Thursday, 7 October 2010


I've said this before, but I'd just like to say it again in another way...

Since the crash and for several years to come, as the leverage unwinding progresses. The things purchased with borrowed money will fall in price relative to the price of things bought with saved money.

Things bought with borrowed money include:

Housing (I'm talking about the price of the house, not the size of the mortgage payments).
Shares (trading on margin).

Things bought without borrowing money include:
Utilities (water, gas,electricity)

Note that in many countries the standard inflation measures (like CPI in the UK) tend not to include (or give much weighting to) things purchased with borrowed money.

Now whether the absolute numerical price of these things rises or falls depends on the rate at which governments pump up their monetary bases. If they pump very fast they may get rising prices in both classes of good. If they pump up slowly there may be falls in both classes. However there is a wide range in between where the price of shares and housing can fall while the price of food and services will rise.

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