House prices in freefall

[Sunfish]

I'm starting to feel for LB. It aint easy to put forward a cautious view.

Acey, I have assumed that you have your affairs in good order. You do not need any advice from me and I was not attempting to give any. I was however trying to bring another view to the table that has not been canvassed here and is clearly unwelcome.

This view is inconsistent with the super high gearing which is so popular. Those with high LVRs may loose everything. I am unwilling to take that risk. Nor am I making stupid statements that I will buy your properties for 50c in the $ next year. I sincerely hope the bad times do not come but still intend to limit my vulnerability in case they do.

If means I'm piss weak and unambitious, then so be it.

Thommo

 

[L Bernham]

Thommo,
The general view on this forum is that you should lever youreself as much as the bank will allow and when that dries up find another bank to get even more.
By doing this in the last 5 years you would have made heaps. The more people that realised this the more investors flooded the market and this pushed prices up (along with the other things I've mentioned previously). This cannot be denied - higher demand from investors will raise prices.

Unfortunately these things can't last forever. However there are some that don't believe prices can fall and those that have the highest leverage with -ve cash flow properties will be the ones in serious trouble. I know of a few people in this boat who are already feeling the pinch. They feel they did nothing wrong apart from follow the dream that everyone else seemed to be following. and its a shame but its going to cost them dearly.

LB

 

[Aceyducey]

Originally posted by Thommo
I'm starting to feel for LB. It aint easy to put forward a cautious view.

Acey, I have assumed that you have your affairs in good order. You do not need any advice from me and I was not attempting to give any. I was however trying to bring another view to the table that has not been canvassed here and is clearly unwelcome.

This view is inconsistent with the super high gearing which is so popular. Those with high LVRs may loose everything. I am unwilling to take that risk. Nor am I making stupid statements that I will buy your properties for 50c in the $ next year. I sincerely hope the bad times do not come but still intend to limit my vulnerability in case they do.

If means I'm piss weak and unambitious, then so be it.

Thommo

Thommo,

You've seriously misinterpreted my post.

I'm simply saying respectfully that not everyone shares your view.

Some people when they feel they have no more chances feel they have nothing to lose by giving it another shot. My parents certainly fall into this category (they were born during WWII).

I don't recall anyone on this forum who advocates super-high gearing - though what you regard as super-high gearing may differ from my definition.

I consider super-high gearing being anything over 90%. Personally I'm comfortable at the 70-80% mark. From the polls we've had on this forum in the past this mark seems to be quite comfortable for many others as well.

I do not believe that people at gearings of this level are at any risk of 'losing everything' - except if there is a collapse of our civilisation, in which case most people will lose everything and have to start over, regardless of their personal wishes.

Certainly it's not a time to 'be brave' and borrow at 100%+ unless you are a highly experienced investor with a solid portfolio.

But that doesn't mean one size fit alls.

Cheers,

Aceyducey

 

[JimBouki]

Sheeez, after having read all these posts, I think LB may be right to a certain point. Doubt that properties will fall by up to 50%, but 20 to 30% isn't impossible. Interest rates go up another few percent, negative press, shares come alive and bingo, there you have it. There is a place up the street from me that has been renting for 8 weeks now. They have dropped the price from $320 p/w to $270 p/w and still hasn't rented out. This house a year ago would have gotten $300-$320 no probs. The little signs are starting to show...

 

[Bill.L]

Hi Jim,

If the slowdown that appears to have started continues, it will lead to less development(because the developers run out of buyers). This leads to a slowdown in the building and trades sector, one of the biggest parts of the economy. This will lead to slower growth(and usually recession in the past).

What makes you think that interest rates will go up "another few percent" ???

For my money if the above starts to happen, interest rates will go lower(remember we already have the highest rates in the western world).

Don't believe the unthinking rhetoric of the dark side.

Though in those concrete canyons(apartments) I will be surprised if there are not falls of 20-30%.

bye

 

[L Bernham]

All the builders and developers can't just stop.

This is their job. They have been making good money selling houses for two or more times what it costs to build. When the demand slows all they're going to do is reduce their prices to the levels they were at before the boom. remember - when you could get a new house built for $120K - it was only 3 years ago. the main reason building costs went up was because of a spurt in demand that couldnt immediately be matched with the supply.

i thought this was obvious
LB

 

[Aceyducey]

Originally posted by Bill.L
If the slowdown that appears to have started continues, it will lead to less development(because the developers run out of buyers). This leads to a slowdown in the building and trades sector, one of the biggest parts of the economy. This will lead to slower growth(and usually recession in the past).

