Monday, 19 May 2008
House Prices mmmmmhhh
Basic money theory says that prices cannot sustain a general increase without an accommodative money and credit expansion.
Therefore, the rise of oil from $20 to $126 could not have occurred under restrained and stable monetary policy. The same goes for corn, rice, milk, etc,,,,, a twofold or threefold price increase cannot take place without an unduly expansionary monetary policy.
What is absurd is that the BOE does not react to abnormally high energy and food prices, that is, what is referred to as Keynes' wage goods.
It reacts only to core inflation.
In other words, when prices of basic food commodities, including bread and butter so necessary for our children, triple or quadruple, this causes no concern to the BOE, because they are not part of core inflation.
However, when toys prices go up by 10%, they may become of some concern because its signaling that core inflation is rising! But with us the workers struggling to put food on table, we are less concerned with buying toys.
Hence, toy prices may never increase, core inflation may not rise, and the BOE may never respond to racing energy and food prices.
Alarming signs of deteriorating global food shortages and an impending world stagflation, stemming from the Fed's policy, are now pervasive.
World energy and food markets have become critically fragile in the face of mounting speculation and inflationary expectations. The falling Pound, Dollar and accelerating inflation will certainly depress both the global demand and supply of commodities.
As money depreciates, suppliers of commodities, already straddled with piling international reserves, will supply less as their expectations of higher prices and revenues are fully met. The evolving food crisis seems to have no precedent in modern history.
While severe food shortages are developing in many vulnerable countries, media-interviewed shoppers in the US have sadly responded that they have been forced to dramatically curtail their food consumption and it will be the same here soon.
I forsee rampant energy and food prices will threaten social stability and will certainly undermine the BOEs objective of re-inflating home prices. Unless mortgage loans are showered without down payments and pay checks, as was the practice during the recent housing boom, prospective home buyers will be preoccupied by simple survival and will be less willing to take on more debt.
Energy and food price inflation will depress further highly overvalued home prices.