Incomes, Inflation & Property

Incomes & Inflation


There are different points of view on this.


A says:

"Governments are printing money like crazy. That will bring inflation, and inflation will pay off you mortgage."


B says:

"Be careful. Unless inflation pushes up Incomes or Rents, it will not help homeowners. In fact, it might hurt them, if rising inflation forces interest rates higher."


So far, at least in 2012, we have seen rapid increases in Rents (+18-20%), and so you could argue that Inflation is helping homeowners. But that has occurred whilst interest rates have remained low, and in fact Rent rises have outpaced CPI which is rising at maybe only 3-4% per annum.


Let's keep this discussion alive, it is an important one.

Hongkongers' median pay rose by only about 10 per cent between 2001 and 2011, despite property prices going through the roof and food prices climbing steadily.


According to the Census and Statistics Department, the 2001 median monthly income for men was HK$12,000.


But a decade later it was HK$13,000 - a rise of just 8.3 per cent, and that does not take inflation into account. Women's incomes went up 10 per cent, from HK$10,000 to HK$11,000.


Even more surprising is that the median income for men and women aged 15 to 24 remained unchanged over the 10 years at HK$8,000. The figure also remained unchanged for women aged between 25 and 34, standing at HK$12,000.


Labour Party chairman and lawmaker Lee Cheuk-yan was appalled by the findings.


He said: "This is shocking and miserable. Hongkongers' lives have not improved in a decade and have even turned worse. When the economy is prosperous, bosses offer pay rises of only 2 to 3 per cent

. . .

The average per square metre price for a property measuring between 100 and 160 square metres in Kowloon went up 3.76 times over the 10 years to HK$154,327. A property of the same size on Hong Kong Island went up 2.95 times to an average of HK$167,939 per square metre.


The figure was HK$34,812 for a New Territories property in 2001, which increased to HK$73,228 in 2011.


Sing urged the government to build more houses under the Home Ownership Scheme so that the middle-class, who cannot afford private housing, can have a place to live.


Lee noted that 10 years ago, Hongkongers spent 30 per cent of their monthly income on paying their mortgage, but for many it now accounts for half their salary.

===

+continues:

http://www.scmp.com/news/hong-kong/article/1125083/hongkongers-median-income-grew-only-10-pc-last-decade

" Hongkongers spent 30 per cent of their monthly income on paying their mortgage, but for many it now accounts for HALF their salary."


Whoops!

And that "HALF their salary" comes when interest rates are at (artificial) ultra-low levels, and when LTV ratios are capped at 50-70 percent.


I smell future trouble for home prices coming on top of threadbare rises in incomes.


(From LGMV on the Main thread):


"Nothing he can do to stop new printed dollars flooding in and pushing up the prices of everything from housing to bahk choy"


Inflation needs to push up incomes, or it will end in tears for people buying at today's high property prices.

Rents will rise strongly ths year - 15-20% is my guess...

Incomes will rise 5% so renters will not be able to pay their rents?

"Rents will rise strongly ths year - 15-20%"


How is that possible, R.?

/ Duplicated from Main - fits here too /


Inflation is not the answer.


BETTER is: Growing the economy in a sensible way, so that Incomes rise steadily over over time, while creating less inflation, because the economy is becoming more efficient.


The reason smart government PUSH UP INTEREST RATES is to (amongst other things) keep home prices down, so that there will be maintained some sort of prudent balance between incomes and home prices. This HK government is not doing that - and there will be hell to pay one day.


Low end property prices are rising too fast in HK now, and that is building in troubles for many.


Buying property is usually a prudent way to protect yourself from rising rents. But now, Buying has become a dangerous way to expose yourself to rising interest rates, unpredictable government policies (and falling house prices.)

my 5 cents:


The governments are currently keeping interest rates artificially low and are pumping money directly into the system (QE, etc). If this doesn't trigger enough economic growth - and we have every indication that it doesn't - then the excess money (vs productivity growth) has to go somewhere.

It can either go into assets (asset inflation/asset bubbles) or into consumer inflation (wages). Since globalization provides an abundant supply of labour, the excess is money has been and is still going into assets and hence we are currently in the midst of an asset inflation cycle (both in the US and in HK).


