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 Post subject: Re: The low inflation mystery
PostPosted: Mon Apr 02, 2018 2:33 am 
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The received wisdom is that QE has increased the inequality between rich and poor. But the Bank of England are now claiming that it has reduced inequality compared to a "no QE" scenario.

FT wrote:
Quantitative easing ‘reduced UK wealth inequality’, says BoE

Wealth inequality in the UK was reduced by quantitative easing after the financial crisis, according research by staff at the Bank of England, contradicting the widespread belief that the policy concentrated wealth in fewer hands.

--Financial Times (paywalled unless you Google it).

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 Post subject: Re: The low inflation mystery
PostPosted: Mon Apr 02, 2018 10:09 am 
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ps200306 wrote:
The received wisdom is that QE has increased the inequality between rich and poor. But the Bank of England are now claiming that it has reduced inequality compared to a "no QE" scenario.

FT wrote:
Quantitative easing ‘reduced UK wealth inequality’, says BoE

Wealth inequality in the UK was reduced by quantitative easing after the financial crisis, according research by staff at the Bank of England, contradicting the widespread belief that the policy concentrated wealth in fewer hands.

--Financial Times (paywalled unless you Google it).


The headline is a bit of a stretch for an article that contains the quote from the original study:
BoE wrote:
“The 10 per cent of least wealthy households are only estimated to have seen a marginal increase in their measured real wealth of around £3,000 between 2006-08 and 2012-14, compared to £350,000 for the wealthiest 10 per cent,”

So the headline could have been "Quantitative Easing increased wealth inequality between upper and lower deciles by £347,000 which corresponds to a proportional decrease" :D

The subheading of the article "Researchers say rise in house prices benefited lower and middle income families more" is also highly questionable if you take into consideration the long term effects on lower and middle income earners when house prices rise disproportionately to wage rates.


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 Post subject: Re: The low inflation mystery
PostPosted: Mon Apr 02, 2018 10:55 am 
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Some FT readers think this is an April's Fool joke but the report itself is fully researched and worth a read:
https://www.bankofengland.co.uk/-/media ... F10DB65600

QE boosted the wealth of asset-holders but it also had macro-economic effects that benefitted labour. The wealth effect obviously increases inequality but the reduction in unemployment helped poorer sections of society. Older generations benefitted from the wealth effects but the younger age-groups got job opportunities. The report claims that
Quote:
most households benefited overall from monetary policy between 2008 and 2014, relative to what would have otherwise happened.


Of course the game isn't over yet or, as the Report says:
Quote:
monetary policy is generally thought of as a short-run tool with a waning influence on the real economy and hence the effects that we report may diminish beyond our sample period.


The report makes the key point about housing wealth that is so often overlooked in Ireland:

Quote:
Housing wealth is illiquid and can only be easily used to finance consumption once a household downsizes to a smaller property and extracts some of that wealth (although it may also be used as collateral to borrow against to bring forward some of that spending). And increases in the measured value of pension wealth on account of low interest
rates do not typically imply a higher future income stream, only that the same future income stream
has become more expensive to provide.


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 Post subject: Re: The low inflation mystery
PostPosted: Mon Jun 18, 2018 5:35 am 
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Quote:
"The problem with QE is that it works in practice, but it doesn't work in theory," said former Fed chairman Ben Bernanke. Monetarists and "creditists" disagree profoundly over the mechanism. Which of the two is right will determine whether the world muddles through or crashes into recession in 2019. The Fed tells us that shrinking the $US4.8 trillion balance sheet will be as dull as "watching paint dry". One of those who designed the scheme at the New York branch told me that this assurance borders on delusional. Mr Bernanke advised his former colleagues to leave QE well alone. He has so far been ignored.

Nor does anybody know what rising borrowing costs will do to a global system habituated to a decade of zero rates. "By historical standards, real interest rates are still low. But the neutral level of real interest rates is surely also much lower too. Monetary conditions may well be tighter than widely assumed," said Jonathan Loynes from Capital Economics.

https://www.smh.com.au/business/the-eco ... 4zm36.html


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 Post subject: Re: The low inflation mystery
PostPosted: Mon Jun 18, 2018 10:05 am 
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Just a stream of random semi-linked thoughts:

What I don't get is that all this "threat" of inflation coming back hasn't moved the price of Gold.

Also, the general thinking and hence the title of this thread is "The Low inflation Mystery" its a mystery because people thought the QE and monetary expansion would push up inflation, but we have had 10 years of low or no inflation despite massive monetary expansion.

Does that mean the flip side is also true that Quantitive Tightening will cause inflation?