Jim,

Bill is spot on.

When the building industry slows down like this (read my Master Builder Thread), developers tend to go into hibernation for awhile.

That's why they mostly contract personnel nowadays (have learnt from past mistakes). It lets them easily reduce their overheads and cut their cashflow requirements when required.

A bare bones development company can run out of a serviced office with only a few staff very satisfactorly.

However they're generally still busy looking at, negotiating and working up different development opportunities. It can take several years or more to get certain developments through design, council approvals, community consultations and other necessary processes.

That keeps them very busy preparing for the next wave.

Equally they can look overseas for more lucrative opportunites

I'm also interested Jim in why you feel interest rates will go up a few more percent. This is not the message from any economic commentators, particulalry neither the RBA (who may move another 0.5%) or the Treasury (who see a potential fall in inflation to 1.75% and see a need to reduce interest rates over the next 18 months).

Nor are there the other factors symptomatic of a need for interest rate rises in the economy.

Don't believe what the doomsayers (or for that matter anyone else) say on the forum - look at what's happening yourself

And if the place up the road from you has reduced rent, well it's just one place......ask agents how the suburb is doing overall. Each house is unique and sometimes the strangest factors can influence property rental rates....

Equally there may be a temporary oversupply of rental accommodation in your burb. It doesn't necessarily imply a systemic issue across all of Australia

Cheers,

Aceyducey

 

[see_change]

Some developers are like investors. They will move to areas where the market is still moving and hot.

There is controversy in Yeppon in recent months over a proposed high rise development. The people who want to do it arn't locals. They develop in various places depending on where they see the demand.

We have a friend who is a developer. When the times are good he starts building spec units / town houses on his own behalf. Builds 5-6 , sells some and keeps 1-2 . When the market is quiet he is smart enough to know that and he slows down his pace of development. Why would you keep on building when you know there is an over supply? Most developers do have a brain in their head . During the last slow down he spent his time building a house for himself. 60 Squares, tennis court , pool , very nice. He 'd bought the original house a few years earlier when the market weas really quiet , at a very good price.

The people who are more likely to suffer are the ones down the bottom of the food chain, the traddies, but alot of those guys do the same . My wifes receptionist was married to a plumber. when he's quiet, he goes around to his friends place and does some work for him , and then the friend will reciprocate by doing the electrics on their new place. Then there are windows that fell of the back of a truck a year ago which they havn't got around to putting in.....


See Change

 

[Peter 14.7]

HI All

Firstly prices are falling in Eastern Sydney ( my area) . My personal experience in in this post.

http://www.somersoft.com/forums/showthread.php?s=&threadid=13984

Reply to Acey asked of Jim

I'm also interested Jim in why you feel interest rates will go up a few more percent. This is not the message from any economic commentators, particulalry neither the RBA (who may move another 0.5%) or the Treasury (who see a potential fall in inflation to 1.75% and see a need to reduce interest rates over the next 18 months).

Acey, you often ask others to support why rates are going to go up?

So what do you make of these comments by Ross Gittins (Age) on why we have acceptable inflation rate. I sure you would agree inflation is critical to the level of rates? If he is right and it appears so we have a trigger here.


To save read time I will delete bits of the article (noted by....)found in full at.

http://www.theage.com.au/articles/2004/02/03/1075776057453.html

Prices rise but cost of living stays the same

Yes, things are getting dearer. But, more surprisingly, others are becoming cheaper, writes Ross Gittins.

I don't know whether you've noticed, but strange things have been happening to the prices we pay. A lot of them have been rising rapidly, whereas another lot have actually been falling.

The consumer price index ...last week showed ...., overall, retail prices rose by 2.4 per cent over the year to December. ........very much in line with the modest rate of inflation we've enjoyed for the past decade or so.................

The price of breakfast cereals has risen 4.6 per cent, ..vegetable prices 5.2 per ..fruit prices ..up 7 per cent... beef ..up 5.8 per cent, chicken 7.4 ..lamb 15.6 per cent. Eggs ..13 per cent ...cigarette prices ....up 4.6 per cent ..beer ..6.9 per cent...hospital and medical services ..up 9.1 per cent, dental ..up ...5.7 per cent.

Then there's the cost of kids. Primary school costs ..up 6.5 per cent ..secondary school ..6.9 per cent, ...10.5 per cent annual increase in child-care costs.....urban transport fares by 4.3 per cent, water rates 4.5 per cent, electricity charges 5.1 per cent, council rates 6.1 per cent, postage charges 7 per cent and gas charges 7.2 per cent.

