ΒιΆΉΤΌΕΔ

Stagflation. Harks back to the good old days of the 70's. Times are different though in the UK today, and we are lucky that global demand for goods, services and most importantly, raw materials, is growing, in line with growing global demographics.

We should be pleased that the emerging markets are eager consumers, so the imminent economic pain from the credit crunch fallout will be more widespread, but gentler within the developed economies.

In Britain though, there is one big worry. The levels of personal debt. Compared to 30 years ago, the position is far worse, and just a modest fall in UK GDP, and a modest rise in unemployment will be quite damaging to UK plc, not to mention Mr & Mrs Joe Public. Falling house prices will remove excess spending liquidity and this has a downward sprialling effect on the domestic economy overall. How do you service present debt levels. Something has to give.

The Bank and HMG has a tricky act to balance. HMG must not over tax, but must also over spend (or maintain existing pledged manifesto spending until 2012) to ensure a soft economic landing.

What a dilemma. I bet the PM is glad he is PM, and not Chancellor anymore. Poor, poor Darling.

....Let's just hope that the aircraft fuel is still available - without cheap energy the economy is going nowhere fast.

I have two problems with this report.

First, if Merv is captain of flight UK1, then he's the only airline pilot in history who has only the landing gear control to hand! All other useful controls, like the joystick(!!), lie with the Treasury and Brussels.

Secondly, I don't know how anyone can meaningfully detach the actions of the city from the 'rest' of the economy. For a number of years, the UK has enjoyed a boom led by the service sector, supported by a frothy housing market, on the back of easy mortgage funds. At the moment, many city commentators are tut-tutting at the way SIVs and the like have been borrowing short to buy long. Nothing different to the typical modern UK mortgage holder who has become hooked on the 2 year discounted rate (i.e. short borrowing), when everyone knows a mortgage is a long term liability (i.e. 25 years).

The problem is that there is no longer a pilot at the controls.

seems to me from reading the inflation report, that the ΒιΆΉΤΌΕΔ headline "Bank 'signals' interest rate fall" is a little flawed. It reads more like we will drop rates if it looks like the economy is going down the tubes or we are sure that inflation is beaten, but not until

Evan

I am curious about the possibility of banks not reducing the interest rates they charge if and when base rates drop.

If they are reluctant to lend to each other for fear of losing money I thought that this might start to disconnect the traditional relationship between the BOE base rate and rates charged to consumers.

I'm not an economist so I'm probably off track, but is it a risk?

I have a number of misgivings about the Bank Of Englands statement. In my view it is quite simplistic.

Prices are a balance between supply, demand and liquidity (i.e. Inflation is too much money chasing too few goods.

Thus a credit crisis reduces liquidity and should be a dampening on inflation, providing the Bank Of England does not print money to shore the economy up - That is where Northern Rock comes in.

I also believe that the UK Banking sector is not is in as bad shape as the Bears would have us believe.

Also Credit Crunches do not last forever. For once there is full disclosure and market confidence returns. The value of the bonds will rise on back of all the good mortgages that are out there.

Also I do not think that in the end there will be a bond defaults, because that really will be a crises and that if these devalue bonds are allowed to run to maturity their full value will be realised.

Thus it only those banks who are seeking short term liquidity, like Northern Rock, that are really affected by the Credit Crunch.

Now that the Banks have come of 'Cloud Cuckoo Land' Mortgages of Five times+ income will almost disappear (there are always exceptions to every rule) and the average marriage couple should only be able to raise morgages based on 3.2 times joint Income.

This does make the UK property market toppish as more and more buyers will need larger deposits to buy houses and thus will be more inventive.

The introduction of Pointless HIPS has also made selling a house more expensive and reduce housing supply in the short term. Especially as the charge for these HIPS has to be found upfront and not on house completion.

So at the same time as buyers are finding it more diffult to buy. Sellers are finding it more expensive to sell.

Thus this will keep the property market more in check than people realise.

So in the end House prices will fall to levels at where people can find finance but there will not be a full blown house price collapse.

Thus there will not be a major recession in the UK caused by the property market. A mild one possibly but cetainly not a major one.

Only if the banks start reducing credit limits and place demands on outstanding balances over those reduced limits will such events happen. However our banks are in much better financial shape than to be forced go down that path.

