Wednesday, Nov 19, 2008
Deflation v's Inflation
Timesonline: Deflation is the new bogey word as crunch sends prices tumbling
The spectre of 1930s-style deflation in the British economy loomed yesterday after figures showed that prices of many goods slumped last month as recession tightened its grip.
Consumer price inflation posted its biggest drop since records began in 1992, falling to 4.5 per cent last month from a 16-year peak of 5.2 per cent in September.
The drop could lead to further aggressive interest rate cuts. Rates are already at a 54-year low of 3 per cent.
Posted by flintster1994 @ 09:20 AM (1068 views) Add Comment
10 Comments
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1. planning4acrash said...
The Blessings of Deflation. If you've been sucked into the casino economy and are leveraged to the eyeballs, its bad for you. If you've saved money and are frugal/sensible, its fantastic! This is economic war between speculators and savers, and the savers don't have a clue.
2. planning4acrash said...
Should We Worry About Deflation? Yes, the current economics brain trust is worried that consumers will collectively show the good sense to delay purchases, pay down debt, and increase their savings. After all, this liquidation of malinvestments will likely take a while. The prudent thing to do in times of uncertainty is not to ramp up debt and spend money you don't have. But now, all of a sudden, "saving" is a dirty word.
3. p. doff said...
The view that deflation/cheaper prices must be a good thing is very simplistic, although there are pros and cons, of course. For prices to genuinely become cheaper, the manufacturer has to become more efficient. Again, this appears to be a good thing - survival of the fittest and all that - but in reality increased efficiency often involves exploitation and slavery of the employees, who have to work longer hours or face company collapse and redundancy. The alternative approach for companies to increase efficiency is to outsource abroad to the latest 'emerging economy' where the locals are prepared to work all hours for peanuts. This results in a decline in the manufacturing base of one country in favour of another as it is all shifted abroad. This is possibly ok if that country has alternatives for wealth generation, but in the case of the UK for example, putting most of your eggs in the financial services basket can have dire consequences when that industry collapses.
So, whilst I personally like the idea of deflation because my savings would be 'worth more', I think you have to look at the wider picture and what is good for the long term economy of a country, and it's workers, as a whole.
4. down wave said...
Deflation is uncontrolable - a spiraling vortice into the abyss. Stock on the selves will be worth less tomorrow. The Equity of any kind of stock that has been paid for, especially if the money has been borrowed to pay for it, albeit, houses, cars, paint, bricks, cement, live stock, land, plant and machinery, they all will be worth less with the passing of time. So selling them will NOT pay back or cover the money borrowed. This will accelerate bunkruptcies accross the board. Benchmark will be a forgotten word.
Many small town centres will become Ghost Towns as businesses go bust, not one by one but five or ten at a time. Commercial property landlords will not be able to find business tenants, yet they will still have to pay their business rates to the local councils. They will also go bust or be forced to sell at knock-down prices. If they are mortgaged and cannot meet the payments, the banks will repossess and auction off the property. This is already happening in my small sea-side town with ten businesses closing in the last month or so. Is is fast becomming like a Wildwest Ghost Town.
Banks will be most reluctant now to lend money for any kind of business or project, including house purchases as they know that the loans will/may not be paid back due to the falling equities and securities values caused by deflation. Each Bank will be rushing to get in first, to reposses. The issues of 'Statutory Demands' by courts will skyrocket. A sucking wirlpool of lost money into the vortice as this 'Sucker' goes down.
Best and safest employment in the next period will be Baliffs and Auctioneers.
This is what the government is terified of and what the TV and newspapers are failing to point out.
5. sneaker said...
Talk of the 1930's is misplaced. The UK got its Great Depression in early, starting 1919, due to the costs of WW1:
http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom
6. japanese uncle said...
In deflation, IR will certainly decline, but is not likely to end up in the near zero terirroty as seen in Japan. Unlike Japan remarkable share of GBP is held by foreign investors (though I have no stats to endorse this point), who are rather quick to abandon the currency in the event a run is triggered, exactly as we witnessed a few weeks ago. GBP can further depreciate by 60-70% in the event of zero IR. Then MPC members will have to do a lot of explaining in Parliament and court of law, on account of having recreated Zimbabwean carnage over here.
7. sold out said...
This is not deflation its disinflation.Don't believe the lies.Hyperinflation is sitting on the horizon if they start printing money.
And we have the perfect party in power to do just that ZaNU Labour.
8. shipbuilder said...
Downwave - would deflation not simply be the economy adjusting to a basic level of spending by the public? Let's not forget that people still need to eat, to move around etc., so that demand will always be there. In my eyes, this could be a good thing.
9. Kruador said...
sold out@7: what's worse, banks inflating through debt-backed money that we have to pay back, or governments issuing interest-free money? As long as the total amount of money created does not exceed increases in production, there is no net increase in money.
Last month, the amount of notes and coins estimated to be in circulation was £51bn. That's dwarfed by £2.5 trillion of outstanding loans. Real, printed, money makes up only about 2% of the money supply. See http://www.bankofengland.co.uk/statistics/fnc/current/index.htm for 'narrow money' and http://www.bankofengland.co.uk/statistics/abl/current/index.htm for information about amounts of outstanding lending.
What does concern me about printing money is that a greater amount of free money will allow banks to create even greater amounts of debt-based money. We can rein that in by requiring higher fractions of deposits to be retained (reducing the fractional reserve ratio). I recently discovered that we are operating with *no* minimum fraction at all, instead having 'capital requirements' that are almost no requirements at all.
On the general topic, it isn't consumer price deflation at all. It's less inflation than we had the previous month. Prices still went up. Taken as a view over the entire year, it's still substantially more inflation than we had last year.
Using CPI as a measure of the actual inflation/deflation of the money supply is trying to be a proxy for stability of the currency. CPI isn't measuring prices of many things that money is used for - if the target is a stable money supply, we need to measure the money supply itself, and M4 and M4 lending have been massively out of control for years. There couldn't have been a house price and commodity bubble if the money wasn't there to be spent.
10. greytornado said...
This Labour Government is racking up astronomical debt. A huge amount of money will have to be be printed; serious inflation will be the result. Don't be confused by the current deflation - it's only a phase we are passing thru.