There will come a time when the governments can't fool the markets anymore and everyone will accept the above (that the money does not stimulate the economy enough and hence we have an excess money supply). At that moment they basically have no choice than to stop QE and raise taxes/cut spending to balance the fiscal position else the USA would default of their bonds. By just doing that but even more so when the asset inflation seeps into consumer inflation, the money supply will lose strength (plus the anticipation of less money supply will work even stronger) and the asset bubble will be pricked - probably rather violently and the whole system will deflate mainly on the asset side to more sustainable levels where money supply and economic/productivity growth is more balanced.


So i would say you cannot win with property either way. You can only try to time it right.


(and of course you could ask what other asset is better placed to retain value on such a asset bubble pricking scenario: is RMB insulated? Swiss francs? Gold? I personally think that any asset where supply is tight and intrinsic demand steady (e.g. water), will retain value better than other assets where supply is more elastic and intrinsic demand is very elastic to economic up-and down-turns (e.g. shares of a toy maker)

Good analysis...


I agree that at some point we will get a (massive?) deflation ... but I also wonder if central banks will go balls to the wall and simply print absolutely insane amounts of money in an attempt to push the string (because they have no other options...) which of course will fail...


Either way surely a deflationary spiral is surely the outcome - and you raise the 64 trillion dollar question...


How does one position for such a scenario...

actually Ed, the central banks (mainly the FED) could succeed in printing "insane amounts of money" as you put it. the point is that if they do that, they might not prick the asset bubble but they would devalue the US dollar.


so from a US citizen point of view who holds a USD asset, he might see a relatively smaller swing on the price of his USD asset. the issue is more that this USD asset has just lost dramatic value against assets in other currencies depending on whether these other countries copy the FED strategy in printing money or not.

in theory other countries (e.g. Germany if it had its own currency) should have an interest to not print money to "up" their currency, but they might simply not be able to afford such a strategy since their exports would be displaced by now cheaper US exports and hence the German economy would tank. It's more likely that they would copy the US strategy to a more or less degree - and i think that even includes China if they can't decouple themselves from the reliance on export jobs and switch to domestic consumption quick enough.


The only time China could be immune is if the US drags the process out for a longer while - which they could easily do for another 5 years in my mind - which could give China enough time to change from an export-led to a consumption-led model which incidentally would then also allow them to allow RMB convertibility. That would then also give other countries an 'out' since they could export more to China in such a scenario (i.e. not only Germany with high-value tech items but also Turkey with clothes!). The only big loser in that scenario would be the US and any pegged country.


I also think that HK property - relative to many other assets - is not such a bad bet since the HK government would surely switch the peg to RMB once convertibility has happened which should protect us from the USD devaluation. Plus HK property has a relatively unelastic supply. The only question is how much demand would evaporate when rates go up and speculators/investors disappear, i.e. how much of the marginal demand in the HK property market is by investors as opposed to intrinsic housing demand from immigration/population growth.

While there will surely come a time when general confidence in the utility of fiat currencies as money will falter, I do not see how it can be asserted that the end must be deflationary. There are plenty of times in history when excessive money printing has resulted in inflation or hyperinflation and plenty of times when it has resulted in deflation. Looking at history gives us some pointers but does not enable firm conclusions to be drawn.


As a starting point, it is expected that governments will continue to print money given that it is impossible to further raise taxes to cover the deficits and that they are politically incapable of reigning in spending to sustainable levels. Add in high debt to gdp levels and it is relatively easy to conclude that they will fight to keep printing and to keep interest rates low (lower than inflation) as long as possible. Against that background, it would take a braver man than me to bet on anything other than an inflationary environment.


Of course, even in an inflationary environment it is possible for prices of hard assets to decline (especially if interest rates start rising). For these purposes, starting valuations matter and today HK property is expensive in both absolute and relative terms - I would be uncomfortable buying at current levels with a floating rate mortgage in expectations that my investment would protect me from inflation.

traineeinvestor, the key question is whether printing money will continue to produce asset inflation (as it does today) or whether - as you seem to suggest - this will trickle into consumer inflation.


i personally cannot see the switch into consumer inflation happening, hence as long as money is being printed, i believe that asset inflation will continue. on that basis i could easily accomodate if someone said that HK property can go up another 50-100% in 3-5 years.


my red flags would be a) if indeed it seeps seriously into consumer inflation, b) if money printing seriously stops or c) if rates indeed are being pushed up (they could print money AND raise interest rates...). that's when i would try to get out of my property.


the issue with property is of course that the transaction time is long and hence you can never time it perfectly.