If the prices of all those things rose by so much, how on earth can the CPI have risen only 2.4 per cent overall? Because of the amazing list of prices that fell.

... children's clothing down 0.4 per cent, women's 0.7 per cent and men's 1.8 per cent. ..towels and linen ..2.4 per cent and footwear 3.2 per cent....fridges, stoves, washing machines and the like - are down 0.6 per cent, but prices of small kitchen appliances are down 4.6 per cent.

And get this: the prices of stereos, televisions, video equipment, cameras and home computers are down 21.3 per cent.

The large sums we spend on motor vehicles make this one more significant than it first seems: car prices are down 2.6 per cent over the year.....

If you divide all the items in the CPI basket into those that are "tradeable" (imported goods plus locally made goods that compete with imports) and those that aren't, you find something interesting: the overall price of tradeable items was unchanged during 2003, whereas the prices of non-tradeable items rose 4.4 per cent.

In other words, all the moderation in inflation of recent times has been imported. You can see that clearly in the cost of holiday travel and accommodation. The cost of local holidays is up 3.2 per cent, whereas the cost of overseas holidays is down 2.3 per cent.

Has the penny dropped? The rising value of our dollar has cut the prices of imported goods and services. That's what the media always assure us will happen when the dollar goes up - and for once the textbooks were right........

If you express the prices of all the things we import in some kind of world currency (to remove the effect of the ups and downs in our dollar), they have been flat or falling for several years.

As I say, strange things are happening to the prices we pay. And there's an extent to which the overall rise in our cost of living is being held down temporarily by the rise in our dollar.

So Acey when you ask why would interest rates go up? It seems pretty obvious to me that when and it will, our dollar does down all the imported good saving our inflation rate in to 2.4%will go the other way.

Inflation then will rise, people want more wage increases and to stop sprial in costs and wages, RBA will have to tighten rates.


Im not an economist but the more I read general economy the more I think things aren't all rosy and some big shocks may be around the corner.

regards Peter 147Prices rise but cost of living stays the same

 

[Sunfish]

inflation/deflation

Hi Peter: I trawl US chat sites and newsletters and they are concerned about the same thing.

True thier's is the worst performing currency but the Chinese Renmimbi is pegged to the dollar so imports from there are still dirt cheep. (Wallmart imports many billions from China every year) And of course they are losing IT jobs to India as we are.

Thommo

 

[Aceyducey]

Originally posted by Peter 147
So Acey when you ask why would interest rates go up? It seems pretty obvious to me that when and it will, our dollar does down all the imported good saving our inflation rate in to 2.4%will go the other way.

All good points Peter & I'm aware of the situation of imports versus local prices

I'd still like to hear from Jim as you've provided your views, but I still don't know why Jim believed there's likely to be a few points rise at this time (and that's 4x the rise we've had so far - a pretty dramatic change proportionately!)

His views could be quite different again from yours Peter


Here's my take:

Certainly there is likely to be a hit to inflation if/when the dollar drops again against the greenback......

However this is where is gets arse-about.

While there is such a large discrepency between the relatively high AU interest rate and much of the rest of the western world AND the weakness exhibited by the US continues, interest rate rises will only increase the value of the AU dollar against the US dollar.

So if the RBA increases interest rates further this will only increase the problem. It will make Imports and foreign loans cheaper & reduce inflation further, hence reducing the impact of imports on inflation and shifting dollars offshore.

If the RBA raises rates 'another few points', this is likely to cause substantial substitution of domestic products for imports. This lessens the dollars flowing to local companies, increases their tendency to source from overseas & shifts jobs away from Australia.

Expect more local companies to disappear and weakness in the employment sector.

The exporters are already screaming (and I don't think prematurely) about the threat of further interest rate rises.

These rises would force exporters to compete at higher price points, or source their own product from outside Australia.

So the way I see it, the RBA is pulling one end of a piece of elastic. If they pull it too far the thing will snap back into their faces.

They have a discretionary area of several percentage points up and downwards around the current interest rate to play in. Any shift outside of this small band would cause huge problems for the Australian economy - runaway inflation or runaway foreign debt & job loss.

At the moment I believe the RBA has been doing a masterful job of managing our prime lending rate to prevent the Australian economy from falling into dissarray. They kept us on track through a global recession to such an extent that Australians are to a large apart unaware of how tough the situation has been in places like Europe and the US.

