Ongoing re-writes, updates and additional material are noted on the LATEST UPDATES page.

The INGRAM SCHOOL is a new school of thought - it provides a refreshingly practical and down to earth new theory of business cycles and how to manage them.


PRACTICAL ECONOMICS can give a soft exit to QE

This new theory is solidly backed by mathematics and the historic data that appears on these pages. It is about the mis-pricing of debt. It may open the door to a soft exit from low interest rates / QE.

With regard to human behaviour during a business cycle, this is not any kind of mystery. The bulk behaviour that goes with the business cycle is highly documented and very predictable.

It is called the 'Wealth Effect' and 'Greed' and the 'Herd Instinct' followed by Fear, Retraction, and Drawing Down of Debt.

The proposition is that the biggest business cycles are all prompted by the incorrect pricing of mortgage and government debt in particular. 

This pricing ensures that the size and cost of mortgage finance moves far more rapidly up and down than anything else in an economy. This should not happen. It has the most profound effects on a major sector and the wealth of the nation.

The same goes for government debt. The cost of debt servicing to the tax payer can be almost anything as the business cycle moves up and down, always burdening the government most when it's revenues are falling or when it is winning against inflation. And always unsettling the wealth of the nation and the reserves held for banking and retirement, when the reverse is true.

In short these pricing movements are major stimulants of the business cycle.

HOW IT STARTS When interest rates are low, because of these structures, asset prices in all tradeables like property and bonds and equities and so forth get inflated, creating the wealth effect, the herd instinct and ultimately greed, enlarging the cycle.

When interest rates rise, if this is done too late, we get a collapse. Now we have QE to keep interest rates low. We get the same thing: inflated asset prices. Any further collapse of asset values will do great harm.

THE WAY FORWARD The suggested new pricing structures open the door to a safe exit from QE. Not an easy option for some people who are buying over-priced homes, but at least a safe exit for the economy. These can be managed so as to allow the inflated prices to stay inflated as interest rates rise, giving time for incomes to catch up and deflate the price to income ratios in an orderly manner.

A WORRISOME article in MARKET WATCH / Bloomberg on inflated mortgages in the USA and a possible doubling of mortgage costs during recovery.

The essay talks of mortgage rates rising to 6%. Maybe that is too low. See - Finding the Mid-Cycle Interest Rate.

This interest rate increase would double the current cost of buying a home and devastate the market value of homes across the nation.

Fixed Interest Bonds are in a similarly vulnerable  state. This makes pension funds etc, currencies, and banks very vulnerable. The whole economy is unstable and everyone knows this.

It is the writer's opinion, although he has no proof, and there are always many factors to look at in any such study, that the Japanese lost decade was born out of this same problem. It is extremely difficult to lift an economy out of such a loss of confidence, loss of wealth, and the instinctive need that people then have to draw down debt. All three combined is a formidable problem, given that if there is a recovery, interest rates must rise, and asset values must fall.

See what was written on these blogs and elsewhere years ago about the QE exit problem before QE had been heard of - It is Edward's essay on the Low Inflation / Interest Trap

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Always check the HOME page of a Blog. It tells you where to find things. This one in particular.

All the main arguments are laid out with illustrations on this one Blog. Especially this one for debt pricing:
Start with MATHS Straight In

Look for the HYBRID MORTGAGE for the soft exit and also look at MATHS 5 ILS Rescue of Banks

For the Government Bonds, stay with the MATHS Straight In page. This is dealt with later down the page. And have a look at this too:

MATHS 2 - The Terrible Risk of Government Bonds

For practical policy-makers there are ten pages numbered 1 - 10 on the Main Blog giving guidance on how to deal with and implement this based on assembling the right kind of steering committee and the right targets for them to hit.

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