Depression in the USA - Deflation verus Inflation

[skid]

Your link is not working but those taking out big mortgages are taking a big risk(there are risks everywhere)
Keep in mind that the property market (even in Auckland) is a bit like a share--it can have good fundamentals but that wont save it if other share markets tank--dont think it isnt possible to have a housing shortage and a situation that creates a drop in prices --All it would take is a housing crash in China and Australia.
The Auckland housing market has been very good to me over the years(along with some hard work) but I am under no illusions that it is only a one way street.
There are solutions other than waiting if you are keen though--one is to buy in a less desirable area and improve and rent it -obviously you have to do research though.

[Aaron]

Dear Skid
This is the article from CNN Money
“Up is down, black is white.
Or at least that's what it feels like in Europe, where at least one bank is paying some customers who borrow from it because interest rates have turned negative.
The European Central Bank has slashed official rates to record lows, and is pumping billions of euros into the economy to boost growth and inflation.
That has forced rates on some mortgage products far enough below zero to create a big headache for the banks: Do they now owe their borrowers?
"We are in uncharted waters," said Luca Bertalot, secretary general of the European Mortgage Federation. "Monetary policy is changing the funding landscape in Europe completely."
Here's how it works. Mortgage interest in Europe is often pegged to interbank lending rates known as Libor or Euribor. Short-term rates on a Swiss franc version of Libor are now approaching minus 1.0%.
Spain's Bankinter, which sold mortgages pegged to Swiss Libor, told CNN it couldn't pay interest on a loan (go figure!) so instead reduced the principal for some of its customers.
Bankinter's policy was first reported by The Wall Street Journal earlier this month.
With no shift in ECB policy likely for some time, the banking industry is worried about how things will pan out. Bertalot said mortgage lenders were talking to the ECB and national central banks about how to deal with the challenge.
"There are no clear guidelines on how to move forward," he said.
The Bank of Spain told CNN it has not issued any official guidance to banks on how to adjust lending practices to the negative interest rate environment. The Bank of Portugal said in March that lenders should take "precautionary measures."
Negative interest rates have created anomalies elsewhere in Europe.
Germany issued its first 5-year bond with a negative yield in February, meaning investors are prepared to make a small loss buying super secure government debt. In the same month, a small Danish bank said it would charge customers 0.5% interest on their deposits from March. So for every $100 they deposit, the bank takes 50 cents.
This odd phenomenon is showing up in corporate bond markets as well. The yield on Nestle's corporate debt went negative earlier this year. "

I am not really worried about buying in Auckland but I thought the information in the article was mind blowing. I was just trying to look into the future from QE and zero interest rates to actual negative interest rates and apply it to the Auckland housing market. Assets prices = the sky is the limit in fact the more you borrow the more they will pay you (or reduce your principal). Imagine the poor savers going from next to no interest rates to having to pay for the privilege of saving while asset prices climb to levels way out of their reach. I suppose I am upset as I am on the wrong side of this scam.

I guess if you think about it further this interest rate is connected to the Swiss Franc so what it says is that people would rather pay to hold Swiss Francs as they have no faith in other currencies.
I have always thought that protecting the borrowers and speculators at the expense of the savers and people on fixed incomes through inflation has been unfair and when I first read this just thought it was the next step in this crazy trend.

Also I read things like this from a supposed intelligent investor.
This from John Addis from intelligent investor.
“The fixation that led the Eurozone into deflation stems from the same place as the German idea that debtors must be punished and money always repaid, regardless of the circumstances. This is primitive economic thinking for which Europe could pay a heavy price.
Draghi helped the Germans overcome their irrational fear of inflation and finally act to address the real issue of deflation. But it took six years for the Bundesbank to get a grip on its obsession.”
What is his thinking if I lend money to someone I always expect it to be repaid with interest. I suspect John Addis would be more concerned with debt repayment if it was his own money. Maybe I should be asking him for a loan to buy into the MYOB IPO.

