Inflation

ski · Sep 28, 2021

teslacoils said:
Inflation which is due to rises in prices of things we dont make, or choose not to make enough of, can't be controlled.

We could build more houses, get some nuclear power stations, have an indigenous manufacturing industry. We have chosen not to. Interest rates will "do a Japan" for a loooong time.

Inflation is caused by only two things.
1) Demand outstripping supply.
If you have a finite currency (Gold for example) this will be the only form of inflation
2) Money printing. If you print more money its value decreases, so you need more of it to buy a given item.
If you have an infinite supply of money ( which governments do) you will may have 1 but you will definitely have 2.

teslacoils · Sep 28, 2021

It's a really interesting case of bank of England independence. Who is, in the UK, creating this money and who sets interest rates?

Yes, the government is borrowing more. Yes the government sets an inflation target. But the independent (in theory) bank of England is in charge of money supply and interest rates.

Is it therefore wrong to say that the UK government can indefinitely print money? It can't indefinitely borrow money - quantitative easing keeps the borrowing rates low. The actual borrowing is on behalf of the UK citizen, on which the ultimate obligation rests.

Tubbylew · Sep 28, 2021

teslacoils said:
It's a really interesting case of bank of England independence. Who is, in the UK, creating this money and who sets interest rates?

Yes, the government is borrowing more. Yes the government sets an inflation target. But the independent (in theory) bank of England is in charge of money supply and interest rates.

Is it therefore wrong to say that the UK government can indefinitely print money? It can't indefinitely borrow money - quantitative easing keeps the borrowing rates low. The actual borrowing is on behalf of the UK citizen, on which the ultimate obligation rests.

People don't care about the obligation, only the monthly cost. Problem is what happens when there is a correction, and if a correction doesn't happen, how are the next generaton supposed to get on?

Clive · Sep 28, 2021

Tubbylew said:
It'll be interesting to see what happens over the next 5 yrs. They seem to have painted themselves into a corner with interest rates. It has to rise at some point but most of the population haven't borrowed to increase their wealth, but to increase their standard of living, holidays and phones/cars/sofas/kitchens etc. Their will be a huge amount of pain for many if rates go up even slightly. Imo

rates will go negative within the next 12 months imo

bookmark this post please !

Clive · Sep 28, 2021

Tubbylew said:
People don't care about the obligation, only the monthly cost. Problem is what happens when there is a correction, and if a correction doesn't happen, how are the next generaton supposed to get on?

better to have loved an lost to have never loved at all

you have nothing
you can borrow to get something

worst case ? The something gets taken away because you can no longer afford it

are you really worse off ?

Clive · Sep 28, 2021

Tubbylew said:
Being a humble peasent i'm not certain what leveraging means? Is it extending the mortgage and kicking the can down the road? Genuine question it's all a bit of a dark art to me.

Leveraging = using existing assets to secure borrowing to buy more assets

ie my house is worth 100k and I want to borrow 100k buy another house, bank will only loan me 80k against the new house (LTV) so I borrow the missing 20k against my existing house

in this example I could buy 5 more 100k houses by leveraging my existing 100k house to the max

I now “own” 6 houses but only 1 is paid for - If I borrow at 2-3% and house inflation is 10%. my 6 x 100k houses increase in value buy 60k a year ……… I could now leverage that increase and buy x3 more 100k houses

if this all goes well I get quite wealthy quite quickly

if it all crashes the most I loose is 100k

all just an example but a good illustration of how people have used debt to make significant amounts of money from a relatively humble start

thesilentone · Sep 28, 2021

We have to remember, the base rate was 5% before the financial collapse in 2008, the base rate today is 0.1% !!

Can you borrow money at say 0.5% ??? No, the markets pulled the drawbridge up.

There is no need for low interest rates OR quantitative easing, as the economy is buoyant.

Inflation can be controlled with interest rates, however they are linked to Government inflation targets, and are set by the BOE who are independent - allegedly.

DaveGrohl · Sep 28, 2021

Clive said:
rates will go negative within the next 12 months imo

bookmark this post please !

That particular prediction has a particularly long queue for you to stand in. People have been predicting it for some years. Timing may be your USP though?

ollie989898 · Sep 28, 2021

I can't see interest rates changing significantly for the next 5 and probably 10 years.

Young people with skills would do well to emigrate.

DaveGrohl · Sep 28, 2021

thesilentone said:
We have to remember, the base rate was 5% before the financial collapse in 2008, the base rate today is 0.1% !!

Can you borrow money at say 0.5% ??? No, the markets pulled the drawbridge up.

There is no need for low interest rates OR quantitative easing, as the economy is buoyant.

Inflation can be controlled with interest rates, however they are linked to Government inflation targets, and are set by the BOE who are independent - allegedly.

Indeed, the BoE was made "independent" so that Gordon Brown could say "look over there everyone, I'm blameless", you could hear him laughing.

