Sunday, 22 March 2009

In "Central Bankers" I Trust


1- Do not forget Finland is part of the Eurozone
:

"The European Central Bank will act quickly if the European policy response to the economic crisis becomes inflationary, ECB Governing Council Member Axel Weber said on Sunday. "I can promise you the European response to this crisis will not be inflationary -- that is why guys like me exist," Weber told a business conference."
First you will hear a lot of information flowing that will try to scare you about inflation and that central bankers are not any more in control (or sometime are part of some kind of malign association).

This could make you act and behave in an irrational way and could probably push you to buy overpriced assets, be it real estate, stocks or anything that has been inflated in the past 10 if not 20 years.

2- Independence underlined by serious bias for inflation fighting:

" "We are independent central banks and we know exactly when to start tightening balances. "What we see in the crisis response now is not inflationary," he said." But I can promise you once it starts looking inflationary we will tidy up the mess," he said. "
So here you will get a clear signal when inflation could become a threat. When the ECB will start tightening i.e start raising interest rates, it would mean that their indicators are showing that inflation is about to appear. At that moment, you would have to make very important decisions.

But for now, we are in the reverse situation, the ECB has not finish cutting rates and could in the year to come implement extraordinary measures to counter the existing threat and a real one: deflation.

3- Inflation, yes, but that is not today battle.

"Weber said that while he could not exclude the need for further policy measures to address the economic crisis if the situation were to deteriorate further, the focus should be on the already agreed steps, much of which were not implemented yet.

"I cannot rule out, if the situation deteriorates further, that there will be additional measures ... it is very hard to judge the overall impact this crisis has had on the economy," he said, and added: "Let's first implement all that has been decided.""
This crisis should not be underestimated. Lots of folks have been accustomed to have a quick recovery after 1-2 years of benign global recession. This time it could be worse, no one can predict now what, and how long it would take to have a global economy growing at sustainable levels .

But the transition will have a price...that is : asset deflation.

It doesn't mean that the world will go into the chaos but instead it would have readjusted itself toward a better foundation. A new financial framework is being put in place, that is robust (better regulation and supervision) and reliable (not going from one bubble to another, where greed is the prime factor).

So what we need is some lesson learned and the capacity from our financial and political leaders to look further away and have a vision for a better world.

The idea that the system can only be cured by debt is advising what has put the U.S. economy the way it is. Irresponsible creditors giving credits to irresponsible debtor.

Government, in a Keynesian way, will use debt to keep unemployment from catastrophic levels and put a floor to the exceptionally fast deteriorating GDP. I would like to note that the Finnish government has clearly chosen this path, albeit a measured one.

And then hearing that central bankers will "wiped out" debt by creating inflation is first, in total contradiction with their mandate and second will promote what is called "Moral Hazard" i.e rewarding the bad economical agents and punishing the responsible one, the good economical agent that do save before buying assets and do not buy or invest if they judge they cannot afford or think it would be a bad investment.

So "in Central Bankers I trust", would be my last word, since they have the power to put us in a stable, sustainable and responsible world. They can commit mistakes, they can underestimate a problem, but what we want from them is the capacity of acting at the most crucial and critical time, and today we are in such situation.

There is no alternative, since the other path will probably put us back few centuries ago.

23 comments:

Andrew said...

HF

I often get the impression you work for a certain large bank

Isa said...

I trust the Germans is all I'll say.

Another thing: how will asset deflation (say, real estate) affect the capital region? You know, shortage of supply... increasing demand...?

Andrew said...

HF

Once again if anybody says they are worried about inflation you say this person is "trying to scare you"

Obviously debate is not possible.

there is only one answer you want to hear or want to promote.

Andrew said...

Apparently, so we are told, there is a crisis in eastern europe.

Apparently German buisinesses are exposed to Eastern Europe

Then there is Austria totally exposed to Hungarian? mortgages.

Then there is the Swiss exposure to this and that.

Then there is the German bank exposure to the Irish problems

Then there is the German bank exposure to the US housing market where Deutsche does not even know if has title rights to the properties it has lent on. And the bad real estate bets in Las Vegas and NYC. Lets not forget all of those German Spanish holiday villas also.

Now those nice Americans have decided to give AIG vast amounts of money so they can give vast amounts of money to Barclays and Deutsche and BNP paribas.

Now you have to wonder how many steps away M Trichet is from all of this? Is M Trichet really just going to do nothing or he going to help his friends out?

After all we are all M Trichets friends now.

I really dont know. My crystal ball is not that good.

