Monday, 9 July 2007

Does anyone remember when the UK had 3 million unemployed?

This UK credit boom thing is playing out as if it was scripted. Back in 2001, the Bank of England sees a recession coming. So it cuts rates like a latin American central bank; a massive credit explosion follows, mostly centered on the housing market. Economic growth picks up, and the recession is temporarily avoided. However, the housing market spins out of control, people load up with debt, and consumer expenditure increases as if the world will end next week.

What do you get when you put it all together? Inflation. First it starts off slow, but then the Bank of England remembers just how persistent inflation can be. Once those prices start to rise, and people begin to expect 5 percent inflation every year, inflation gets nasty. Furthermore, growth starts to slide as inflation discourages savings and reduces investment. A recession can only be avoided by ever increasing monetary growth which in turn results in higher inflation. Sooner or later, the Bank has to decide - accelerating inflation or a nasty and extremely painful recession.

In the last 30 or so years, the Bank of England fought two serious battles against inflation - 1980-82 and 1989-91. On both occasions, the Bank of England jacked up rates, and the UK economy fell into terrible recessions that resulted in more than 3 million unemployed. That is the kind of policy response needed when inflation gets out of control.

I am not making any predictions that the UK is about to enter a catastrophic recession, that will leave millions unemployed. Rather, if the Bank of England doesn't get a grip on inflation now, then inflation will do what it always does, when it is left unchecked. It will accelerate. The longer the Bank dithers, the more painful will be the solution. The Bank is now raising rates; that is a good thing, but it isn't doing it quickly enough.

I am, however, making some strong predictions about the housing market. The housing market is about to collapse. Forget all those stories about a lack of supply. That lack of supply will still be there when house prices are 3 times income. People will still not be living in the homes that they want, and thirty somethings will still be living with their parents. This bubble won't survive in an environment of six percent interest rates.

89 comments:

homeowner said...

You are sounding like an old record. Interest rates may have risen a little, but demographics, migration, planning restrictions all add up to a lot of pent up demand. There is simply no way that house prices will fall. Move onto another subject please.

Anonymous said...

There is simply no way that house prices will fall

that's the oldest record sound, indeed!

"no way"

Anonymous said...

"There is simply no way that house prices will fall"

Cause not, never have, fly me to the moon.

Anonymous said...

"There is simply no way that house prices will fall"

Yep. This, finally, is the time will everything will be different. Prices won't revert to the mean, affordability isn't relevant, and I have a bridge in Brooklyn to sell you.

mb said...

bwahahahahaha.

Cash up people....cash up. There is no way any central bank in the world (worth it's salt) will allow this inflation to continue.

Deflation here we come.

It amazes me how people easily forget.

laplace77 said...

LOL

think you've already seen this amazing video

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regards from Italy (we have this bubble too)

Anonymous said...

I pray to god there is a catastrophic ression. I am so sick of this idiot fools paradise we currently have to live in. Why bother to be hard working and honest, when Gordon Brown creates a idot economy where you can live like a millionaire when in reality they should be on a dole que!!

Anonymous said...

"There is simply no way that house prices will fall" ????

It's 1929 all over again !

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