Tuesday, June 02, 2009

Down In The Jungle



Some inflation survival tips from Ray

By common consent, the Second Great Depression has been averted. Thanks to Decisive Action by Great Statesmen, the green shoots are back in view. As Mr Kaletsky puts it:

"Green shoots are sprouting into a jungle around the world... British house prices have risen in two of the past three months. Japan has experienced its biggest monthly increase in industrial production since the Fifties. Consumer and business sentiment are rising strongly in the United States and Britain and are even showing some signs of life in Europe. In America, where all the trouble started, unemployment claims have fallen, durable goods orders and property sales have bounced back and house prices have stabilised...

...world share prices have enjoyed a three-month rally, led by commodities, retailers and financials, capital markets have re-opened, with record issuance of equities and corporate bonds, credit spreads have narrowed and government bond prices have fallen in exactly the way they did at the start of the recovery in 2003."


So hurrah! The Depression is behind us, and the relief boom is about to lift off.

On Saturday, Tyler experienced the forthcoming boom first hand. Accompanying a couple of first-time home buyers (junior Tyler and his young lady) he journied to Sarf London, where they met with a financial advisor blandishing large wodges of freshly printed mortgage cash.

The advisor was alarmingly young - certainly no more than 14 - and bore a striking resemblence to the Artful Dodger. Clacking away on his keyboard he maintained a terrific apples and pears patter:

"A free bed house for less than two-fifty? You can't go wrong. I'll tell you what - back in '07 you'd have paid free two five for that. Free two five! Cuh!" Clack clack. "As it 'appens, one of my clients - love him to bits - just bought half of Mitcham for free seventy. We did the deal, bish bosh. Course, he'll split it into flats. Not that you'd like Mitcham - it's a bit of a jungle. Cuh!"

He swivelled the screen so we could see the deals he'd pulled up.

"There we go - looks like Northern Rock is gonna be best - two year fix on 3.9%, or five years on 4.8%. Course, back in '07, I could have got you ten years on 2.4% - unless you'd been an asylum seeker, that is... then it might have cost 2.5%. Lovely stuff."

Tyler furrowed his brow. "Sorry, did you say Northern Rock? I thought Northern Rock had gone bust... surely they're in no position to offer the best deal."

Dodger tapped the side of his nose. "You'd be surprised! As long as your credit record is OK, they love you to bits. Love you to bits! Course, my mate who got divorced and had his Porsche repossessed, he gets letters all the time from Northern Rock asking if he'd like to switch his existing mortgage to someone else. Love him to bits! Cuh!"

The bottom line was quite clear - as long as you can scrape a deposit together, and as long as you have a job, and as long as your credit history is OK, mortgage finance is flowing again.

And house prices?

Certainly in Sarf London, prices for first-time buyers seem to be bottoming. Cutprice offers are being rejected, houses "priced to sell" are selling, and the agents seem to be doing business again. Which is exactly what we'd expect.

Let's just remind ourselves of some highlights from Teach Yourself Monetary Economics.

When the government/central bank pumps up the money supply, the first big visible impact is on asset prices - with money flooding the markets, the value of things like stocks and shares, and houses gets bid up. Which is pretty well what's happening right now.

But what happens next?

Ideally, what you want is for the uplift in asset prices to stimulate new investment - as for example, companies find it cheaper to borrow. But given what's been happening recently, do people want to invest right now? Probably not.

Instead, they might well decide to consume more. Fine - in a recession, that's exactly what the government wants.

But what if large chunks of that consumption are imported? And what if that puts further downward pressure on the currency? And what if the markets take fright at that prospect and accelerate the process?

And what if some of the initial uplift in asset prices worldwide spills into commodities? And what if that gives a upward push to inflation?

You can see where this is going...

Those green shoots may well be sprouting into a jungle. But Ray Mears aside, jungles are not terribly hospitable places. The giant snakes of inflation wait coiled behind every tree, ready to strike.


PS Guilty pleasures - if you haven't seen the revival of Oliver! you really should. Meanwhile, I'm quite convinced this guy is our financial advisor:


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