If we trust the Germans then we might want to start worrying?

Can we trust the French? Have they also not supported their economy with mountains of debt?

Didnt the belgiums have to be bailed out?

Who actually is left to pay?

Finland??

Luxemburg maybe?

HousingFinland said...

@Andrew

When all the indicator are today showing a disinflation or a deflation threat...so when I hear news or some famous investor coming on the media limelight shouting (for over a year) that hyperinflation is coming I'm afraid the aim of those people is to confuse some weak investors or private people into having bad judgement.

As I said I would not listen to some handful amount of individuals or some media to know when REALLY inflation is back.

I will look at the economical agents which count for millions and should be well informed.

So I will look at Yields on various government bonds (strangely enough the people that are shouting for hyperinflation are as well shouting for bubble in this area).

Maybe I should clarify what kind of indicator should be looked at.

1-the Euribor is good short to medium term indicator. Should the Euribor goes beyond the 5.5%,( a limit that fail to be broken in 2000 and 2007...), then I will get worried about high inflation.

1 year Euribor

You will notice how fast the economical agents (mainly bond investors) have reacted...far faster then the ECB...

2-I will look into Government bond. U.S., German, UK etc..

The U.S. will be the first country to get out of this recession (depression?) so worth to observe it.

The U.S. Bond yield to look at is the 10 years, should it go beyond its long term average then it will be the first alarm:

Government Bonds

At the moment it is at 2.64% ...

As I said we are not in the 70's so let's not confuse the readers.

Today we have globalization combined with the technological advances that allows to put production where it is cheap and where it make sense.

In the 70's, so during the period of high inflation, oil price in fact all energy prices were shooting up to levels not seen at that time:
http://www.wtrg.com/oil_graphs/oilprice1947.gif

Today, we are clearly out of that as commodity have collpased with oil price divided by 3 in few months...so people at that time were scaring people with the 70's scenario to only be dead wrong within 2 months.

So you can have a 70's type issues in India, China but in no way in Europe or even New Zeland.

Today, company are fighting for survival and will have to fight to be competitive and not like in the 70's raising prices to get higher profit and paying its worker higher wage...This time in Europe is gone...

HousingFinland said...

@ Isa

I do agree with the Germans and with you too ;->

German central bank was an example during the 70's it managed to go through this period with a very strong currency and robust economy.

German, I think have had a very bad period during the 30's that taught them a life lesson. So indeed I will listen to them and what they say is more or less what the ECB is thinking through the voice of WEBER.

increasing demand if the job employment stay at the level observed in the past...which won't be the case. They are supply coming in many parts of the capital region, some Flat do not sell simply because their price do not match the demand.

As I said in an earlier post, one company went bankrupt while building 90% of apartment block. The price was just surrealist and the company pay the high price..."lose it all"..they did not understand the rule of the market and I suppose many will follow the same path if they do not change back to reality.

Bankrupt Company

Another point to think about:

While the housing market were rising , real estate agent were focusing on commission amid high level of transactions..thus helping raising higher and higher prices.

Today, while transaction volume has clearly collapsed, real estate agents will fight for their survival thus in need of raising the number of transaction. To do that they will force price down in order to recreate a market...the same will apply for builders.

That is just a thought but could materialize...other country that have had advance real estate correction could give some clue too on what will trigger such correction...faster since anyway the correction is under way.

Anonymous said...

Actually, a chaos system is not really "chaos," but is driven by those influential forces, via the gray areas of the laws created by the forces to limit the others. That system is thus intentionally nonlinear. I would thank HousingHelsinki for the very informative contribution, no matter where he works. He make with the best he could.

Here might be a living example on the nonlinearity:

Helsinki time Monday (23.3.2009) reports:
Finland in European top ten in number of freedom of speech violations...
Their reason on this: One reason for Finland’s relatively high number of freedom of speech violations may also lie in the fact that the Finns are very good at complaining. "Very good at complaining," is it true or the other way around?

Andrew said...

Anonymous

If you say that chaos is driven by laws then you are not describing chaos.

Chaos is just entirely random. At one point in time it may appear that a particular law can be created and applied. But at other times these laws no longer apply.

Much of the current financial mess has been created by the belief that laws that seem to apply to today will apply next year or decade.

I think what you are revealing is that you believe in laws that must apply.

Whereas i think that law is inflexible and does not accurately describe reality.

Our human minds can use laws to help us understand what we observe so give us some sense of safety or some ability to compare later.

When we are children we often create a law that mum and dad look after us. At some point we need to change that to 'mum and dad dont look after us unless we help them look after us'

Our created laws are useful but they dont describe absolute reality as far as i can see.

