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The Phoney Currency Collapse

(Please note there is a podcast of this blog should you prefer to have it read for you. Look to your right, and click the link.)

Things you need to know about interest rates. And dont forget the 2% rule. Here, I remind you.

I dont do predictions as you all know, but maybe now is the time to remind readers of one or two small matters which may in the future loom large, and propel us into another economic tailspin.

Back in the late thirties Europe entered a period which became known as the phoney war. It didn't last very long, and eventually broke into a real war. We are currently in the midst of a phoney currency collapse. I have no idea how long it will last, but I am convinced it will turn into a real collapse in the not too distant future.

I did point out last year that interest rates on US bonds had risen dramatically. They dropped back slightly, but the trend of lower interest rates has probably come to an end. In her latest testimony to congress, Janet Yellen, our new Fed head honcho (or should that be honcha?) stated that the Federal Reserve Bank (Fed) will be looking to raise interest rates by mid 2015.

That is going to do several things. It will bring to an end the easy money that has been the order of the day for most of the last decade. It will cause the dollar to rise, and several peripheral currencies will decline. It will exacerbate economic conditions in emerging countries, and will mean other reserve banks such as the Bank of England, and the European Central Bank, will likely have to raise their base rates as well.

We are probably only looking at quarter per cent rises to start with, which wont make much difference, but the key issue is that it will signal the end of easy money, and will usher in a period of rising interest rates rather than falling rates.

There is also the issue of the Renminbi, which I was going to write about back in January, but decided not to because I thought it might be too technical an issue for most readers.

Basically, we are seeing a gradual flight from the dollar as an international trading currency (a reserve currency). The dollar is increasingly being sidelined by the renminbi. At the moment that is not crucial, but it is rapidly becoming a very real issue. The Chinese have been ramping up their purchases of gold, and have been very slightly loosening controls on the value of their currency. Sometime over the course of the next five years (or at the latest, the next 5-10 years) they will float the currency, make it fully convertible, and back it with gold. That will make it the only currency on the planet backed by gold. That will hit the dollar hard.

That will mean the Fed will have to hike rates considerably to maintain the value of the dollar, or simply let it collapse. Either way, that will cause massive upset throughout the financial world.

What does mean for house prices in the UK, and across Europe?

In the short term (1-3 years) probably nothing at all, which is why I left the article on the Chinese financial changes out of this year's annual survey. However, in the medium term (3-10 years) it will mean a lot. Interest rates will rise. Borrowing money will therefore become more expensive. That will not affect the UK mortgage market that much in the early stages as typical interest rates are still around the 5% mark, but once minimum lending rate rises above about 2% it will mean more expensive mortgages.

In the EU the tipping point is much lower. Average mortgage interest is about 3%, which means once the ECB minimum lending rate climbs over 1.5%, mortgage rates will rise considerably. This will put pressure on property prices across the whole region.

It's at this point that I always make the following statement: remember that a 2% rise in the interest rate on your mortgage translates into a 30% rise in the cost of your mortgage. Right now is the time to take on board that fact.

For the average house buyer the end price of a house doesn't mean much. If you sell low, then you probably buy low. If you sell high, you can buy high. All house prices go up or down pretty much together, so moving house wont affect your wallet. If you are a first time buyer or an investor, it will affect your wallet with a vengeance. This is why I always say the best time to buy a house is when interest rates are high but falling. The worst time is when they are low and about to rise. That is probably going to be sometime in the next one to three years.

For most of my readers that will seriously affect the housing markets across the whole of Europe. Both the UK and the EU will see higher minimum lending rates sometime soon, either as a result of the Fed raising the lending rate in the US, and/or the entry of the renminbi into the international monetary system.

A secondary effect to all this will be the increased costs to governments of their sovereign debt. That will impact quite seriously on the economic base of all EU countries.

Once again, I cant predict exactly what will happen, or when. I am merely suggesting that the times they are a-changing, and you guys need to look out below. The ice might be about to start getting thinner.


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