Good thread so far. Couple of points from my perspective.


As a business owner, the reason that inflation will almost never reach workers salary is simply due to the fact that I'd rather pocket the difference. I'd rather be more profitable. The only time you'd have an issue is with employee retention, and if no business is willing to bring their salaries in line with the excess money, then there's nowhere to go. This is why salaries and wages will always lag WAY behind increased money in the market.


I'm fairly certain that the US will stop printing the moment the USD feels significant pressure of devalue. Why? Pride. The cheaper they make it for foreign currencies, the more susceptible they are to corporate takeovers. Imagine the psychological efect of someone like China taking majority stakes in large US companies. Americans won't be able to deal with that.


Deflation vs inflation vs hyperinflation. I'm still really dividded on the topic. They are compelling arguments made from all sides. My advice, in this period of uncertainty, wealth preservation should be your primary objective, don't be too concerned with trying to make money or you could get caught with your pants down. Unless you're loaded, then go nuts.


Hong Kong Property. Let's see if the HKMA's numbers are right. I'm interested to test the market strength by bringing interest rates to a more reasonable figure (4-5%). That should part the red sea.

There was a post at Huffingtonpost mentioning something about the reason why inflation is not with us yet. It claims that the bulk of the newly printed moneys go to banks' coffers and not loaned out.


Up to this date, it still bothers me why inflation (and its side effects) does not manifest. It's another proof that the markets are rigged, and in the end only those in the know (insiders) benefit big.

It will be lent out at some point and that will start a chain reaction in money supply and inflation.

C-09, your:

"... the key question is whether printing money will continue to produce asset inflation (as it does today) or whether - as you seem to suggest - this will trickle into consumer inflation.


i personally cannot see the switch into consumer inflation happening, hence as long as money is being printed, i believe that asset inflation will continue. on that basis i could easily accomodate if someone said that HK property can go up another 50-100% in 3-5 years."


I cannot fully buy that.

There are limits to Property Asset Price inflation, if Income&Rents do not underpin it, and the banks will not finance it. As a former banker, I have seen asset bubbles created by banks, who finance higher and higher asset prices at higher LTV's, with less cash flow coverage as prices rise. In fact, observing that phenomenon in the shipping market many years ago, got me interested in Cycles. I wrote magazine articles and a book about what I observed. And some of those articles are still on some college reading lists years later.


But we are NOT seeing that in HK. The banks here are sticking to prudent LTV, so this asset appreciation is driven by cash rich investors, and panicky owner occupiers REACH for higher prices.


But now we are seeing the rapid prices rises almost entirely confined to "lower end" properties under $5 million, where many people can find the downpayments, and don't mind so much coming up with the (smaller) stamp tax.


But over $8 -10 million, the market is very quiet, even comatose.

offthepeak i don't think you necessarily need income&rents for asset inflation. in fact income&rent rises is primarily a consumer inflation issue that can seep into asset inflation. but that is not what is going on here.


in my personal view, what is happening right now is that people - well mainly the richer people since you need some existing assets against the loans - can get loans at an artificially cheap level of interests and part of that money is directly or indirectly going into property. and i am not just talking about wealthy honkies but as much also about hedge funds, PE firms, tycoons, etc. for these people it's all about assets and the return they can get. as long as rates stay low, they will push up rents until demand dies (like on the high-end already) and are even ok if rents&incomes do not go up and hence their yields on properties go down since they a) still get an excess return over the loan rate and b) get some upside opportunity on the capital appreciation side.


what the average honkie is doing is to pay higher and higher rents for the same sqf until they can't afford it anymore and then they would accept a smaller and smaller shoebox since that is all he can afford when rents go up. this whole play will only stop when people revolt against having only 185 sqf to live. but our government is exactly helping the cycle to prolong further by building low-end supply.


