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.

87 comments:

Anonymous 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.

Anonymous said...

LOL

think you've already seen this amazing video

and there's some more to watch

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 !

Anonymous said...

Thanks for article!

Anonymous said...

Thanks for interesting article.

Anonymous said...

Excellent website. Good work. Very useful. I will bookmark!

Anonymous said...

7K8Wjc You have a talant! Write more!

Anonymous said...

fRWzCB Good job!

Anonymous said...

AU11O9 The best blog you have!

Anonymous said...

lk5eKe Good job!

Anonymous said...

Hello all!

Anonymous said...

Wonderful blog.

Anonymous said...

Nice Article.

Anonymous said...

Please write anything else!

Anonymous said...

Nice Article.

Anonymous said...

Thanks to author.

Anonymous said...

Nice Article.

Anonymous said...

Good job!

Anonymous said...

Hello all!

Anonymous said...

v96Avj write more, thanks.

Anonymous said...

Please write anything else!

Anonymous said...

Magnific!

Anonymous said...

Hello all!

Anonymous said...

Magnific!

Anonymous said...

Wonderful blog.

Anonymous said...

actually, that's brilliant. Thank you. I'm going to pass that on to a couple of people.

Anonymous said...

Wonderful blog.

Anonymous said...

actually, that's brilliant. Thank you. I'm going to pass that on to a couple of people.

Anonymous said...

Please write anything else!

Anonymous said...

Thanks to author.

Anonymous said...

Thanks to author.

Anonymous said...

Magnific!

Anonymous said...

Clap on! , Clap off! clap@#&$NO CARRIER

Anonymous said...

Calvin, we will not have an anatomically correct snowman!

Anonymous said...

Ever notice how fast Windows runs? Neither did I.

Anonymous said...

Beam me aboard, Scotty..... Sure. Will a 2x10 do?

Anonymous said...

A flashlight is a case for holding dead batteries.

Anonymous said...

When there's a will, I want to be in it.

Anonymous said...

Ever notice how fast Windows runs? Neither did I.

Anonymous said...

Clap on! , Clap off! clap@#&$NO CARRIER

Anonymous said...

Good job!

Anonymous said...

Calvin, we will not have an anatomically correct snowman!

Anonymous said...

If ignorance is bliss, you must be orgasmic.

Anonymous said...

Oops. My brain just hit a bad sector.

Anonymous said...

The gene pool could use a little chlorine.

Anonymous said...

Ever notice how fast Windows runs? Neither did I.

Anonymous said...

Please write anything else!

Anonymous said...

Change is inevitable, except from a vending machine.

Anonymous said...

Give me ambiguity or give me something else.

Anonymous said...

Clap on! , Clap off! clap@#&$NO CARRIER

Anonymous said...

Ever notice how fast Windows runs? Neither did I.

Anonymous said...

Give me ambiguity or give me something else.

Anonymous said...

Friends help you move. Real friends help you move bodies

Anonymous said...

When there's a will, I want to be in it.

Anonymous said...

C++ should have been called B

Anonymous said...

What is a free gift ? Aren't all gifts free?

Anonymous said...

640K ought to be enough for anybody. - Bill Gates 81

Anonymous said...

Save the whales, collect the whole set

Anonymous said...

Lottery: A tax on people who are bad at math.

Anonymous said...

Oops. My brain just hit a bad sector.

Anonymous said...

A lot of people mistake a short memory for a clear conscience.

Anonymous said...

Thanks to author.

Anonymous said...

Wonderful blog.

Anonymous said...

Suicidal twin kills sister by mistake!

Anonymous said...

Hello all!

Anonymous said...

The gene pool could use a little chlorine.

Anonymous said...

Build a watch in 179 easy steps - by C. Forsberg.

Anonymous said...

Lottery: A tax on people who are bad at math.

Anonymous said...

When there's a will, I want to be in it.

Anonymous said...

I don't suffer from insanity. I enjoy every minute of it.

Anonymous said...

When there's a will, I want to be in it.

Anonymous said...

Build a watch in 179 easy steps - by C. Forsberg.

Anonymous said...

640K ought to be enough for anybody. - Bill Gates 81

Anonymous said...

Build a watch in 179 easy steps - by C. Forsberg.

Anonymous said...

C++ should have been called B

Anonymous said...

All generalizations are false, including this one.

Anonymous said...

What is a free gift ? Aren't all gifts free?

Anonymous said...

Suicidal twin kills sister by mistake!

Anonymous said...

What is a free gift ? Aren't all gifts free?

Anonymous said...

Lottery: A tax on people who are bad at math.

Anonymous said...

Oops. My brain just hit a bad sector.

Anonymous said...

C++ should have been called B