investment don't work out as planed

Apologies for mudding the water by using the UK but it's the clearest example I can think of. But is this not the case for Germany as well.

Most likely the government issued bonds to cover the capital injection. Those will be repaid via taxes, in simple terms. However, they're working on the assumption that the intrinsic value of the banks is undervalued at the moment. The preference shares they've taken will hopefully bear dividends that can cover the cost of the bonds/other borrowings (and include a premium for the government) because the interest rate the British government are asking for in the programme is 12%, much higher than would cost the government in bond payments.

In exchange for funding the banks have had to cede quite large amounts of control: RBS will get £20 billion in exchange for preference shares worth 60% of the company; HBOS and Lloyds will get £17 billion and have to cede 47% of control. The government will get this back at some point, they're modelling it on a Sweedish intervention in the '90s. It's not a simple, hand over the taxpayers' money and let banks go bananas approach. Politicians aren't that stupid.

Ok looking at Ireland.

No money has been invested in our bank by the goverment yet.

But the goverment has give an under taking on all their liablities (should they go bust) and hence exposed itself to risk, which I assuming is reflected in the risk premium lender apply when lending to the Irish goverment. this inturn leads to higher interest and hence higher repayments, therefore higher taxes?

Higher taxes (Non performing i.e. not spent on infurstructure) - would mean people would not be able to pay as much for goods, resulting in deflation?

The risk on Irish government borrowing doubled after the announcement of the guarantee (from 30 to 63 bps I believe), that's true. However, they're still AAA rated bonds, and the chances of Ireland defaulting on our debt is still very low. As has been explained before, we wouldn't lose 400 (+) billion because their assets would be sold off, and that's assuming that every bank under the plan fails. The banks will have to pay a premium for this guarantee. The guarantee was given under the assumption that it would never have to be fulfilled, simply by being a guarantee it stopped any collapse because of deposits being withdrawn or a refusal by money markets to lend to the banks because of the increasing risk on their liabilities.

The causes of a deflationary spiral are complicated and not linked to one factor alone. People are still arguing over what causes deflation, and no 'cure', so to speak, has been found. The supply of currency in Ireland has still been growing, people aren't massively turning to gold, but the last NCB figures show overnight deposits being down. Private sector credit has actually been increasing (by lesser amounts though) so banks are still lending (lending to residents increased to nearly 400 billion in August). On October 27th we'll know more about the money supply for September, those will be interesting.

Another way to look at deflation is a basic supply/demand analysis. Supply of money falls, but demand rises quite rapidly. That's what has happened and that's why central banks are attempting to inject large amounts of liquidity into economies, to stop this from happening. That's another reason why it's important to lower interbank money market rates, to get Libor, et cetera, premiums down. You could argue that the increases in tax rates will lower the velocity of money, leading to an increased chance of deflation as people horde money, but that is being offset by an increase in government expenditure. The real problem would come from banks, specifically people removing their deposits and banks severely cutting the amount they lend. It's not an exact science, as you can see, but I'd still be highly doubtful that we're, in Ireland, headed into a large deflationary period--thankfully the ECB has lowered rates. I think what you're trying to say is that inflation will slow down.

asdasd

I think what you're trying to say is that inflation will slow down.

Is it true that since joining the EU we havent had a positive real interest rate? Inflation looks to decline to 2.5% next year, not sure the ECB will go down that low.

Private sector credit has actually been increasing

That surely has to reverse sometime. Even the lower levels or growth ( 13% y-o-y in April was what I heard) the rate is still expoential, and the ratio to gdp still expaning massively ( particularly with declining gdp).

Économiste Monétaire

asdasd wrote: »

Is it true that since joining the EU we havent had a positive real interest rate? Inflation looks to decline to 2.5% next year, not sure the ECB will go down that low.



That surely has to reverse sometime. Even the lower levels or growth ( 13% y-o-y in April was what I heard) the rate is still expoential, and the ratio to gdp still expaning massively ( particularly with declining gdp).

To the first question, I'm not sure about that, since we joined the EEC in 1973. Since 1999 I wouldn't be surprised if it were true. The Euro area HICP is still too high, I can't see the ESCB ignoring their mandate.

Re: the second point, it most likely will continue to slow down--by how much is a guess.

asdasd

Ta, I meant the Euro, not the EU.