these are just some thoughts that are or could be at play here. of course additional govt supply could equally lead to lower prices but same as the stamp duty measures, etc i think the only thing that will make prices significantly go down is when money is taking out of the system and/or rates go up (on its own or in response to consumer inflation).

sorry one more thought: i think in general the average public underestimates how long these cycles can run until something happens. greenspan started in 1987 to prop up the markets and it popped only in 1997 for the first time (and 2001 for the second time.) since 2008, we are only 4 years into another (asset inflation) cycle and hence my belief that this could easily go on for another 3-5 years.


the only thing that could kill it, is a sudden confidence crisis (USD? US govt bond default?) or somehow a seeping into consumer inflation (e.g. if the governments forces banks to stop hoarding the excess money and lend it out to small potatoes on main street, or if governments even distribute the money directly to people - which is not anymore such a crazy thought as maybe 10 years ago unfortunately...). apart from such dramatic scenarios, i just can't see this whole cycle playing out very quickly.


people like bull markets and hate downturns and everyone will do everything to prolong the pain for as long as possible

Ed -"Either way surely a deflationary spiral is surely the outcome"


I would go so far as to say deflation is the ONLY outcome, printing money ain't going to cut it, its certainly helped to defer the crisis longer enabling you the chance to prepare, but its surprising how many ppl think its business as usual, granted there is no precedence for what we are going to experience in the near future.


Money printing or credit creation requires velocity ie borrowers to support asset price inflation, if there is little pool of worthy borrowers or lenders, then there will be no inflation.

As Jim Rickards states:


$1 billion times zero velocity = 0

$1 Trillion times zero velocity = 0

same goes with $100 trillion ... you get the picture.


And why would there be few borrowers? job instability, economic instability, projects get canceled ie mining, investments get held back, consumption reduces, debt overburden, the list goes on.


Keeping rates low temporarily encourages more borrowing hence supply of borrowers, people think because central banks can "print money out of thin air" that inflation is a certainty, did they ever consider that credit can disappear just as quickly?? As Nicole Foss states, 95% of "money" out there is credit based, so when credit contracts, you very little money available ie paper fiat, versus goods, this is deflation and cash is king.


It doesn't take much at all for this to happen, back in 2008, subprime based mortgages were packaged into what they call "tranches", there were AAA rated tranches (yes, subprime rubbish rated AAA!) along with B and C, the ones rated AAA and trading at a premium were valued as such only because tranches B and C needed to default before A would be impacted, and only a couple of hundred basis points move up in interest rate was needed to wipe out tranches B and C completely.


The current low rates is supporting a massive global credit bubble, and when its burst and it will, this will be horrifying, because it is not limited to HK or USA, it will pop the property bubbles in Canada, Australia, China, Singapore, New Zealand, etc


Part of the reason I view this forum is to gauge property sentiment, and it appears despite the property bubble happening around them, people are still as gung ho as ever, proof of property bubble?


- Car park on HK Island selling for $3 million

- More than ever the number of people forced into sub divided homes

- prices per square foot higher than ever

- Ever walked around your own estate and noticing how most store spaces are occupied by

property agencies? and convenient stores like 7/11 have been forced out?


When credit expands you have good times..temporarily but just like a pendulum, when it swings to one extreme, it doesn't come back and stop inthe middle, it heads straight to the other extreme end with its stored up energy, and my prediction is this, a few years from now, when deflation hits, I predict the medium unit price in HK would cost less than $1 million HKD, and I think I am being generous with that price.


Think that's impossible? you may be thinking if that were to happen, you would go on a buying spree like crazy? well no you wouldn't because:


- If your an employee, you would be out of your job

- If you run a business, you would have no customers, and very little access to credit/loans and

at a high rate

- If you have a bank account over $500K HKD, you may lose the excess over that amount, the deposit board only covers 500k, some banks will default

- If you have shares, they will be worth nothing

- If you have cash in brokerage a/c, may still be screwed, your broker could fail along with the banks.

- Cost of labour ie wages would come down even if you have a job.


The most reliable commodity is the actual physical cash, USD, ie cash under the mattress, speaking of which, I will be upgrading my mattress to store the cash. Listen to Nicole Foss on this interview entirely, very intelligent women and puts it very eloquently.