Finally there are concerns that sterling is too high against the dollar and Euro and that this will exacerbate things. This is utter nonsense.

A lot of the current international inflationary pressures are due to american policy (i.e. Large Budget deficits, poor lending, low oil stocks, High Trade Deficits, poor transport infrastucture, unthought out bio-fuel plans, the reluctance to sign the kyoto protocol and China Phobia - let alone the war on terrorism).

Thus the dollar deserves to be where it is and in fact I believe that a stable rate range for the dollar against Sterling is 2.25 -2.35 given the above.

It is how the other currencies that adjust against the dollar that is more important and given time the Chinese Yuan will float.

However given the weakness of the dollar already, once it does freely float the rise in the Yuan will not be as high as the US or Mandleson expect - probably no more that 10-15% from current levels -given the current rate of Chinese Inflation.

So I believe that things are not as bad as the Bank of England, or even you Evan, are reporting.

With inflation not under control yet, the financial "credit crunch" still over our heads and what’s more worrying, that nobody knows for certain how much bad debts are out there, petrol prices at record high (lets hope Mr Bush or his old friends in Israel do not press the panic button and star a war in Iran and push the barrel of oil to who knows what price) personal debt in the UK to over Β£1,25 trillion, house prices beginning to fall, are we brewing the β€œperfect storm”? Lets hope not and assume we have a super pilot in charge!

Is the UK economy a bubble just about to burst ? There are plenty of hallmark signs and the situation is very similar to that of the Japanese economy of 1989 which burst in 1990 and still hasn't fully recovered. Once house prices drop to point where many owners are in a state of negative equity and banks are left holding security on loans that is only worth a fraction of their initial value, the whole economy starts to grind down. Someone above mentioned stagflation...well we've had it here in Japan for nigh on 16 years.

I have a number of misgivings about the Bank of England’s’ statement as it is, in my view, quite simplistic.

Prices are a balance between supply, demand and liquidity (i.e. Inflation is too much money chasing too few goods.

Thus a credit crisis reduces liquidity and should be a dampening on inflation, providing the Bank Of England does not print money to shore the economy up - That is where Northern Rock comes in.

I also believe that the UK Banking sector is not in as bad shape as the Bears would have us believe.

Also Credit Crunches do not last forever. For once there is full disclosure and market confidence returns. The value of the bonds will rise on back of all the good mortgages that are out there.

Also I do not think that in the end there will be a bond defaults, because that really will initiate a crisis. So if these devalued bonds are allowed to run to maturity, their full value will be realised.

Thus it only is those banks that are seeking short-term liquidity, like Northern Rock, who are really affected by the Credit Crunch.

Moving on. Now that the Banks have come of 'Cloud Cuckoo Land' Mortgages of Five times+ income will almost disappear (there are always exceptions to every rule) and the average married couple should only be able to raise mortgages based on a more realistic 3.2 times joint Income.

This will make the UK property market toppish as more and more buyers will need larger deposits to buy houses and thus the market will need to be more inventive.

Also the introduction of β€˜HIPS’ into the UK property market has also made selling a house more expensive and thus is reducing housing supply in the short term because the charge for these HIPS has to be found upfront and not on completion.

So at the same time as buyers are finding it more difficult to buy, sellers are finding it more expensive to sell.

This will keep the property market more in check than people realise and prevent a full-blown property price collapse.

So in the end House prices will only fall to levels at where people can find finance to but them but, as I have said above, there will not be a full-blown house price collapse.

Consequently there will not be a major recession in the UK caused by a weaker property market. A mild one possibly - but certainly not a major one.

Only if the banks start reducing credit limits and place demands on outstanding balances over those reduced limits will such events happen. However our banks are in much better financial shape, so as to be forced to go down that dangerous path.

Finally there are concerns that sterling is too high against the dollar and Euro and that this will exacerbate things. This is utter nonsense.

A lot of the current international inflationary pressures are due to American policy (i.e. Large Budget deficits, poor lending, low oil stocks, High Trade Deficits, poor transport infrastructure, un-thought out bio-fuel plans, the reluctance to sign the Kyoto protocol and China Phobia - let alone the war on terrorism).

Thus the dollar deserves to be where it is and in fact I believe that a stable rate range for the dollar against Sterling is 2.25 -2.35 given the above.