I don't know.

I do think that full employment, will cause wage inflation and I'm seeing it already where I work. The US also appears near full employment and a lot of US companies are reporting commodity and supply price rises, so I'm pretty sure that inflation is coming. So what happens next.

The Fed raises rates until the stock market pops triggering the next bear market. The US sneezes and everyone else catches a cold.

Back to my original question. With all of the obvious signals for higher inflation coming down the line then why is gold not trending up but the yield on the US 10 yr Bonds is?

The next question. If you do think that inflation will make a comeback over the next few years then what are the best investments to inflation protect your pension?

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 Post subject: Re: The low inflation mystery
PostPosted: Mon Jun 18, 2018 3:03 pm 
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Terra Incognita wrote:
The next question. If you do think that inflation will make a comeback over the next few years then what are the best investments to inflation protect your pension?

Some good questions and I've tried to think about your last one over the years...
Im betting on property in areas that will benefit from high commodity prices.
E.g. parts of Australia.
It will obviously have the benefit of leverage.


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 Post subject: Re: The low inflation mystery
PostPosted: Mon Jun 18, 2018 9:24 pm 
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Terra Incognita wrote:
Just a stream of random semi-linked thoughts:

What I don't get is that all this "threat" of inflation coming back hasn't moved the price of Gold.

People who do that kind of speculation have moved to bitcoin. You need to remember that gold is a haven for speculators rather than a hedge against inflation.

Terra Incognita wrote:
Also, the general thinking and hence the title of this thread is "The Low inflation Mystery" its a mystery because people thought the QE and monetary expansion would push up inflation, but we have had 10 years of low or no inflation despite massive monetary expansion.

Does that mean the flip side is also true that Quantitive Tightening will cause inflation?

It did cause inflation - house prices and rents have increased. But these don't figure in our inflation figures for some reason - and yet just ask the people you work with what is the biggest part of their monthly spend. All the QE went to the wealthy - the wealthy protect their wealth by buying property when it is at or below the long term curve. They haven't been buying it for a while - they're selling it to suckers now.
Terra Incognita wrote:
I do think that full employment, will cause wage inflation and I'm seeing it already where I work. The US also appears near full employment and a lot of US companies are reporting commodity and supply price rises, so I'm pretty sure that inflation is coming. So what happens next.

It is - we will now be told to curb our excessive demands less we damage the "fragile recovery" i.e. lest we start taking some of the money that "rightly" belongs to the people who "get up early in the morning"

Terra Incognita wrote:
The Fed raises rates until the stock market pops triggering the next bear market. The US sneezes and everyone else catches a cold.


Yep - that's next

Terra Incognita wrote:
Back to my original question. With all of the obvious signals for higher inflation coming down the line then why is gold not trending up but the yield on the US 10 yr Bonds is?

The next question. If you do think that inflation will make a comeback over the next few years then what are the best investments to inflation protect your pension?


There is probably nothing you can do - If you are not incredibly wealthy anything that you can think of to protect your money will be of little use. The Government will take it from you to help out the rich the next time they run into a problem. Between the banks (64bn) and apple (32bn) and the rest of the MNCs (probably another 20bn) the taxpayers are owed about 20k per man, woman and child for bailing out the rich over the last decade - and still they want to vote for political parties that believe this is the way to run an economy.

My best bet is to wait until the next crash - make sure you are in cash just before it - then pump it into ETFs. Timing is everything and if you don't have insider knowledge you probably won't get the timing right, and if you get it right the government will take it off you and give it straight back to the rich. Either that or be a drug dealer - just make sure you are properly armed.


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 Post subject: Re: The low inflation mystery
PostPosted: Tue Jun 19, 2018 1:20 am 
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Good luck trying to time the market for the next crash. The one following the dotcom boom happened in a series of mini-crashes. Yes, the NASDAQ got a hammering in March 2000 but the wider stock market slide didn't bottom out until the end of 2002. The was plenty of opportunity for the value investor to get caught by the short and curlies.

The dotcom boom was also an era of low inflation and low unemployment, so today's low inflation mystery is not unprecedented. The US Fed faced a similar situation of an economy that seemed to be overheating in spite of low inflation. It tried to apply the brakes for a soft landing with half a dozen rate increases in twelve months, but the wheels came off the trolley anyway. Then it did a handbrake turn on rates in the face of the stock market crash(es) and 9/11, setting the scene for the run up to the GFC. But regardless of all this, inflation in the US, UK and Germany has not been above 5% since a period of a few months in 1990-91 and before that since the early 80s. So maybe inflation is not the most likely problem in the near term.

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