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

ltse - I agree generally with the above analysis ... but where I am less certain is when the massive deflation strikes... how certain can one be that cash will continue to hold value?


Fiat currencies would appear one of the root causes of this epic debacle... who's to say that governments might simply wipe the slate clean and issue new currencies exchanging what is out there for pennies on the dollar?


I'm familiar with Foss... and I share the concern that there is a much bigger picture behind all of this i.e. the end of cheap oil... if that is indeed where we are then epic is too soft a word to describe the changes that are coming.... the fact that many countries have decided to frack for energy (expensive dirty) and the fact that countries in Europe are rejecting this extraction method... leads me to believe Foss (and Richard Heinberg) are correct...


Again, not sure cash is a hedge against such a scenario

Would physical gold be a better hedge than cash in this event?

Itse, your argument hinges on this one


"Keeping rates low temporarily encourages more borrowing hence supply of borrowers, people think because central banks can "print money out of thin air" that inflation is a certainty, did they ever consider that credit can disappear just as quickly?? As Nicole Foss states, 95% of "money" out there is credit based, so when credit contracts, "


I can agree or disagree with you but you have to tell me first what would make credit to disappear quickly? granted if central banks don't print money or raise rates, then this can happen. but if central banks continue, what in your mind would make credit to disappear?

Ed re "how certain can one be that cash will continue to hold value?"


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


Watch this video from minute 8 onwards, Foss addresses exactly that question, cash is not the ultimate safety, but its the safest thing there is during this period of major deleveraging. The issuance of a new currency is on the agenda, but its not an overnight process, when assets are cheap thats when to diversify out of cash. She then goes on to contrast USA and the former USSR, the USA is a credit based system, there is no purchasing to dispossess from its citizens from issuing a new currency, unlike the Soviet where citizens hoard cash due to their distrust of government forced them to issue a new rubble to dispossess all wealth.


Cookie re "you have to tell me first what would make credit to disappear quickly?"


http://www.youtube.com/watch?v=kYXA9XHFUCU


Pls watch this clip, this is the key: "Credit creates virtual wealth thru speculation, people bid up the price of assets, and you create excess claims to underlying real wealth"


To appreciate what shes saying, you have understand what credit is and what function it plays in this ponzi scheme. Credit is simply an IOU or simply put, its debt, every time a loan is taken out, either by an individual, a bank or a nation, credit expands, more "money" becomes available, hence you see ridiculous asset prices, this has been the process during the past 3 decades at least, the USD loss 90% of its purchasing power since the inception of the Federal Reserve, how did it lose so much value? it happened during the boom, the private sector and public sector debt expanded, it was the private sector "printing money", hence the dollar lost value, but during this credit contractionary phase in the private sector, ie credit destruction, the opposite is happening, private sector deleveraging is bolstering the dollar. I mentioned public and private debt, this is especially significant, because you always hear about government debt, but most of the debt out there is PRIVATE SECTOR DEBT.


http://en.wikipedia.org/wiki/Economy_of_the_United_States


"Total public and private debt was $50.2 trillion at the end of the first quarter of 2010", $16.4 trillion of which is public debt, ie private sector debt stands at a staggering $34 Trillion.


Private sector debt/credit contracts when people or corporations simply stops taking out loans ie zero credit expansion, or simply pays off existing debts, and disappears completely when default is declared or bankruptcy is filed. If Party A lends Party B $100,000, party A's asset is the $100,000 plus interest, is also B's liability. If interest rates rises and B says I can't pay, the $100,000 vanishes into money heaven, and if there is any collateral to seize they will be used to cover the debt, thats why's the Fed wants to do everything it can to support housing, real estates are the banks collateral, any further deterioration would deem the banks insolvent.


Interest rate is key, in Jamie Dimon's testimony before the senate:


http://abcnews.go.com/Business/ceo-jamie-dimon-trades-misunderstood/story?id=16557193


""Dramatically rising interest rates and a global type of credit crisis," he said, "those are the two biggest risks we face."


