Comments on: The Fog of the ’Flationary War is Lifting http://www.dailyreckoning.com.au/flationary-fog-of-war/2008/09/12/ An independent perspective on the Australian and global investment markets Sat, 21 Nov 2009 17:27:32 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Joe http://www.dailyreckoning.com.au/flationary-fog-of-war/2008/09/12/comment-page-1/#comment-41121 Joe Fri, 12 Sep 2008 13:08:49 +0000 http://www.dailyreckoning.com.au/?p=3706#comment-41121 The boom in house prices has not been reflected in CPI figures (I know this in the U.K and I suspect it is the same in the U.S). Since CPI was weighted to give the impression of low inflation purely as a means to self fulfill the politicians prophecy, it was designed as a large stick with which to beat wage demands. The logic went, inflation is at 5% but CPI is at 2.5% and so wage demands come in at or around 2.5%. Between 2000 and 2003 in many parts of the U.K house prices doubled. This is the single most expensive item any average person will ever buy, and the cost of it doubled inside 3 years. Since 2005 there has been another boom in house prices but not as dramatic as the 2000-2003 period. In essence a great part of the British economy (if not the biggest part) was expanding at 30%+. The net affect of this is that the greater portion of the U.K economy had its money supply expand in order to finance the housing transactions, yet, this was not included in the national gauge of inflation. This is where the debt bubble really began. Income increasing at an average of 4% per year, and housing increasing by say 8% a year (these are figurative numbers/guestimates I do not know the actual numbers). All of a sudden there is a need for the average man to borrow an unsustainable 5,6 or 7 times what he earns to buy a house. The financial markets then invented a disguised debt facility so that it could continue borrowing in order to support the transaction volumes. The very basis of this disguised facility was that in order for diluted fees to be poliferated through the financial networks, it needed more and more volumes and an ever increasing value. Even the FED played its' part post 9/11 by making it more profitable to borrow and invest, than to save, by trying desperately to avoid the recession the World needed back in 2001 and 2002. It was inevitable that this expanding bubble of debt would burst, and that estimated default rates would blow out. The unsound pillars on which these financial instruments were built, would collapse. The collapse in house prices in the U.S and U.K has come about simply because the money supply to finance transactions has shrunk, this has forced prices down as there is no demand. So how does the World ensure that this is not repeated if and when it sorts itself out (with all the ensuing pain it will inflict) ? Simple tie the cost of housing into the national calculations, such that rate setting policy can adjusted to take it into account. The governor of the Bank of England Mervyn King was warning the Treasury that the housing bubble was expanding beyond reason. As this report from the BBC in February 2002 shows: http://news.bbc.co.uk/1/hi/business/1840004.stm the current problems in the Worlds economies were predicted as far as debt vehicles is concerned. Along with the BOE warnings of the housing bubble, it just seems too many chose to ignore them. I wonder if it was the bonuses and fees that blinded them. The boom in house prices has not been reflected in CPI figures (I know this in the U.K and I suspect it is the same in the U.S).
Since CPI was weighted to give the impression of low inflation purely as a means to self fulfill the politicians prophecy, it was designed as a large stick with which to beat wage demands.
The logic went, inflation is at 5% but CPI is at 2.5% and so wage demands come in at or around 2.5%.
Between 2000 and 2003 in many parts of the U.K house prices doubled.
This is the single most expensive item any average person will ever buy, and the cost of it doubled inside 3 years. Since 2005 there has been another boom in house prices but not as dramatic as the 2000-2003 period.
In essence a great part of the British economy (if not the biggest part) was expanding at 30%+.
The net affect of this is that the greater portion of the U.K economy had its money supply expand in order to finance the housing transactions, yet, this was not included in the national gauge of inflation.
This is where the debt bubble really began.
Income increasing at an average of 4% per year, and housing increasing by say 8% a year (these are figurative numbers/guestimates I do not know the actual numbers).
All of a sudden there is a need for the average man to borrow an unsustainable 5,6 or 7 times what he earns to buy a house.
The financial markets then invented a disguised debt facility so that it could continue borrowing in order to support the transaction volumes. The very basis of this disguised facility was that in order for diluted fees to be poliferated through the financial networks, it needed more and more volumes and an ever increasing value. Even the FED played its' part post 9/11 by making it more profitable to borrow and invest, than to save, by trying desperately to avoid the recession the World needed back in 2001 and 2002.
It was inevitable that this expanding bubble of debt would burst, and that estimated default rates would blow out. The unsound pillars on which these financial instruments were built, would collapse.
The collapse in house prices in the U.S and U.K has come about simply because the money supply to finance transactions has shrunk, this has forced prices down as there is no demand.
So how does the World ensure that this is not repeated if and when it sorts itself out (with all the ensuing pain it will inflict) ?
Simple tie the cost of housing into the national calculations, such that rate setting policy can adjusted to take it into account.
The governor of the Bank of England Mervyn King was warning the Treasury that the housing bubble was expanding beyond reason.

As this report from the BBC in February 2002 shows:

http://news.bbc.co.uk/1/hi/business/1840004.stm

the current problems in the Worlds economies were predicted as far as debt vehicles is concerned. Along with the BOE warnings of the housing bubble, it just seems too many chose to ignore them.
I wonder if it was the bonuses and fees that blinded them.

]]> By: Ross http://www.dailyreckoning.com.au/flationary-fog-of-war/2008/09/12/comment-page-1/#comment-41086 Ross Fri, 12 Sep 2008 06:10:57 +0000 http://www.dailyreckoning.com.au/?p=3706#comment-41086 But where did the constitutional basis of US legal extra-territoriality come fom? But where did the constitutional basis of US legal extra-territoriality come fom?

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