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Samizdata quote of the day Let’s get this straight. The house price bubble has been caused by money printing. In today’s world, that means as a result of the Bank of England keeping interest rates artificially low. That’s why the money supply is growing at more than 10% a year and this money has to go somewhere. Lots of it has gone into the housing market. And the “solution” from all of the above is more of the same!
Those who are going to pay for this mess are the prudent, those who haven’t lived beyond their means. Their savings will be inflated away to bail out the welfare bums, many of whom are economic illiterates infesting the business world.
– David Farrer names and shames a bunch of granny muggers
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As it happens, Ambrose Evans-Pritchard at the Daily Telegraph keeps repeating, in column after columns, that interest rates should be slashed and the Pound depreciated. Why does he still have his job?
Tosh. Bubbles are peackock’s tails they continue growing because they start.
The reasons house prices are among the main source of bubbles in the UK and some other places are (1) that they are an asset you can live in, so they are the sole form of investment most people can justify to themselves; and (2) they get peculiar tax treatment. As taxes on other investments, particularly pensions, have racked up, the comparative attractiveness of tax-free gains on your principal residence is increased.
Crowd effects will do the rest. No money-printing necessary.
You mean this is not the first time?
Well, the bubble has at least partly been created by unreasonably low interest rates, and governments are partly to blame for this, but I wouldn’t say it is excessive money printing per se. If it was that, there would have been more general inflation. (Okay, there were certain global forces that had a negative impact on prices, so perhaps a little money printing).
I have been saying for years now that when this all started to unwind, the first response would be calls from the precise sorts of people David quotes for government to bail insolvent home-buyers out. This translates as “steal the money and assets of those of us who have behaved prudently to bail out those who have behaved irresponsibly.
Sadly, though, the cult of hone-ownership in places like Britain is so strong that many people are incapable of seeing buying a home as anything but sensible, and people harangue me from time to time for my irresponsibility for not buying a house, and they continue to do this even after the events of the last nine months. It is really tiresome.
Money printing may not be a necessary cause, but that doesn’t mean that it is not the cause in this case. The money supply has been rising. Mortgage lenders have been lending at ridiculous rates. What happens to the price of houses if you suddenly give people large sums of money to spend on houses?
“tosh” – Guy you are, no doubt, a more cultured man than me and better educated in many ways. But you know nothing about economics – in the sense of the science of exchanges in society (catallactics), I am not claiming that you know nothing about how to maxmise the well being of your household (the literal meaning of “ecconomics”) – indeed you no doubt know more about that than I do (which would not be difficult).
Asset price bubbles are indeed created by rises in the money supply – the money has to go somewhere.
For example, a “12% increase in the money supply” does not mean that everyone finds they have 12% more money in their wallets – it means (normally) that certain specific financial enterprises (and the individuals most closely connected with them) have had access to an expanded flow of credit money, which then goes on from them into certain specific parts of the economy (often the real estate market and the stock market).
As F.A. Hayek put it in one of his essays in “New Studies” (1978) it is wrong to think of an expanded money supply as gushing flow of water going everywhere almost at once. It is better to think of it as like a “flow of treacle” pileing up in certain places. Thus distorting the economic structure of society.
The Bank of England is seeking, by its cuts in interest rates, to maintain the credit bubble – rather than see it collapse. This is also the policy of the Federal Reserve.
In the short run this may cause less pain than allowing the credit bubble to liquidate – and the short run is very important (it is vital to keep either Senator Clinton or Senator Obama out of the Whitehouse).
But eventually malinvestments must be eliminated.
So you are saying that the Fed should delay the bursting of the bubble until after the elections? 😉
Asset price bubbles are indeed created by rises in the money supply – the money has to go somewhere.
Not necessarily. Granted a rise in the money supply might contribute to a bubble – though it could not choose what to bubble. Or a bubble itself (were it to result in the creation of bank deposits) might assist a rise in the money supply. But I do not think you can safely assert that every asset price bubble is caused by monetary growth. Or when the bubble bursts, where does the excess money go, if it has to go somewhere?
It vanishes into thin air, as the current deleveraging demonstrates.
In the US, the Federal Reserve has been busily inflating the money supply and artificially depressing interest rates for the last 7 years or so, which contributed greatly to our housing price bubble. [Another result is the extremely low exchange rate of Dollars for (e.g.) Euros.] Allegedly intelligent people here are also calling for more of the same. (“Hair of the dog”?)
It’s so stupid. Let the market clear. A short, quick pain is better than a long, drawn-out one (like pulling off a band-aid). Unfortunately, thanks to the government monopoly (effectively) on schooling, economic illiteracy is rampant, and venal politicians who want to be seen as “doing something” to assuage people’s pain are taking advantage of that ignorance. Of course they will make things worse, but the only thing that matters is their (perceived) intentions, not actual results.
Of course it is. When the only tool you have is a hammer, everything looks like a nail.
At the risk of digressing slightly, I’ve just been watching a C4 News report about people starving due to the current (environ)mentalist fad for burning food as fuel. The wisdom dispensed went something like this:
1. People in “poor” countries are starving.
2. This is largely because of interference by the governments of “rich” countries.
3. That interference cost a lotof money.
4. But that’s OK, ‘cos in “rich” countries money grows on trees.
5. And the solution is, governments of “rich” countries need to harvest more money from their money trees and give it to the World Bank.
6. Who will use it to do some more interfering.
Christ!
Laird: only 7 years?
Ah, but, with respect, your mistake here is to confuse money with wealth.
Guy:
The rise in the money supply IS the bubble.
As for where does the money go – as Ralf points out sometimes it just goes.
For example, the decline in the money supply (broad money – there was no decline in notes and coins of course) between 1929 and 1933 that the Chicago school people complain of so much (it never seems to occur to them that it was the rise in the money supply, the “boom”, that was the start of the problem).
Sometimes there can be a liquidation of malinvestments without a “price level reducing” decline in the money supply – 1981-1982 in the United States is a classic example.
Milton Friedman thought the cut off of ADDITIONAL (for that is what we are talking about) funny money was too rapid/harsh – but actually Paul V. got it right. Cold turkey was the best way – and as the “general price level” never actually fell even the Chicago school people should have been in favour of his policy (although they were not).
If there must be Fed (and I would like to demolish the building and sow the land with salt) let us have a Democrat like Paul V. (not that there are any like him anymore) rather than a “libertarian Republican” like that …… Greenspan.
Ralf:
Would I continue to toss more funny money at the markets in a desperate effort to prevent a full scale bust before November?
Well such a policy (which seems to be in operation)would actually make the eventual bust worse – but I am a politician and you should not lead a poltician into temptation (we are not good at resisting temptation – in the same way that the sea is not above the sky).
What is more important than when the bust finally fully comes is what the reaction is.
The reaction decides whether the bust is short lived (like 1921 or 1981) or something like the Great Depression.
Both Senator Clinton and Senator Obama would greatly expand government spending and taxes and would do all they could to PREVENT wages and prices adjusting to the bust.
And they call their foe “Herbert Hoover” – pity few people actually study past events and actions (as opposed to the fairy stories that pass for history in the school and university text books).