Unlike the Federal Reserve, Trichet and the EC are very concerned with high Inflation:
Remember, the EC has a single charge — maintaining price stability — and is not concerned with maximizing growth . . .
Source:
Trichet Sees `Rather Protracted’ High Inflation
Gabi Thesing and Christian Vits
Bloomberg, May 8 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZrZpAw8DbmI&
Yes he did and the European yield curve fell 15bps out at the ten-year end and 12bps at the front. So the bond market clearly doesn’t give a hoot about this inflation.
OT, but crap. The bottom is in: http://www.newsweek.com/id/135724/page/1
Lereah thinks the downturn has more to go. I guess I’d better close my shorts and go long?
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BR: That was my response too — see the 9am post later today
Former Republican strategist Kevin Phillips writes on Huffington Post today:
Washington’s Great “No Inflation” Hoax
http://www.huffingtonpost.com/kevin-phillips/washingtons-great-no-infl_b_100719.html
can’t fool all the people all the time…
I have never understood the Fed’s mandate of price stability and full employment. Does this mean keeping inflation low, except sometimes, when inflation fueled growth is desirable?
They certainly are, and that is the main reason not rate cut is going to occur. Europe has certainly averted the subprime mess that has devestated the U.S. This has enabled them to fight inflation in a more aggressive way.
Banker
Banker,
From what I’ve read about Spain and the UK, they are going to be facing the same problems the US is. Imo, it’s inevitable. When prices for assets go way up, and those assets are highly leveraged and unsupported by fundamentals, they will eventually come down. Subprime or not, home prices went up just as much (or more) in the UK and Australia than they did in the U.S. I have a difficult time believing that occurred with 20% down, verified income, and a solid credit score. What’s even more troubling, for the UK especially, is the demographic picture. They’re aging even more than the US.
Home prices in the UK and Australia were increasing at double digit rates for years. In the last year the rate went to zero. The same thing happened in the US, and in the US it didn’t stop there. The growth rate went negative and is accelerating. In a nutshell, the UK and Australia are very close to where the US was about a year and a half ago. Building has dropped way off, as have sales. These were the precursors to the drop in prices in the US. Prices finally reached a point where buyers disappeared, yet the sellers stubbornly stuck to their guns. At least for a while. Those who lowered their prices first were able to sell. Now we’re seeing the leapfrog effect of who can drop their price more in order to be first to sell.
The fall in prices in the UK and Australia is just a matter of time. The prices are too high; they’re unsupported by wage growth. Such debt obligations become chains around the neck in recessionary downturns.
To follow up on Mista, I agree that it is only a matter of time before Europe finds themselves in the same boat as the USA.
Ireland’s housing prices are clearly on the way down now. Spain ridiculously overbuilt. While I was in Europe last year, the ads touting real estate were overwhelming and they were still building like mad everywhere I looked. I went to a social event in Blackpool, of all places, and left with the feeling that I was the only one attending who did not have an ‘investment’ property in Spain.
This will not end well.
The simple fact is that low interest rates feed inflation. Low interest rates also might keep people from defaulting on their mortgages and thus sending a highly leveraged set of financial instruments into further declines. The ECB and Fed are simply making a call about which is the lesser of two evils.
On the property issues, the thing to consider is that the UK and Ireland have some of the highest rates of ownership in the EU (Spain is in an even more precarious position as it has one of the highest rates of foreign owned second homes) while the rest of Europe tends to have higher levels of either rented or lower amounts of mortgages compared to property values. For this reason the ECB can be more aggressive – sacrificing the UK and Ireland’s need for lower rates for their goal of maintaining lower inflation across the EU. Right or Wrong, who knows? Ask me in 5-10 years…
Trading Sys,
I don’t think the ECB sets interest rates for the UK.
«Subprime or not, home prices went up just as much (or more) in the UK and Australia than they did in the U.S. I have a difficult time believing that occurred with 20% down, verified income, and a solid credit score.»
Well, that has happened regularly before — there is nothing that UK banks and borrowers like more than easy money via house speculation. Most recently in 1990. The problem in the USA is not a subprime problem, even if subprime is where it manifest first — it is a lot of people taking $500,000 mortages to buy $250,000 houses. That has happened in the UK too.
In both case it is because borrowers were sure to be able to sell at a higher price, and anyhow the only thing they were looking at was the monthly payment until then.
«What’s even more troubling, for the UK especially, is the demographic picture. They’re aging even more than the US.»
That is being fixed with a massive wave of immigration (much bigger than in the USA). Since immigrants cannot vote and don’t own houses yet they are going to apy very very dearly for their immigration. Either live for generations in squalid overcrowded slums like the Irish did in the 19th century or pay up every penny they earn to the rentier class of their citizen and voting landlords.