It is how the other currencies adjust against the dollar that is more important and when the Chinese Yuan will freely float.

However even if the Yuan does freely float, given the weakness of the dollar already the rise in the Yuan will not be as high as the US or Mandleson expect - probably no more that 10-15% from current levels –taking into account the current rate of Chinese Inflation.

So I believe that things are not as bad as the Bank of England, or even you Evan, are reporting.

With inflation not under control yet, the financial "credit crunch" still over our heads and what’s more worrying, that nobody knows for certain how much bad debts are out there, petrol prices at record high (lets hope Mr Bush or his old friends in Israel do not press the panic button and star a war in Iran and push the barrel of oil to who knows what price) personal debt in the UK to over Β£1,25 trillion, house prices beginning to fall, are we brewing the β€œperfect storm”? Lets hope not and assume we have a super pilot in charge!

I have a number of misgivings about the Bank of England’s’ statement as it is, in my view, quite simplistic.

Prices are a balance between supply, demand and liquidity (i.e. Inflation is too much money chasing too few goods.

Thus a credit crisis reduces liquidity and should be a dampening on inflation, providing the Bank Of England does not print money to shore the economy up - That is where Northern Rock comes in.

I also believe that the UK Banking sector is not in as bad shape as the Bears would have us believe.

Also Credit Crunches do not last forever. For once there is full disclosure and market confidence returns. The value of the bonds will rise on back of all the good mortgages that are out there.

Also I do not think that in the end there will be a bond defaults, because that really will initiate a crisis. So if these devalued bonds are allowed to run to maturity, their full value will be realised.

Thus it only is those banks that are seeking short-term liquidity, like Northern Rock, who are really affected by the Credit Crunch.

Moving on. Now that the Banks have come out of 'Cloud Cuckoo Land', mortgages of Five times+ income will almost disappear (there are always exceptions to every rule) and the average married couple should only be able to raise mortgages based on a more realistic 3.2 times joint Income.

This will make the UK property market toppish as more and more buyers will need larger deposits to buy houses and thus the market will need to be more inventive.

Also the introduction of β€˜HIPS’ into the UK property market has also made selling a house more expensive and thus is reducing housing supply in the short term, because the charge for these HIPS has to be found upfront and not on completion.

So at the same time as buyers are finding it more difficult to buy, sellers are finding it more expensive to sell.

This will keep the property market more in check than people realise and prevent a full-blown property price collapse.

So in the end House prices will only fall to levels at where people can find finance to buy them but, as I have said above, there will not be a full-blown house price collapse.

Consequently there will not be a major recession in the UK caused by a weaker property market. A mild one possibly - but certainly not a major one.

Only if the banks start reducing credit limits and place demands on outstanding balances over those reduced limits will such events happen. However our banks are in much better financial shape than that and thus will not be forced to go down that route.

Finally there are concerns that sterling is too high against the dollar and Euro and that this will exacerbate things. This. I believe, is utter nonsense, as markets do not work like that.

A lot of the current international inflationary pressures that we are facing are due to American policy (i.e. Large Budget deficits, poor lending, low oil stocks, High Trade Deficits, poor transport infrastructure, un-thought out bio-fuel plans, the reluctance to sign the Kyoto protocol and China Phobia - let alone the war on terrorism).

Thus the dollar deserves to be where it is and in fact I believe that a stable rate range for the dollar against Sterling is 2.25 -2.35 given the above.

It is how the other currencies adjust against the dollar that is more important, as well as when the Chinese Yuan will freely float.

However when the Yuan does freely float, given the weakness of the dollar already, the rise in the Yuan will not be as high as the US or Mandleson expect - probably no more that 10-15% from current levels –taking into account the current rate of Chinese Inflation.

So I believe that things are not as bad as the Bank of England, or even you Evan, are reporting, because the overall UK economy is strong enough to sleepwalk through the current crises with just a ripple in the current storm, once Northern Rock has been sorted out.

Hi there.

This isn't about anything economic but I thought you may like to hear that my daughter aged 13 is a great fan.

She was somewhat concerned that you were always referred to as Effing Davies but I've clarified that now. She says well done on Childrens Dragons Den.