The RBA have a small margin up their sleeve (maybe 1% upwards, 1% downwards) to cope with significant shifts in the global economy and have demonstrated the finesse to make small adjustments as required without over-compensating.

I can't see the RBA shifting Australia's rates outside of this band in the near future.


A small side point, the Australian dollar has not appreciated as much against other currencies as against the US dollar...such as the Euro, Yen & Pound. Thus our exporters are not as severely affected in these markets and reverse is the case of imports.

Always be careful when a single major currency is performing badly - when it's the currency compared to the AU dollar in the media. It's not the entire story

BTW - I'm met Ross Gittens several times, he's a nice guy, very rational & I have always respected his views (some hero worship when I was at uni). He's not always right though.

He also wears the most shocking ties!

(Ross, in case you are reading, I ran a number of careers days you spoke at back in the early 90s and we had some interesting chats at MPI events)

Cheers,

Aceyducey

 

[bbg2003]

L Bernham makes some interesting and valid points.
Just because you don't always agree with them (neither do I) don't mean he is to be flamed.
Unlike most he also has the courage and conviction to post them, with his reasoning behind them.

Yes there is a chance that prices may decrease by more than 40%. Some properties have already decreased by ~20%, and it seems the worse is still to come.

Can US rates stay at this level for long? Do they want to keep the outflow of capital going for much longer?

We can't see domestic products substituting imports when these companies are already stretched to the limit. It takes capital and infrustructure to create domestic products. What will happen is that Chinese products will be the substitutes.

Australia avoided the recession because of the low dollar and the high rate of home ownership (RE boom). This will not last forever and is already changing.

Got your hard hat ready?
bbg2003

 

[Aceyducey]

Originally posted by bbg2003
Yes there is a chance that prices may decrease by more than 40%. Some properties have already decreased by ~20%, and it seems the worse is still to come.

Can US rates stay at this level for long? Do they want to keep the outflow of capital going for much longer?

We can't see domestic products substituting imports when these companies are already stretched to the limit. It takes capital and infrustructure to create domestic products. What will happen is that Chinese products will be the substitutes.

Australia avoided the recession because of the low dollar and the high rate of home ownership (RE boom). This will not last forever and is already changing.

Got your hard hat ready?

I don't follow much of your reasoning BBG.

US rates are going to rise at some point. That point will come when it's best for their economy. Until then they certainly can afford the level of capital going out. In fact the dollars going out of the US help the rest of their trade partners.

Domestic products substituting imports - if you're referring to my comments I was talking about the REVERSE. Imports substituting domestic products.

Local companies are not 'stretched to the limit' providing products, it's simply not commercially sensible for them to produce more. A big drop in the AU dollar making imports more expensive and domestic products more competitive will see domestic business gearing up.

Low-cost Chinese products are in finite supply. As China develops you'll see their prices increase, just as has happened to, say, Japanese products....or for that matter any country's products as their living standards improve.

Your claims as to why Australia survived the recession are flawed. We don't have a particularly high rate of home ownership. Other western countries who did have a recession have higher home ownership rates AND lower interest rates than us.

We survived it because the RBA made some good calls and kept the conditions appropriate for us to survive it. Housing boom has nothing to do with it! Strong across-the-board domestic economy did. Look at share prices across the western world in the last five years & it will be clear to you.

BBG - price decreases over the last few months are relatively normal for the Xmas New Year period....albeit more severe than for during the last few boom years. Apply a longer perspective on things. Any decrease after a boom can look to the uneducated as a crash, when in fact it's a normal slowdown in the cycle.

The only properties having even mild issues right now are central metro units in Sydney and Melbourne, and everyone who was serious about property saw that coming three years ago!

No hard hat drama required, simply common sense, an eye on market conditions & preparedness to take the opportunities as they come.

In other words, Chicken Little, the sky ain't falling.

Cheers,

Aceyducey

 

[Peter 14.7]

Hi Acey

There are so many points it will be hard to cover them all but in reply to your comments I write.

1. I greatly appreciate you acknowledging my good points. I enjoy the forum and a good debate but it is always a shame when either bad sportsmanship or personal attacks get in the road. If you never admit another person’s perspective you never change/learn. IMHO only those with a lack of self confidence demand to be always right!

2. I also like Ross Gittins. I never went to University until mature age but from my lay person’s economics 101 viewpoint, I agree he makes more sense than other commentators and seems to not have a political axe to grind.

3.

