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More rate cuts coming

sidsid
edited December 2007 in The Economy
Looks like inflation might not be the main concern for the fed.
http://www.bloomberg.com/apps/news?pid= ... refer=home

If Inflation goes up quite a bit then house prices will also follow. I think the savers are going to be the biggest losers.

Comments

  • AwaySoonerAwaySooner
    Is this guy serious? Last I check, I pay gas and food with dollar bills, may be he thought we just bartered them? Last I checked, everything is imported!

    "Still, increases in the prices of food, imported goods and energy products may raise inflation and inflation expectations, he said. "
  • deejayohdeejayoh
    sid wrote:
    Looks like inflation might not be the main concern for the fed.
    http://www.bloomberg.com/apps/news?pid= ... refer=home

    If Inflation goes up quite a bit then house prices will also follow. I think the savers are going to be the biggest losers.

    If inflation goes up, interest rates go up. Savers will do just fine. Unless I am forgetting my finance 101, that's pretty much how it works*.

    Housing prices, on the other hand, will probably drop much faster in real terms in a world of high inflation. Home debtors may do ok because they get to pay off their mortgages in play money (at least those with fixed rate mortgages) - but the trajectory for the real value of homes will likely be little affected by inflation or the discount rate.

    *(1 + r)(1 + i) = (1 + R) where r is the real interest rate, i is the inflation rate, and R is the nominal interest rate
  • rose-colored-coolaidrose-colored-coolaid
    That's actually a really good point DJO. Inflation sky rocketed in the late 70s, but weren't 20 year T-Bills paying 15% interest? If you got 15% annual from 1980-2000 with 0 risk, you crushed any other investment out there. I'd have to punch out the numbers, but you probably still won even considering the 1996-2000 was a massive stock bubble.
  • deejayohdeejayoh
    Genesis over at the Market Ticker had a rant about this today. worth a read.

    Oh Do Come On Friday
    Give me a break.

    Strong rally. All week, basically.

    On the basis of what? Another 20, or even 50 bips of rate cuts?

    How'd the last two rate cuts do in terms of stimulating the economy and unlocking the credit markets?

    THEY HAVE DONE NOTHING BECAUSE THEY CAN'T!
    Deflation is in our future - the worst-case scenario for anyone in debt. Why?

    Because our government is refusing to do its damn job of regulation and has refused to get the handcuffs out and slap 'em on the CEOs and others who have made these insanely-rosy projections and statements, while at the same time encouraging and enabling the hiding of liabilities!

    As such confidence has collapsed between parties in the market, and this WILL lead to a collapse in lending and credit - the destruction of money, which is the definition of deflation.

    It has already started and is going to get MUCH worse.

    If you're in debt and can't get out, you're finished. Sorry; that's how it is.

    If you can get out of debt in the next few weeks and months, do so. If you have cash, conserve it. Save. Keep your powder dry. Do not be stupid and listen to people like Cramer who said last night that "cash will be the biggest losing asset class."
  • MarkorMarkor
    deejayoh wrote:
    If inflation goes up, interest rates go up. Savers will do just fine. Unless I am forgetting my finance 101, that's pretty much how it works*.
    Higher interest rates also can mean a higher total price to be paid for a house, even if house values fall in in real terms. Wages are unlikely to keep pace with high inflation (it's a great opportunity for employers to drop real wages), but rents are very likely to do so. I agree with sid that if inflation goes up quite a bit then most savers (renters) are going to be the biggest losers.
  • MarkorMarkor
    rose-colored-coolaid wrote:
    That's actually a really good point DJO. Inflation sky rocketed in the late 70s, but weren't 20 year T-Bills paying 15% interest? If you got 15% annual from 1980-2000 with 0 risk, you crushed any other investment out there.
    There's some hindsight 20/20 there. It wasn't 0 risk looking into the future in 1980. If the gov't offers x% interest tomorrow, there's a risk that inflation will be > x% on average for the term of the loan.
  • rose-colored-coolaidrose-colored-coolaid
    Markor wrote:
    show previous quotes
    There's some hindsight 20/20 there. It wasn't 0 risk looking into the future in 1980. If the gov't offers x% interest tomorrow, there's a risk that inflation will be > x% on average for the term of the loan.

    I certainly agree. But the point wasn't where inflation would go, but rather that bonds and inflation tend to move together. Agreed that 15% only looks excellent because inflation moderated to a few percent. But if inflation had moved up to 25%, then you'd probably have seen T-Bills at 28%.

    The only part of this which is hindsight is the part where inflation then plummets and you make a killing. The rest is fundamentally sound at any time.
  • MarkorMarkor
    rose-colored-coolaid wrote:
    Agreed that 15% only looks excellent because inflation moderated to a few percent. But if inflation had moved up to 25%, then you'd probably have seen T-Bills at 28%.
    If that happens then the 15% T-Bill would be losing money at the price you bought it at, and so it's worth a lot less on the secondary market. Maybe you can make that up on the new T-Bill if you have any cash left over, or maybe not. Maybe you buy the new T-bill and inflation subsequently jumps to 35%.
    The only part of this which is hindsight is the part where inflation then plummets and you make a killing. The rest is fundamentally sound at any time.
    Keep in mind that at some point--many would say soon--the US is going to have to do some or all of the following: default on its debt, reduce its debt via inflation, reduce its debt via higher taxes or reduced services. The most likely route is the inflation one.

    My bet is that if the Democrats win the White House next year, inflation will ramp up soon thereafter because that will be the incentive of the Republicans and their business cohorts, so they can reclaim the White House. If the Republicans win then it will take longer for inflation to ramp up, but when it does it will be worse.
  • deejayohdeejayoh
    Look what they are saying in the UK
    Market fears that Bank has 'lost control'

    John Wraith of Royal Bank of Scotland said: "They haven't got the control over rates in the financial system that they ordinarily have.

    "Historically, a 25-basis point change in Bank rate would lead to an almost identical change in Libor [the benchmark rate in the money market]. That hasn't happened."

    He said this made it highly likely that the Bank would eventually be forced to cut rates even further than anticipated. A swathe of economists predicted borrowing costs could now drop to as low as 4.5pc or below by the end of 2008.

    Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: "The fact of the matter is that the market rather than the Bank is now dictating monetary policy - and not from the point of view of controlling inflation, but from the point of view of a random walk. It is behaving in a way which is totally rational for individual banks but adds up to a major deflationary issue.

    Sounds familiar to me
  • rose-colored-coolaidrose-colored-coolaid
    Markor wrote:
    Keep in mind that at some point--many would say soon--the US is going to have to do some or all of the following: default on its debt, reduce its debt via inflation, reduce its debt via higher taxes or reduced services. The most likely route is the inflation one.

    I used to agree, but I am no longer as convinced. Inflation is a convenient way to retire debts, but it behaves very slowly. And it's dangerous if you lose control of it. This is why the Fed loves 3% inflation. It's really just a silent extra tax.

    But that's way different than a 20% inflation. Raising taxes and cutting spending is probably more palpable to politicians than the massive turmoil caused by a devalued currency.

    I expect some combination of all the strategies, but it will be entertaining to find out what really happens.
  • deejayohdeejayoh
    It's very hard (and painful) to put that genie back into the bottle.

    this article over at Bloomberg was interesting. probably meaningless, but interesting.

    http://www.bloomberg.com/apps/news?pid= ... refer=home
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