My favourite metaphor for global economics is the geological one - the tectonic plates are shifting all the time but every now and again the San Andreas fault fractures under the stresses and an orogeny occurs. Now is one of those times and the landscape is changing as what were mountains become valleys and vice versa. The structure that is fracturing this time is the Anglo-American economic model, the stupor mundi which has produced the apparent miracle of self-sustaining growth for the last 10 years, and this 'seismologist' predicts the following main changes in the UK economic scenery in the next year or two:
1. $ & Β£ much depreciated against the Euro.
2. 'Real' assets incl. natural resources & manufacturers at a premium.
3. Much smaller services sector.
4. Smaller public sector &/or higher taxes.
5. Higher interest rates.
6. Loosening of Treasury instructions to B of E as only alternative to politically impossible interest rates: leading to
7. Higher inflation.
8. Therefore houses holding value in nominal terms but losing it in real terms.
9. Russian billionaires decamp.
10. Improved trade balance.
11. Some growth in manufacturing - but on balance
12. Unemployment: therefore
13. Recent immigrants on social security.
14. Less spending power.
15. Altogether some painful readjustment.
16. Eurozone with lower interest rates and lower inflation looking attractive.

My concerns are for those who have recently boarded the 'Mortgage' flight!At sometimes as high as 5 x Annual Salaries I wonder if they are aware how bumpy the flight will be should a 1% or 2% increase arrives in the next few years!I bet its not something explained when they are signing on the dotted line? Perhaps they should be more cocerned about landing(Final motgage payment in 25 or 30 ters)rather than a few bumps along the way!!

Evan,

It is interesting that you consider King Merv and the BofE the captain of the economic plane. Surely their principle concern is inflation and keeping it within the 2% or so CPI band. Whilst growth is an issue they cannot ignore, I was lead to believe it is not their primary consideration. Perhaps Gordon Brown thought making the BofE independent would get him off the political hook if the economy went bad? I know he wants a similar 'independent board' set up for the NHS.

In any case, i question if monetary policy on its own could adequately deal with a serious slump in the UK right now. With both individuals and businesses heavily indebted, surely lower interest rates to get us to borrow and spend more would take a long time to work with economic sentiment so poor. It is interesting that in the USA the Fed has slashed interest rates but foreclosures on houses is still increasing and economic growth is very likely to suffer this year and next. The problem appears to be the credit crunch which despite huge injections of liquidity into the markets still seems to be hampering the lending markets. Perhaps the answer for the UK will have to be a mixture of fiscal measures to cut taxes and increase public sepnding. The only trouble appears to be that Gordon Brown has already sold us down the economic river by failing to keep to his pronouncements on prudence and his golden rule.

I think the tails on fire which you cannot see from the cockpit. I bet all those central bankers had their fingers crossed. Blair has lead the UK in to a hole thats going to be hard to get out of. You have a uncompetitive over regulated economy welcome to the real world.
As people focus on debt repayment spending will crash you will drag China down because it relies on the west buying its goods. How much that you buy from china do you really need? China will suffer as most of what it produces will be the things that get cut off first as spending falls.
I wish I could sit back in New Zealand and think we are safe but even more so for us. I can see that those UK immigrants are going to stop pushing our house price up soon.

I think the tails on fire which you cannot see from the cockpit. I bet all those central bankers had their fingers crossed. Blair has lead the UK in to a hole thats going to be hard to get out of. You have a uncompetitive over regulated economy welcome to the real world.
As people focus on debt repayment spending will crash you will drag China down because it relies on the west buying its goods. How much that you buy from china do you really need? China will suffer as most of what it produces will be the things that get cut off first as spending falls.
I wish I could sit back in New Zealand and think we are safe but even more so for us. I can see that those UK immigrants are going to stop pushing our house price up soon.

Whist a house/home purchase is something we [mostly] do rarely, would it not be logical to include house price inflation in the official inflation figures?

The problems we have do seem to be linked somewhat to those who need a mortgage and those who don't;
It has created an extreme imbalance in society.

@ Tony Ridge 'seismologist'

Good post, but! You left out

17. pensioners on fixed income, pensions in sterling, mortgages paid off, living outside the Eurozone.

I think I'm going to be begging on the roadside.

Thank God Islam says every Moslem should pay alms to the needy.

Where can I get LIBOR rates on my savings?