"I am reading George Soros' book "The crash of 2008 and what it means". In it, under the section on interest rates, he says that "the way out of a deflationary trap is to first induce inflation and then to reduce it".
He is speaking in context of the US economy, so not sure what the impact will be here in Oz. Given that we haven't had the same level of deflation in asset prices (in fact the opposite) to me it makes sense that RBA lift interest rates earlier."
That's what I'm suspect of. If we go back to 1987 where we had 'the crash' house prices from there bubbled as money was diverted into safe property. What followed afterwards was extraordinarily high interest rates that almost brought our economy to a standstill - house prices didn't fall, they just drifted with houses remaining on the market for 1, 2 or more years being very common.
The resulting boom we had last decade was the natural result after a decade long suppressed housing market - if you had the market on a chart then you would have seen a very tight Bollinger band squeeze over the 90s followed by a massive breakout.
So in the 90s house prices were under priced and what followed afterwards was inevitable. PE ratios were around 3. Now they are 8! What's it going to be? Are wages going to be pushed up to bring the price earnings ratio down or are interest rates going to do the correction for us? If this rate of house inflation were to go uncheck then it would not take long for the average home to crack the 1 million dollar barrier. That sounds far fetched but not impossible in this heavily manipulated economy.
The bottom line is the bankers have an aim - and that is to have every adult locked into a mortgage for most of their working lives, which produces an endless stream of profits and growth for banks when running nicely producing winners virtually everywhere. The problem is there will be times where natural corrections must take place, and the biggest victims should always be the bankers responsible for the excessive lendings.
But as we've seen most banks in the western world have been given 'get out of jail' cards by the feds. This has stemmed the natural tendencies for the markets to deflate down to affordable levels before normal lending to earning ratios are achieved.
We are at critical levels right now and it would be a very brave person to punt hard in one particular direction. We too often forget that we are global now, and are part of the system that makes us vulnerable to the waves in the markets as such. The market right now is anything but normal - it is in a state of heavy manipulation for the sake of political power, saving face and saving the pockets of the most greedy and corrupt in our society.
Choose to play their game and you should be a winner in their perfect world. Get it wrong and you could end up holding massive debt and falling asset prices!