[skid]

I think this is a reflection of how bad things have gotten in Europe--People are so scared, and other forms of value(assets) are on such shaky ground (deflation)that people are willing to pay to keep their cash relatively safe.
It seems ludicrous, but those who have cash(even if they have to pay to keep it ''safe'') could be in a far better position than those with assets-which may devalue to the point that those with safe cash could potentially get a ''fire sale'' in terms of buying assets (houses etc)
If that played out here ,you may not get much, if any, interest -but you may be able to pick up assets like a house at a super cheap price(so your savings for a market downturn could pay off--Its kind of like the reverse of gambling on a speculative stock you hope will double in the sense that you could end up getting the asset for half the price.
This situation in Europe would be far better for those who are in the ''safe haven'' category than those loaded up with assets bought on debt.---thats my take at least..

[Aaron]

Inflation or deflation ahh the mystery. Dairy prices down again(this is a disaster for NZ and the farmers by the way), Dr Copper down, other base metals down. If commodity prices are a leading economic indicator then looks like deflation might be gaining an edge at long last. What will the central banks do. Negative interest rates where you are openly stealing from depositors to pay people to borrow might work but inflation is a so much less obvious way to achieve this and it might cause depositors to cotton onto what central banks are trying to achieve if they are too blatant. Helicopter drops of cash would be fun. I think if asset prices are pushed beyond the average wage earners ability to invest by expanding credit no amount of QE will work if interest rates are above zero.
Also I suspect you will get less economic activity if 1 out of 100 people have 40% of the wealth and 80 of those 100 people have to share 7% of the wealth amongst themselves.(that's the US don't know if NZ is there yet). There is the argument that these 1% with more wealth available will create more industry and jobs for the plebs but I suspect like the trickle down theory it will be shown to be bull****. It is a matter of how long before people wake up and realise it is a theory and not a very good one beyond a certain point. John & Bill are believers in smaller govt. lower taxes equals better society. I'm not so sure. Still I have a bet each way with 50% cash and 50% mostly defensive shares no debt currently still waiting for the crash. Upset at what I have missed out on but that was my decision to make.

[JBmurc]

Yes ... I've been eating humble pie for some years now holding my Silver Bullion position and continuing to believe in many micro caps in the Precious Metal sector / Energy to be holding some very sizable Tax losses .... will Inflation of Fiat lead to higher Inflation of real assets and the destruction of Trillions of FIAT DEBT ......2016 ? might be the year

Talking about Dairy ... just think how much DEBT is going hit the wall ...got to be many banks sweating on billions loaned out not getting paid for ...and actually having Dairy farmers needing to loan more to survive

In the USA it's the shale oil industry ... trillions ticked up .....Hedges running out ...everyone knows it's only a matter of time before the house of Cards comes down

In China shadow banking debt in property ......Aussie Iron ore + Property etc Massive leverage ....the DEBT Bond market 30yr bull market
talk about BUBBLE

[Aaron]

What are the world’s demographics doing? Still growing but probably only in the third world no money to splash around there. Baby boomers getting ready to retire will be reducing consumption and spending. Growing wealth inequality will mean less overall spending and consumption. Maybe deflation is inevitable. Maybe it is a sign that the world is more productive and efficient and the price of things should be coming down. It is only an economic theory that states the ideal is 1%-3% inflation each year. Maybe this theory is wrong. The arguments that deflation is somehow a dreadful thing are again only theories. Which to don’t seem very strong to me. See Post #319 & #320.

What will be achieved by endless money creation. Endless asset price inflation? Heavily leveraged people get to buy and own the world’s wealth and the rest of us mugs might even pay them for the pleasure as this would be the logical conclusion to draw from negative interest rates. Negative interest rates, money dropped from helicopters, at that point it becomes absurd to my way of thinking. I guess low interest rates make sense in a deflationary environment.
Growth and inflation aren’t the same things. I am betting the price of gold will continue down along with growing deflationary pressure. Once the limits of monetary policy are reached or start becoming absurd to the man on the street then I guess we have war as this is inflationary and does wonders for GDP as things are destroyed and rebuilt also it will be good for the price of gold. Maybe the word sustainable should get bandied about in the corridors of power more.

What is the point of this post??? Nothing really just cogitating trying to justify my investment approach as I remain patient and try to influence other peoples thinking.

I promise I will post something useful on this site one day.