On a global scale same thing, Greece has so far got a line of credit from the ECB, negotiated with its creditors to prolong its repayment terms and at a substantially lower rate than trying to raise capital with its own government bonds at markets rates north of 7%, its own citizen withdrawn massive cash from the Greek banks. When Greece eventually defaults, remember its liability (debt) is somebody else's asset, many banks and other countries could follow, triillions will disappear out of thin air. Governments can extend credit to postpone the crisis not resolve them, with decades of excessive debt and consumption, its simply impossible to pay off with means of production, interest rates will eventually rise, game will be over, thats not even taking into account the big elephant in the room, the derivatives markets.

ltse --- I've seen the Foss video as well as some others in recent months....


I believe the scope of the problem is being underestimated... we are talking about the potential for massive global defaults... all major economies including the US undergoing some sort of reset...


Surely this would be a cataclysmic event like no other seen in history? Buying HKD1M property would be the least of one's concerns (the former head of a canadian bank's bond division in asia suggested to me post lehman that 'if a single major economy defaults on its debt - we will see some sort of mad max situation' - also that govts know this and they will throw every single thing they can at trying to stop a default - how many trillions have been throw at this to date?)


If that happens I believe all bets are off.... my inclination is to think that the last man standing will be gold....

now sure you have answered my question Itse.


If i haven't missed anything in your post, then you are basically saying that interest rates would need to rise in order for private sector debt deleveraging (i.e. "credit to disappear") to happen. granted that is correct since many people would default on their payments in such a scenario.


but my question is: if central banks continue to print money and are not raising interest rates, what in your mind would make credit to disappear?


what i am trying to say is that in order for a credit crisis to happen at a country or global level, you need the deleveraging to happen at the source, i.e. the FED. i am happy to be educated otherwise (and add to my personal 3 indicators of a red flag), but i have yet to see an argument why the credit bubble would be burst as long as the FED keeps rates down and pumps money into the economy.

Itse, I dont think more money 'become available' or disappear to money heaven in the private sector. The only people who can print money are central banks. The private sector can only create or destroy value of assets and liabilities. To create credit someone must lend, ie give someone else real money. That means credit is driven by available funds and ability or willingness to lend.


I agree, as willingness or ability to lend reduces, ie banks deleverage, asset prices should reduce, and we see that for example in real estate markets in Europe. In the HK property market, the leveraging appears to be much less due to tighter borrowing requirements.


However, what is the impact of all the money printing? Effectively central banks are printing money and giving it to governments to spend by buying their bonds. The only way for that supply extra supply of money to disappear is for the govts to give it to the central banks for them to destroy. What is going to make the central banks deleverage? I dont think anyone will as long as inflation is a holy grail for central bankers.


So we have two opposing dynamics, one deflationary, one inflationary. Economically we end up with whichever is stronger. This will be location and situation dependent. In my mind HK will have inflation as it is imported through the peg and there is limited need to deleverage. The US will have inflation, and most likely stagflation as the govt keeps printing to support the economy and there has been a significant amount of deleveraging already. Europe will have deflation for the time being as many markets and banks still need to delever. China to me is the big question mark as there is so much government control, but probably the most likely to experience a severe deflationary impact as there is less visisbility on lending conditions.

I have seen this... and I believe this is PR spin coming out of the Fed for the purpose of manipulating expectations of the public...


More specifically ... if they say QE is to end then that would create the impression that we will have a recovery at that time...


Two things:


- US GDP is trending lower - again... I have seen Q4 expectations of sub 1%


- US debt is approaching 17 trillion - the interest payments to service that with rates near 0 are substantial... if the US doesn't print then someone has to buy their debt - rates will need to rise to attract buyers - debt servicing costs will be one of the biggest items in the US budget... the US credit rating would be challenged which would drive interest rates higher... the US would become Greece


I cannot see how the US ever stops printing - let alone this year.

have to agree with ED, this is pure spin in this case. however it should also be said that even the real stop will start with such an announcement, since the FED needs to see the reaction and adjusted future expectations of the public before they can really stop it.

HKLEV - "The only people who can print money are central banks."


That is not true at all, in fact most of the money printing comes from the private sector, which has $37 Trillion in total. The Fed despite all its QE programs only has a puny $3 Trillion on its balance sheet. It may be news to you, but banks don't lend out money that they have, currency is sprung into existence when loans are taken out under our fractional reserve banking system. There is a video on youtube titled "Money as Debt" that explains the process if you need more info.