While there is such a large discrepancy between the relatively high AU interest rate and much of the rest of the western world AND the weakness exhibited by the US continues, interest rate rises will only increase the value of the AU dollar against the US dollar.

I agree as my vote and post in poll re: rates. RBA cannot move until USA and others move. But this week saw Bank of England raise rates and USA RB finally, talking about raising rates.

The question is how much and how quick. Since the USRB dropped a lot quicker than everyone else the logic would be they are willing to raise the same way if they want to. Hence I watch the USA and other RB more than RBA to see what rates are going to do here. I fear we may be unpleasantly surprised in 2004.

4.

They (RBA) have a discretionary area of several percentage points up and downwards around the current interest rate to play in. Any shift outside of this small band would cause huge problems for the Australian economy - runaway inflation or runaway foreign debt & job loss.

Agree and I worry about A "runaway inflation" and B "runaway foreign debt & job loss" risk however rates is not the only factor in determining the AUS $ valuation. It was already over 70c before the first rise. It appears all the world saw Oz as the only healthy economy and poured the money in. Also trying to get in on that the expected upswing will use raw materials which we have.

But... when the USA economy gets online the reverse could happen and the ASU$ dips to say 70c and under again. Risk A then kicks in with no cheap imports to control inflation.

From my post most of the increases in costs were things within Aust and outside of our control such as food. For example...meat prices. I recently spent a lovely few days in Wagga with friends who own four cattle and sheep properties. They were well prepared for drought and did not decimate their stock levels AND still they believe it will take 3 to 4 years to get back to pre- drought production of lamb wool, meat and cattle meat. So we can expect high prices here for least 2-3 years.

5.

Low-cost Chinese products are in finite supply. As China develops you'll see their prices increase, just as has happened to, say, Japanese products....or for that matter any country's products as their living standards improve.

Disagree here. It took 10 years before the Japanese raised their prices and through technological improvements they still produced better cars and still at cheaper prices against OZ for another 10 years. China will be the same if not more because they actually have natural resources which the Japanese did and have not. I remember in the eighties we still made small cars in OZ now is all European, Korean or Jap. Will our large cars go the same way in ten years???

Sadly, in OZ we only have the following Pros going for us against the rest of the world:

Resources (lots in the ground)
Cheap agriculture (lots of land)
Great tourism (lots of beaches)
Security and no diseases (this one under pressure re terror, bird flu and others)
Professional services (multilingual and mostly not corrupt)
Stable financial and political climate (excluding NAB currency traders)
Lots of clean LAND

And all of these rely on the AUS $ be low to make them worth while.

Whilst on the Con side we have

Technology (minimal or moving to India)
Manufacturing (to small a local base)
Cheap labor (only backpackers)
Lots of land to service (roads, rail etc...)
Inefficient government (three levels of gov., state by state laws)
Bad taxes (high PAYE, payroll tax, stamp duty everywhere)
Aging population (about to retire)

So with my hand on heart I cannot see how the RBA can raise the AUS $ any further and in-fact will want to lower it down. As rates rise OS and RBA can raise here, our economy will falter and the OS $ will go elsewhere, and $ will drop. Some pain for gain.

What do you think?

Regards, Peter 147

PS I am a natural optimist so I see the above as opportunity to manage not doom and gloom.

 

[Aceyducey]

Originally posted by Peter 147
So with my hand on heart I cannot see how the RBA can raise the AUS $ any further and in-fact will want to lower it down. As rates rise OS and RBA can raise here, our economy will falter and the OS $ will go elsewhere, and $ will drop. Some pain for gain.

Peter,

I think this is the only key point that needs to be addressed.

Peter, you believe that you can't see how the RBA can raise AUS $ further and will want to lower it.

I agree.

But the mechanism for reducing the AU dollar is to REDUCE interest rates, not increase them.

By reducing interest rates the RBA is reducing the differential between Australian interest rates and those of other countries.

This reduces the benefit of putting money into Australia for foreign countries & through flow-on reduces the AU dollar.

Rises in UK and US rates will have a small effect if their rates remain well below AU dollars.

Think of it this way.

Right now I can borrow US$1 million at 1.5% interest. I can then lend it to a bank in Australia and get 5% interest. I make 3.5% on the deal.

Only if the differential between US & AU interest rates drops will the propensity to borrow money in the US and lend it to AU reduce.

Cheers,

Aceyducey

 

[Peter 14.7]

Acey you posted

"Only if the differential between US & AU interest rates drops will the propensity to borrow money in the US and lend it to AU reduce"

I agree and that was my point as well that as the US and others raise rates then the RBA can raise here and the differential stays the same. So no increase in Aus $.

