Forget inflation, stabilize the markets

The toleration of inflation is becoming fashionable. Stabilizing financial markets and avoiding recessions are more important than keeping the lid on inflation. There is no trade-off between inflation and growth. Financial markets shrink and die when inflation takes off. Are these lessons that we need to learn again?

Other storied focus on the fact that Freddie and Fannie are now safe, but Citigroup has gone dangerously mysterious.

Read on; each day seems more depressing than the previous one.

Avoid interest rate hikes and inflation will kill you

I despair when I read stuff like this. Kate Barker is warning the MPC "must guard against keeping interest rates too high for too long and from tipping Britain's economy into a slump as it fights to curb inflation, one of its most influential officials says today." Did Ms. Barker clock yesterday's producer price data. Yes, there was another digit after the one. Yes, it did say 10 percent inflation.

Citigroup's $1.1 Trillion in Mysterious Shadow Assets

The title of this Mish blog post was just too scary. I couldn't read it. I simply could not soak in the idea that Citigroup could be holding $1.1 Trillion of shadow assets. It is too much mystery for me. Someone else read it for me and tell me that it will all be OK.

Why the Fed should ignore inflation

More stupidity on show; this time from CNN. It seems that the Fed should calm markets and leave the fight against inflation until later. Oh no, inflation doesn't destabilise financial markets. Savers will just accept negative interest rates and give the Fed time to sort out Freddie and Fannie.

Why do bankers never have to suffer?

Good question. Unfortunately, the Mail does not have much of an answer.

Depositors queuing up for their money

This looks familiar. NRK meets California.

CDO's are back

A few brave hedge funds are dipping into the CDO market and buying. Good luck with that, I say.

The toleration of inflation is becoming fashionable. Freddie and Fannie are safe, but Citigroup has gone dangerously mysterious.

Depositors queuing up for their money

This looks familiar. NRK meets California.

The largest bankruptcy in Spanish history announced

Yes, it is a real estate company.

CDO's are back

A few brave hedge funds are dipping into the CDO market and buying. Good luck with that, I say.

Don't Panic - Freddie and Fannie are safe

I saw a couple of these "the GSE bailout isn't a big deal" stories today. Here is the one from the WSJ. As they see it - "the Treasury and the Federal Reserve announced they would take steps to prop up the two corporations if and as needed. So there is no reason for stock market panic." It reminds me of that old line from John Kenneth Galbraith. In the United States, the only respectable form of socialism is socialism for the rich.

How many loafers are loafing about?

The Bank of England would like to replace wage restraint for interest rate increases. This "policy" would inevitably fall hardest on public sector workers. Darling has already indicated his intention to push for below-inflation wage increases for public sector workers. Next year's wage negotiations could prove to be very contentious.

Yesterday, I had a quick look at public versus private average earnings. The data showed that between 2001-4, public sector wages grew faster than those in the private sector. More recently, the private sector had the edge. Perhaps, the key finding concerns recent real wage developments. Neither wage growth in either sector; private or public, have been able to keep up with inflation. Average real wages are declining across the economy.

Today, I looked at public sector employment. The public payroll peaked in 2005 at almost 5.5 million. Labour pushed through large increases in public employment, between 1998 and 2005, hiring an additional 670,000 workers.

More recently, the public employment numbers have fallen slightly. The government deficit has risen, pushing up public sector debt and threatening the government fiscal targets. It also means that the government now has little room to expand expenditure in an effort to boost growth and maintain aggregate demand.

Too much spending during the good years, and now there is little room to use fiscal policy as the bad years approach. Timing is everything.

Problems everywhere

The bank of england just published their monthly business conditions report. Each month, the bank surveys 700 businesses about market conditions. This month, the survey suggests that the UK economy is both drifting into a slowdown, while inflationary pressures increase. Turnover is slowing, firms are increasingly reluctant to invest, while costs and prices are rising.

The only potential good news from the survey comes from labour costs, which remain subdued. However, firms are telling the bank that they will probably begin to reduce employment in the coming months. The unemployment numbers look likely to increase.

Here are a few quick charts that illustrate the main trends:

More denial

Location, Location Location is back tomorrow. So how will Kirstie and Phil handle the housing crash? Will they move with the times and acknowledge the crash or will it be more housing denial.

The Channel 4 website suggests denial. It seems that Kirstie thinks that stamp duty might be the problem:

"All this talk about the credit crunch is a red herring. The problem is not falling house prices but falling transaction levels, down by 26 per cent nationally. If supermarkets suddenly sold 26 per cent less groceries what would that say about our economy?"

Let repeat that - the problem is not "falling" prices but falling transaction levels". Kirstie goes on to explain:

"my (i.e. Kirstie's) first flat had a £72,000 purchase price – with £720 Stamp Duty. At today's prices, that flat would be worth £325,000, so the Stamp Duty should be £3,250. But instead it is £9,750! This sum represents nearly a third of the minimum 10 per cent deposit insisted on by banks at the moment.

The market simply cannot continue to be used as a bottomless pit of money by the government, it is being milked dry and the resulting stagnation is bad for everyone."

If only the government stopped charging stamp duty, transactions would be higher and everyone would be better off.

Actually, I was with you Kirstie until that last point. How would renters be "better off" if transactions were higher? Do renters suddenly see their rent fall as transactions go up? Personally, I reckon that a stagnating market is good for renters. If it is harder to sell, more properties come onto the market, and increased supply pushes rents down.

So lets hear it for stamp duty; the higher the better.

We have a date set for the housing crash.

Apparently, it is going to be June 1st, 2007. At least, that is what the headline from the guardian says.

Everyone is screaming about those awful home information packs (HIPs).The housing industry is in a particularly hysterical mood, claiming that HIPs will provoke a massive housing crash. Dammit, why didn't we introduce them before? If we had, the Bank of England could have avoided raising interest rates, the HIPs would have cooled the market.

Ironically, the timing of these HIPs will probably closely correspond with June 1. It could well be that we are seeing a myth being born. Rather than buy-to-let idiocy, monetary stupidity at the Bank of England and repulsive greed, we can collectively blame the government for the crash.

"It wasn't us, Guv, honest, it was those HIPs and the government wot done it".

Crash, mayhem, disaster . . . estate agents and surveyors were in full-on apocalyptic mode this week as they issued stark warnings about the damage home information packs — or Hips — will wreak on the housing market. With less than a fortnight to go until the controversial packs are finally with us, the scheme's many opponents mounted a multi-pronged attack.

While the chartered surveyors' body Rics launched a legal challenge, and opposition MPs tried — and failed — to block the reforms at the 11th hour, some estate agents claimed the scheme would severely damage the property market. The Haart chain says the rules are a mess, and unless the government amends the legislation, "it will have a housing crash on its hands on June 1" — the date the scheme goes live across England and Wales.


"Panic is spreading among sellers as they start to realise the full implications of the ill-conceived Hips," says Rics member Mark Hunter at agents Grice & Hunter in Doncaster, south Yorkshire, while Edward Waterson at Carter Jonas in York say he expects "mayhem".