Cookie09 - "but my question is: if central banks continue to print money and are not raising interest rates, what in your mind would make credit to disappear?"


Allow me to turn this question around on you, what makes you think money printing will continue to work? I mentioned interests rates rising as one scenario, but there are multiple scenarios:


- What happens if the PIIGS continue to ask for bailout money? why do you think creditors like Germany would want to stay in the Eurozone?


- Same with the USA, what makes you think China would continue to buy US Bonds indefinitely? After all, QE require foreign buyers, if there were none, bond yields would spike to attract buyers.


- What makes you think the USA can repay its foreign creditors? with shrinking tax revenue, government spending would have to shrink at some stage, and if borrowing continues, what happens when interest payments on national debt consumes 30%-50% of tax revenue?


- What about the next debt ceiling? why do you assume they can raise it indefinitely?


- What happened in 2008? how did the deflation occur so suddenly? are the same players not around this time?


The best way of explaining the current business environment, is to quote an example from Peter Schiff. Lets assume you run a restaurant, you have employees, and overheads as any business would have. One day a circus comes to town, and all of sudden there are more people in town to watch the show and naturally your restaurant is doing more business than usual. But lets say your interpreting the false signal, you don't see the relationship between the circus in town and your increased revenue. You then decide to expand your capacity by renting more space, hiring more staff, and taking on more inventory. One day the circus raises the stakes and decides to leave town, what happens then? you've over expanded, so now you have to go into recession, a contractionary phase by laying off staff, and vacating some space because you have declining revenue.


The same thing happens in the real economy, all the stimulus, the QE's the ultra low and artificial interest rates is the false signal issued by the central banks, it is what has encouraged the misallocation of capital that is propping up all these asset prices, and many business activities ...temporarily. A stimulus no matter what form it takes is temporary by nature, and at some point if will start to wear off, as Ed quoted declining US GDP above.


Now with interest rates already at zero, ie Fed fund rate @ 0.25%, the longest its been ever, businesses especially those based on consumer consumption will benefit, but what happens when the stimulus wears off? you mentioned what if banks kept rates low forever, they could, but nonetheless the stimulus will wear off, at some point even with rates at zero, peope will not be wanting to take out loans or mortgages, corporations won't have revenue beating estimates, there will be a diminishing return even with rates at zero. But they can't increase the stimulus by making rates go negative, ie paying people to borrow. That's why unemployment will only continue to increase because a genuine recovery ie a recession was never allowed to take place by the central banks, and because of that companies and businesses along with individuals who are interpreting the false signal of low rates as economic prosperity has misallocated capital, that's how bubbles are formed, HK is no exception.

there's some basic questions around how money enters and disappears in an economy. i have stated my views but if we don't want to discuss that here, then happy to leave this discussion to the usual banter

Itse....the youtube videos are trying to explain something complex in simple terms and are cutting a few corners to do so. No non-central bank can create money, it can only create asset and liabilities as accounting entries on its balance sheet. By passing money round banks can theoretically create an infinite amount of these on their balance sheets(which allows them to fulfill their purpose in the economy), that is not the same as creating money. Banks have to physically borrow/fund money before they lend it out again. Failing to get the funding is one of the main immediate causes of bank and company bankruptcy. This is why asset and liability and liquidity management is important to companies and banks.


Simple example:company debt is created because there are real assets which need to be funded, eg company buying a factory from a seller.,bank debt is created as cash flows through the system to allow the economy to function, eg bank borrows from a pension fund to lend to the company to buy the factory. Note that all that has happened is that money has flowed from the pension fund to the seller of the factory, leaving behind several (offsetting) asset and liabilities on the balancesheets of the different entities, but there is no new money in the system.


If there was no fractional reserve system, the bank would borrow the cash from the pension fund and sit on it. The company could not buy the factory and the economy would grind to a halt. Or the company would need to go directly to the pensionfund and the pensionfund would need to start doing credit analysis of the company. The whole point of banks in the economy is that it sits inbetween and allows this matching of funding requirements to happen efficiently. The fractional reserve system exists not to create money, but to let it flow to allow economic activity.