The Resolution Foundation Has Confused Wealth With Inflation - Another Economist View

18th July 2023

Yesterday we published a link to the Resolution Foundation publication Peaked Interest. Today some of the assertions are being challenged. This is one for people interested in UK economics and it your are not then it may be hard to get your head around it. If so STOP HERE.

The Economist Starts......

Today we can combine several themes as we look at what is a classic case of not seeing the wood for the trees. Along the way we can combine a nod to tomorrow's main inflation release in the UK and my past career in bond markets. You can take the boy out of the bond market but can you ever take the bond market out of the boy? These markets are usually only in the news for bad reasons and at the moment they are there for government borrowing and mortgages, both of which are now much more expensive.

In a way I should thank the Resolution Foundation for kindly defining the asset price inflation I have been describing ever since I started this blog.

A defining change to Britain and its economy took place over the past four decades: household wealth grew from around three-times GDP in the mid 1980s, a level typical of the second half of the 20th century, to seven-times GDP on the eve of the pandemic.

However that will not deter me from pointing out that the bit I have highlighted below is somewhere between nonsense and utter rubbish.

And while the pandemic initially led to a surge in
wealth, the cost of living crisis - and the higher interest rates that have followed - have thrown this trend into reverse for the first time in living memory.

We can switch now to them unwittingly making my case for me.

Rather than active saving on the part of households, ‘passive' gains from rising asset prices have been the dominant force in determining the level of wealth in recent decades - around three-quarters of the rise in wealth is accounted for by such gains.

The major part of these gains will be from higher house prices or what they call "passive" gains. So by merely owning your property you become a financial genius. There are two problems with this in that you are confusing a marginal price with the level at which everyone could sell their property which will be lower and is likely to be quite a lot lower. The next is that they are confusing inflation with wealth. Inadvertently is highlighted here.

The full blog HERE

What he is challenging is within Peaked Interest