Bank lending policy

Whatever those ratios, the falls indicate that house prices are prevented from falling neither by the fact that more land isn't being made, nor by low interest rates.

The high price/earnings ratios there may simply be a reflection of a country in which consumers save 10% or more of their income rather than somewhere close to 0% or less.

FoFP

Reply to
M Holmes
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"M Holmes" wrote

A "New Paradigm" ? - "it'll be different this time" ?? ;-)

Reply to
Tim

"M Holmes" wrote

Not quite a "sell-by-date" - but the value of the coin could fall as time goes by!

"M Holmes" wrote

Hmmmm. I wonder - do people expect (say) a one-shilling coin, minted in (say) 1890, to be worth only 5 pence now??

*I* wouldn't expect that....
Reply to
Tim

Skene's book "Cycles of Inflation and Deflation" is technical but readable and concentrates of the effect on bank flows, with a nod to effects on land and property prices.

Gary Shilling's book "Deflation: How to Survive and Thrive.." is tilted towards the popular market but still contains enough detail to make it interesting.

Me neither.

Whether it's a problem depends on how you're positioned when things flip from one to the other. If you read the Austrians, deflation is the cure for the monetary sickness of an inlationary boom. Basically deflation highlights the loans which have been made to enterprises basially unprofitable, but made to seem profitable by money illusion caused by inflation (or by interest rate manipulation). It also has a salutary effect on credit bubbles in that it wipes out leveraged speculatrs (providing lessons about more careful money management in future) and returns the prices of bubble-inflated assets back to their position at the start of the cycle, enabling hard-pressed wage-earners to again afford these without sacrificing a great deal of their income, and thus freeing up income to buy goods which have been demand-constrained during the bust.

Some have linked this to Schumpeter's idea of cycles of creation and destruction. Basically new technologies are tested in various market models during the reflationary and inflationary upswing. The disinflationary bust wipes out the models that don't work by closing down companies and defaulting loans. The blow-off boom then sees lots of initial tests of the technologies whch will feature in the next cycle, with the sillier of those killed in the deflationary bust. Once the cycle starts again, much capital and labour have been freed up to test the survivors in a more healthy market.

So those that propose all sorts of regulation to smooth out booms and busts (mentioning no particular Chancellors by name) may simply be suggesting that we do away with a major feature which has made capitalism the roaring success that it is, and leave us all the poorer as a result of their interference.

Here's a toast to booms *and* busts!

FoFP

Reply to
M Holmes

"M Holmes" wrote

Do you think that it may be easier for people to accept when we get rid of all coins/notes, and simply use little plastic cards all the time for our money - which just store a "number" on a chip or such-like ??

Reply to
Tim

you just described my life, and I won't be accepting it!

Reply to
Jo Reed

The simple answer is that nbody is going to do calculaions based on the date of minting of a note just to buy a beer and that if a Pound smeone gets in wages can't be spent as a Pound later then they're going to start asking for wages in silver, gold, or Reeboks.

There have been lenty of deflations in the world. That one has never flown. Butchery of the currency has though quite often led to repudiation and a flight to gold.

Needless to say, the currency being repudiated creates sufficient new problems that deflation becomes a niggling wory.

FoFP

Reply to
M Holmes

They almost certainly didn't, which just shows that inflation unacompanied by sufficient deflation is even more pernicious than deflation.

FoFP

Reply to
M Holmes

You could try. My suspicion is that it'd just get your plastic cards repudiated.

The simple fact is that one of the functions of money is to act as a store of value. Inflation itself pisses many people off because it undermines that, and as has been pointed out, people demand compensation for inflation in the form of higher interest rates or they move their cash to a more reliable currency or asset which is seen to be inflation-protected.

You can't make people use a currency you're debauching. John Law tried it (and outlawed gold to achieve same) and barely escaped a hanging for his trouble.

FoFP

Reply to
M Holmes

"M Holmes" wrote

I would imagine that, people with debt in a deflation could :- "demand compensation for deflation in the form of lower (even negative) interest rates".