And it is the lesson i think of the last 100 years of science that law based science is restricting and narrowing of the possibilities that our minds can create which when we look for it 'in reality' we can find it and can develope it regardless of whatever laws that might seem to apply to say it is impossible to be created.

And so the overly logical person says there must be laws that say such events as todays must have been forseeable. And they find examples of people who foresaw it and the create the law that these people fortold the future because the future could be known by the details that were known about in the in the past.

But in reality many people are forcasting realities in the future which never ever come true.

Much more is random and chaotic than it is pre planned and known in advance by some supreme being or illuminated one.

Possibly!

HousingFinland said...

regarding forecasting, you predict how a system will be at a certain point of time based on your current knowledge but clearly you do not have control and knowledge of all the variable involved in this system and how it will make it evolve...so clearly accurate forecasting is Impossible and it is even true as the time prediction goes further up the time line.

That is why when you predict you will give a probability that this event will occur based on certain assumption and provide as well alternative scenario.

To me, the Finance ministry committed a total forecasting failure last September, it was based on over confidence, blindness, foolishness and a total lack of understanding of the impact of certain "variable"...and in the middle of September, the Lehman butterfly effect came to add a variable that was not planned and put clearly their forecasting in the bin (from +1% growth to -4% in a matter of a month).

In my view, you can have a baseline scenario that you adjust as time goes where more variable are known or some uncertainties disappear.

So a good example is the weather forecast, I suppose one look at it even though we know that it is not 100% accurate but then what is the other alternative, you know that in average they might be right.

So you need to forecast even though you know that there is a probability that you get it wrong, but you learn and you refine your model.

regarding the financial, there was a lot of part that was related to Fraud and greed, variable completely taken out of the system...

Anonymous said...

Here is the news from UK:

By Telegraph Staff
Last Updated: 4:21PM GMT 24 Mar 2009

The Consumer Prices Index (CPI), the government's preferred measure which is used in economic policy, rose unexpectedly to 3.2pc in February, official data showed.

Andrew said...

Anon

Back in the 70's? the UK would just announce it was devaluing the pound by 10% and that was that. I suppose that was because currencies were not floating at that point in time or there were even so aggreements to peg within ranges?

If these inflation numbers persist is the BOE going to end QE? I think we can safely say 'No'

They will only end QE when every man and his dog realise that inflation is all around them and if they dont spend their savings they will be worth a sweet fat useless almost meaningless number.

I recall buying my first pint of beer in 1973? when i was 17? I paid 17? Pence i recall. Now a beer is around 279p. almost 17 times increase.

I dont think property did much in the UK in the 1970's until it began rising in 1980's? I bought at 32500 in 1983 and that house at the peak was worth maybe 500,000 at 15 times increase.

What does it all mean?? I am not sure but inflation in my life seems like a never ending continual monster you have to defend yourself from dispite the bullshit dished out by the likes of tricky Trichet and his chums!

:-)

Andrew said...

Bare bones of Krugman:

Latest plans wont work. USA just doing what Japan did.

"Give me 4% inflation for 5 years now and i think that would be a good thing"

http://www.youtube.com/watch?v=rQLnVyEx0Kg

Anonymous said...

HELSINGIN SANOMAT Wednesday 25.3.2009:

The government also decided to raise the maximum and minimum levels of the property tax. The changes will take effect from the beginning of 2010.
The issue of raising the property tax was the topic of a “mini-dispute” within the government. The Centre Party was especially reluctant to support the project, which was seen to be likely to impose higher taxes on residents of municipalities that were already in a difficult position, whereas municipalities in a good position would not have had to raise the tax.
The property tax increases will probably raise housing costs in many communities. According to calculations of the Taxpayers’ Association of Finland, the property tax will go up in at least 184 municipalities.

---> They drive even faster and deeper into the blue-planned economy.

---> Yes, inflation would allow them to tax you as much as they need...

Andrew said...

I might have to get my head out of the sand. I suppose i rely on my wife to keep me informed too much!

Evidently I learnt today that there is a crisis in local authority funding presumably made worse or created by company profit taxes plunging?? Or is this related to Nordea shifting out of local authority lending last year onto some kind of state supported organisation?

Meanwhile I am looking to buy in Helsinki regions. Espoo are at the lowest property tax range. Helsinki i am not sure about. But property taxes in Helsinki are anyway very low as far as i know. Even if they double it would not make much of a difference to me as far as i know?

I think i need to know more!

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