Additionally as the US rates are at (I think) 1% they can raise a lot more than we can say 0.5% to our 0.25%. The return on investment in OZ is less and money goes back OS. Aus $ goes down.

Of course then if the AUS $ goes down the return increases when converted back to US $ so it's all "swings and roundabouts" to an extent.

It will be interesting what effect the Free Trade Deal with USA has on all this.

On face value we should benefit being cheaper dollar and being much smaller than the US in population and hence demand? I mean how many Australians want a giant pickup truck versus Americans wanting Monaroos, sorry Pontiac GTOs.

Enjoying our debate, Peter 147

 

[spark]

Originally posted by Peter 147
...as the US rates are at (I think) 1% they can raise a lot more...

Suppose they rise theirs by 50 points to 1.50%, the impact of such a rise is of 50%, much more than 50 points here for example (which would be only 10% rise). This is the reason why I do not believe that the US RB will close the gap so quickly... Thus, IMHO, it will take a very long time for rates here to get to 6%, at max...
Unless, and I do NOT think that it will happen (but I saw strange things in my life), unless the USD falls to 1.8-2 to the EUR, and the panicked US RB will try to re-establish the confidence by hiking the rates higher. But I cannot see it happening. US is not Argentina. Yet...

 

[Aceyducey]

Originally posted by spark
Suppose they rise theirs by 50 points to 1.50%, the impact of such a rise is of 50%, much more than 50 points here for example (which would be only 10% rise). This is the reason why I do not believe that the US RB will close the gap so quickly... Thus, IMHO, it will take a very long time for rates here to get to 6%, at max...
Unless, and I do NOT think that it will happen (but I saw strange things in my life), unless the USD falls to 1.8-2 to the EUR, and the panicked US RB will try to re-establish the confidence by hiking the rates higher. But I cannot see it happening. US is not Argentina. Yet...

Spark,

True, but it may take bigger rises to influence the US economy than it is taking to affect Australia's.

In fact, one of the few worries I have about the AU economy is that a 50 basis point change in interest rates causes such a large response......twenty years ago it would take a 200 basic point shift (2%) or more to elicit the same sort of reaction

That's a sensitive economy!

And a sensitive economy may be a vulnerable one. (and leaves this thread open to a new diatribe by a doomsayer)

Or maybe governments & central banks are finally getting the hang of this newfangled economy thang. It could also be a symptom of a more connected & responsive economy due to IT revolution & global trade growth.

Perhaps we may see a change of mindset to move to 5 or 10 basis point shifts at a time...ie: 5.25% to 5.3% instead of the current policy of 25 basis point moves.

Cheers,

Aceyducey

 

[Sunfish]

I doubt the US economy could withstand rate rises of more than 50 basis points.

They need to sell 1.4bndollars daily to balance the books. This is where the pressure to raise comes from. To make their currency more attractive to world investors.

Official US Gov debt is 5% of GDP. That's near 50K for every citizen.

Income tax collections are insufficient to pay the interest bill on these debts. How could they double the rate?

US wages have been in decline for many years. They have maintained their life style through debt.

Freddy and Fanny have borrowed short massive sums to lend long to mortgagees. 20yrs @ 5-6% is the norm in the US. Their collapse would be catastrophic.

The US Fed is truly between a rock and a hard place. ATM they are keeping all the balls in the air but should they drop them ANYTHING is possible.

Thommo

 

[Bill.L]

Hi Thommo,

Of course "The US Fed is truly between a rock and a hard place. ATM they
are keeping all the balls in the air but should they drop them
ANYTHING is possible."

But what are the likely scenarios??

To my way of thinking there are 2 longer term possibilities.
1/ They raise rates, which choke off any recovery while adding massively to interest bill payments and US govt debt. This leads to deflation followed by economic collapse.(There is some fuel for the Doomsayers!!)

2/ Rates stay on hold or very low, even though growth starts to accelerate with inflationary pressures building. Inflation then runs AHEAD of rates for a few years. This allows for increased tax revenues while keeping the debt payments at a minimum. The govt can then retire the debt with deflated dollars.
Of course you need to have a few wording changes by the Fed every couple of months to keep everyone guessing.

Now, which do you think is the preferred strategy?? My money is on a bit of inflation ahead which will be good for borrowers, but bad for retirees with large cash holdings that they plan to live off.

bye