In other words, some enterprising company could set up which pays-off a debtors debt to someone else, and then "charges" them interest at a negative rate. If that negative rate is still higher than the (negative) deflation rate (ie the size is less - eg inflation at -5%pa (deflation), the company sets interest at -2%pa (negative)) then the company would still be quids-in!!

Example :- If the company "buys" debt of 1000 GBP in 2010, and "charges" negative interest of -2%pa (in other words, reducing the debt even without the debtor making any payments) then the debt would be just 817 GBP in 2020 (without any payments having been made). But if there's been inflation at -5%pa (ie deflation) from 2010 to 2020, then the 817 GBP in 2020 will buy the same goods as 1365 GBP would have bought in 2010 - so it is worth more than they paid for it!

Reply to
Tim

why wouldn't said enterprising company not just put the 1000 under the bed, then in 2020 it would be worth 1000 rather than 817?

or are you talking about time-limiting cash?

Reply to
Jo Reed

At least you *will* have £871 in the bank. The £1000 might not stay in the mattress, they might end up in a swag bag.

Reply to
Ronald Raygun

"M Holmes" wrote

Can you re-phrase that? I'm not quite sure what you're aiming at...

Reply to
Tim

"Jo Reed" wrote

Time-based value of cash! The 1000 GBP would then only be worth 599 GBP! [Or possibly a bit more depending on the rate of decrease of cash-value used.]

Reply to
Tim

"M Holmes" wrote

I was imagining that the chip on the plastic card would be clever enough to do that itself!

Reply to
Tim

"M Holmes" wrote

But surely the prices of the silver, gold and Reeboks would also be falling??

Reply to
Tim

ok, sure, so you put it in a safe deposit box...then companies rise up that will hold your cash in a safety deposit box for only 5 quid a year, then a competitor comes along and says "i can do this for only 1 quid a year if I store all the money together in one safe"... hence everyone puts their money in the new compnay, and gets and 'account; with them, much like a bank account. but I can't see it ever getting that far, cause the banks wouldn't do -ve interest rates in the first place, for this very reason, a flight of cash

Reply to
Jo Reed

They do, in the form of threatening to default if the debt isn't renegotiated. I suspect that won't work with mortgages though because even if the mortgage itself doesn't carry insurance for the lender, the mortgage-backs they're packaged up in will contain credit default swaps as part of the package. The owner of the debt can thus just say "Make My day!" and let the insurer reposess the house, sell it at any price and pass the remaining debt on to a credit collection company for whatever it will fetch.

The threat of being homeless is a bigger one to the homeowner than the trivial threat of default is to the primary or even secondary lender.

Except that the company would do much better just sitting on its cash. Why take some of the gain from deflation when you can take all of it?

And if the company just sits on its 1000 Pounds until 2020, doesn't it gain even more?

FoFP

Reply to
M Holmes

People are always going to use cash because there are certain trades they don't want the government or constabulary to know about (not to mention their spouse). Thus if the money on the card is dropping in value while the cash in their pocket isn't, it's bye-bye card account.

People are lazy, but they're not entirely stupid.

FoFP

Reply to
M Holmes

Prior to The Great Inflation, people were quite used to the idea that sometimes we got inflation and sometimes we got deflation. The price of bread in 1900 wasn't significantly different from the price of Bread 400 years earlier, give or take the point in the cycle. Deflation wasn't something that worried people. In fact deflations are often accompanied by good solid growth in the economy and folks feel better because the price of goods is steadily falling while wages tend to be stickier. People know they're making some headway and can roughly predict that the price of stuff that they need won't run beyond their means.

Of course a high rate of deflation can be very problematic, just as can a high rate of inflation. Also the kind of demand-led (or lack of it really) deflations that follow credit bubbles are nastier than the cost-led deflations that were largely a feature of such periods.

If you'd told people then that a Pound would have been worth less than a Penny in 100 years time, they'd have been absolutely astonished. That onslaught of inflation in the past century has had many destructive effects. The current credit bubble is just the last gasp of those effects.

FoFP

Reply to
M Holmes

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