[Aaron]

Effing Moron
http://www.cnbc.com/2015/09/20/fed-r...est-rates.html
Macro Economists only have Output(GDP), Money & Expectations to deal with. If it doesn't fit into their calculations they suggest something moronic. Don't they appreciate the study of economics is included in the "Arts" because it is not a science and they are just guessing at things and how people will react.
Now inflation is not working stealing off savers and investors these d**kh**ds suggest taking it straight out of their bank accounts with negative interest rates. It is unbelievable.
The arguments against deflation are as follows as far as I know.
1/ people will spend and consume less. (in a world that has concerns about global warming is this really a problem)
2/Borrowers will be worse off than lenders (horrors responsible people not borrowing to excess being rewarded for their conservative approach)
3/Wage earners might do better as there would be a reluctance to reduce wages.(People on a fixed income like wage earners do worse with inflation)
4/ the reduced economic activity would lead to marginal businesses going under and increased unemployment but how bad a problem would this be.

Save the wealthy, overconsumers and the speculators at the expense of the investors and savers. I don't see this working out well long term.

[skid]

Those arguments against deflation didnt seem to hold water in Japan in their ''lost decade''

They are starting to talk more about negative interest rates and paying to keep you money in banks (for the really wealthy it is almost impossible to store that kind of bulk of paper money)

There is an interesting article on this on one of KWs links on the Black Monday thread.

[Aaron]

Those arguments against deflation didnt seem to hold water in Japan in their ''lost decade''

They are starting to talk more about negative interest rates and paying to keep you money in banks (for the really wealthy it is almost impossible to store that kind of bulk of paper money)

There is an interesting article on this on one of KWs links on the Black Monday thread.

The zero hedge article about NIRP?. I can't get my head around it. No one would want cash/money in the bank so where do the banks get the funds to lend to the borrowers(central banks?). And who wouldn't want to borrow excessively if you get paid to borrow. Money becomes meaningless and you just buy whatever real estate or shareholding you can as asset prices have no limit except the limit provided by central banks controlling money supply. It would be a rush to get your hands on funds to buy anything at any price. But it is just finance the world would still have the same amount of resources. This is what happens when you let Bachelor of Arts students run the world. Not saying they are thick just that they aren't always rooted in common sense as it is easy to be confused by abstract ideas and theories. I know I am when I consider this stuff.

[skid]

The zero hedge article about NIRP?. I can't get my head around it. No one would want cash/money in the bank so where do the banks get the funds to lend to the borrowers(central banks?). And who wouldn't want to borrow excessively if you get paid to borrow. Money becomes meaningless and you just buy whatever real estate or shareholding you can as asset prices have no limit except the limit provided by central banks controlling money supply. It would be a rush to get your hands on funds to buy anything at any price. But it is just finance the world would still have the same amount of resources. This is what happens when you let Bachelor of Arts students run the world. Not saying they are thick just that they aren't always rooted in common sense as it is easy to be confused by abstract ideas and theories. I know I am when I consider this stuff.

If you look at Switzerland (that apparently fits this scenario)Im sure you will find that it would still cost you to borrow,and there would still be strict guidelines as to who they lent to---Its the savers that will get burned,especially the ones with nowhere to put their paper cash if they could get it from the banks (and secure it)--Its pretty heady stuff alright ,thats the problem with economic intervention--things get really complicated.
I dont pretend to understand all of what they are saying,but I do understand the fact that China (as most of us know)hold vast amounts of US currency(bonds etc)--enough to stuff the USA if they dumped it(this of course they wouldnt want to do as it would devalue what they want to sell---but now that they have started meddling with their economy and their share market is getting into trouble,they are needing to liquidate some of that US paper (more ,Im sure than they would ordinarily be comfortable doing)to try to shore up their market--Meanwhile the Fed (US) is starting to run out of options,with their tools(or lack of)
I assumed the Fed would chicken out and not raise interest rates and therefore the ever optimistic US markets would then bounce--but after a day to digest this, the markets dropped (have they finally realized the emperor has no clothes?)
This may all bounce back tonight,but to me ,it represented a troubling turning point-the fact that this 1.74% drop has come at this point.

That negative interest scenario is certainly scary though if it plays out.