Prisoners Dilemma and Boom&Bust

Aug 29

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Bank of England prints new money, up to 20%[1] of the money supply.

Stock market rallies hugely, on thin volumes of trading.  Well, that at least has some merit, given quite how far it had fallen.

— But —

an unheard-of 18% fall in investment!  A nominal fall: against what should have to be a 20% rise to retain its value in real terms!  The productive economy is dropping out of competitive measures other than cost-cutting (notably staff costs).

And that 20% of new money gets soaked up by housing, where the price crash has halted since the spring, again on low numbers of transactions!

It’s a prisoners dilemma: do individuals use their money for the overall good, or for personal gain?  In a healthy society, the two would be, well, if not fully aligned, then at least not in stark opposition to each other.

You take out a big mortgage, get security, big tax breaks, and government bailouts if you lose your job.  You rent and save for a house, you get poor security, and you have to live on the savings (including investments) if you lose your job.  So here’s the prisoners dilemma: if the job’s not secure, get the biggest mortgage you can, and put those savings into a house!

Repeat over lots of prisoners-dilemma-victims and the economy takes a real hit: the tax-and-benefits system has hobbled it.  Not once but twice: the money sunk into a house is not being invested in the productive economy, and the homeowner has lost flexibility to move!

It seems to me we’re on a timeline with this escalating boom&bust:

2005: house prices take a small fall, quickly “corrected” by low interest rates, ~15% underlying inflation (M4 money supply), and pouring public money in.
— leading to —
2007: lenders start going bust
2008: house prices take a bigger fall, “corrected” at mindblowing expense to the economy
— leading to —
2010? government starts going bust
2010/11? house prices take a proper collapse, taking the currency and much else with them.

What to do about it?  Well, emigrating again has appeal.  Short of that, I’m putting ever more of what I have into assets that derive value from outside the UK.

[1] and counting, until they pull the plug on Denial.

Posted on August 29, 2009, in economy, house prices, rants, uk. Bookmark the permalink. 2 Comments.

  1. Tim | August 29, 2009 at 4:33 pm

    Yes, well. I did a bit of shopping around for an online broker and invested a small amount of savings directly in metals (in two locations) elast November. Currently running at 5% “profit” relative to GBP (and would have been lots more if I’d cashed-in in February).

    It was an interesting and slightly scary experience, trying to find a suitable company and establish their reputability starting from completely no knowledge of the metals market.

  2. vet | September 2, 2009 at 8:58 pm

    Hmmm. When you put it like that, I realise that by leaving some of my money in the UK, I’m actually helping to bail you all out. Its value has dropped like a proverbial half-brick in the last month or so.

    You’re welcome.

    They keep saying that “economics” isn’t a zero-sum game. That may be true in theory, but in practice I think there’s some very happy-smiley assumptions built into that statement.

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