Govts set the parameters for the BoE to work around. Simples.

farmerm · Sep 28, 2021

Andy26 said:
I don't think you understand, Bitcoins are a trusted brand that can be converted into a real currency or asset. One Bitcoin is approx £30k where as one Dogecoin is about 25 pence.

I could start a new cryptocurrency it would have all the same standards as Bitcoin but it's highly unlikely anyone would readily trade it for something real.

There is a pyramid effect, bitcoin and a couple of others may for now sit near the top but over time money spills down into newer crypto currencies. Just because bitcoin is trusted right now doesn’t mean it will retain its crown. Trust is hard won and easily lost.

Andy26 said:
I don't think you understand, Bitcoins are a trusted brand that can be converted into a real currency or asset. One Bitcoin is approx £30k where as one Dogecoin is about 25 pence.

I could start a new cryptocurrency it would have all the same standards as Bitcoin but it's highly unlikely anyone would readily trade it for something real.

Bitcoin may be trusted and king of the tree for now but there is a pyramid effect in play. The fact that Dodge coin was started as a joke and yet has gained any value shows the lunacy of crypto. Trust is hard won, easily lost.

Tubbylew said:
It'll be interesting to see what happens over the next 5 yrs. They seem to have painted themselves into a corner with interest rates. It has to rise at some point but most of the population haven't borrowed to increase their wealth, but to increase their standard of living, holidays and phones/cars/sofas/kitchens etc. Their will be a huge amount of pain for many if rates go up even slightly. Imo

the cost will one way or another be born by those who prudently increased their wealth not those who used debt to inflate their living standards

Tubbylew · Sep 28, 2021

ollie989898 said:
I can't see interest rates changing significantly for the next 5 and probably 10 years.

Young people with skills would do well to emigrate.

Where to though? Canada, Australia, New zealand and even the US don't seem very far behind us for numpty politicians. Perhaps a nice stable country like russia...

le bon paysan · Sep 28, 2021

Doing it for the kids said:
Borrowing money is all well good if you use it to buy appreciating assets.

its obvious saying that but I’m still baffled by those living in modest houses buying on tick new cars and TV’s which are worth so much less in a years time, how do they do it?!

A better question would be Why do they do it?

thesilentone · Sep 28, 2021

le bon paysan said:
A better question would be Why do they do it?

You need to separate the spending of disposable income whether it be cash or borrowed, and investment, it's a bit like the store and fat ring. One is full of optimists the other realists.

We do it because we don't like Mud Huts and clapped out Mondeo's

...and to pxss the neighbours off.

tullah · Sep 28, 2021

Clive said:
better to have loved an lost to have never loved at all

you have nothing
you can borrow to get something

worst case ? The something gets taken away because you can no longer afford it

are you really worse off ?

But you can't start with NOTHING and borrow to get something. You have to be able to put down some cash or have an asset to borrow against.

Hilly · Sep 28, 2021

Doing it for the kids said:
Borrowing money is all well good if you use it to buy appreciating assets.

its obvious saying that but I’m still baffled by those living in modest houses buying on tick new cars and TV’s which are worth so much less in a years time, how do they do it?!

The biggest best appreciating asset of land can bite back , it’s been know to drop in value ! And currently it’s very very valuable imo more chance going down than up you could buy an acre and loose four !

thesilentone · Sep 28, 2021

Hilly said:
The biggest best appreciating asset of land can bite back , it’s been know to drop in value ! And currently it’s very very valuable imo more chance going down than up you could buy an acre and loose four !

.............and it has, on several occasions.

The 70's saw buying and selling quickly very profitable, inflation looked after that.

But someone bought some expensive land (at the time) at a high interest if with borrowed money. By today's prices it was still cheap.

The good thing about land is, it's value underpins the balance sheet of many of our large institutions that we have borrowed off, so they certainly don't want to see it fall in value.

Doing it for the kids · Sep 28, 2021

Hilly said:
The biggest best appreciating asset of land can bite back , it’s been know to drop in value ! And currently it’s very very valuable imo more chance going down than up you could buy an acre and loose four !

true, nothing is certain out there.

also depends what you bought with the loan and how much cash that generates to pay the loan back

Clive · Sep 28, 2021

tullah said:
But you can't start with NOTHING and borrow to get something. You have to be able to put down some cash or have an asset to borrow against.

correct you cant start with nothing but in my example you could start with 20K - the deposit on asset number 1 in that chain

however, I've posted before high inflation and low interest rates make the rich (those able to leverage debt the most) richer, whilst the poor (unable to access debt) get poorer ............. the gap widens until ??? revolution ?

Clive · Sep 28, 2021

Hilly said:
The biggest best appreciating asset of land can bite back , it’s been know to drop in value ! And currently it’s very very valuable imo more chance going down than up you could buy an acre and loose four !

this rarely happens, but yes anything is possible

tangible assets that are finite (ie gold, land etc) are without doubt the safest class of asset under inflationary circumstances however, personally, I can't see land dropping in value until economies are far more stable than they currently are

Inflation

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Up to 25%

25-50%

50-75%

75-100%

100% I’ve had enough of farming!

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