2012 – Part 3
Scenario Two: Central banks start printing money like there’s no tomorrow.
This money will be channelled to all the banking institutions that are broke so they can pretend not to be broke. The currency will be devalued. Inflation will get into gear, and we will all feel seriously poorer. Those with cash savings will get shafted completely. Those with property will do well to hang onto it, as eventually house prices will rise to compensate for inflation, but it will be a long ride back up, maybe ten years or more. And rises wont start until a couple of years after economies have returned to an upward path. Typically house prices are the last to rise in any economic recovery. People are too stunned and wounded to start hoping until they are sure the danger is past. Money will also be tight because banks will be reluctant to get in a mess so quickly after being bailed out.
Things will be tough, but at least we will be able to see our way out of the mess. Holiday property prices will be the last to recover. One other problem in this scenario: interest rates will probably rise.
One of the problems at the moment is that money is not being treated very well. If you can lend money at 5% and inflation is running at 5.5% then lenders are losing money. So why lend? The money goes somewhere else. Money starvation equals stagnant economies, stagnant house prices, and a slow drop in living standards. This is why we so often hear that the ideal situation is a 2% inflation rate.
Unfortunately, banks tend to borrow short term and lend long term. Short term borrowing costs are way ahead of long term lending rates. I’m paying 1.7% on a UK mortgage, and 3.8% on a euro mortgage. With UK inflation at 5.5%, my UK lender is effectively losing 3.8% p.a. That’s no sensible business arrangement. There is a similar math in Europe. That cant last if banks are to get back into the black, and stay there.
A general rule of thumb over the centuries has been for people to look at returns on cash invested of at least 3%, and over. If inflation is down at 2%, then money should cost about 5-6%. If inflation gets up to 7% then the cost of money should be around 10% to compensate. Interest rates up there soon put the real cost of buying a house through the roof. One does not want to get locked in to a loan with that likely scenario in place.
john
