Sunday, Mar 22, 2009
Another deflation prediction
Telegraph: UK to remain in deflation trap until 2012, economists warn
"The forecast, by a team at BNP Paribas, states that prices in Britain will keep falling for at least another two-and-a-half years, as Britain suffers an apparently intractable bout of debt deflation." Other than the bursting of the housing ponzi scheme, I don't see much deflation around me - quite the opposite in fact. I don't believe the deflationary threats being given by our government but BNP Paribas should be relatively impartial. Are there any deflationists out there who would like to comment?
Posted by quiet guy @ 12:23 AM (1783 views) Add Comment
23 Comments
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1. Johnny5thumbs said...
Those who don't know, shouldn't comment. I only know part of the picture, so I can only part-comment. I import from U.S., Pakistan & China. All 3 areas are dollar-priced, and all my imports are now coming in at 40 - 45% higher than 15 months ago (then $2.05 ... now $1.40 approx). If you look at the pavements outside High St. shops on rubbish day, and note where the cartons originate - 90% are China or Thailand - all dollar-priced areas.
I don't know the method used to calculate the housing-related component of C.P.I. (and R.P.I. if there is a housing-related component), but judging by the retailing element, it's really hard to see how the 'threat' of medium-term deflation can be anything more than an excuse for the government to soften us all up for the cranking up of the currency printing presses.
I'df love to expand my knowledge of the other and maybe contradictory part of the story ...
2. Liam10 said...
Deflation is invevitable. It has to be 99.99% certain for 2009, given the deleveraging firestorm that is enveloping consumers and corporates. Everyone has spent beyond their means and like the turning of a kaleidoscope they are suddenly seeing their reality very differently. They are not wealthy individuals sat on appreciating housing assets, they are actually cash poor and at risk of losing their jobs. They won't spend with that mentality and if they do they will factor in falling prices. Look at the housing, no one is buying because they know that prices will be lower next month than they are now...in other words a self fulfilling deflationary spiral. Same with cars, same with holidays, same will all high price tag items. The only inflation is going to be mid way 2010 at the earliest when the QE starts to have a real impact. Then we may well see accelerating inflation.
3. Suzyandjoe said...
Cars have been reduced, new that is though as second hand have been going up through low supply.
4. Hotairmail said...
The only thing I can think of is that on top of the massive debt deflation, demand will have to be collapsed from the public sector to cut costs and also the private sector as it is taxed out of existence.
Apart from that it's inflation all the way.
5. rotten tomato said...
@quiet guy
How can BNP Paribas be impartial? Even they have massive holes in their balance sheets which, like all western banks, they are trying to paper over with massive liquidity injections from the ECB. It is only natural that in the overall drive to get the central banks to print more and more money, they would wheel out the "economists" to say that deflation would be the problem. It doesn't matter that BNP is a French bank and thus "removed" from the UK. As the AIG fraud has shown, money which the US taxpayers gave them was funneled to directly to EU banks and Goldman Sachs, thus letting AIG and the US taxpayer take the whole loss, and the banks none. It's all a bloody game to them, and so far none of them high level financiers have been forced to pay (i.e. go to jail) except for the scapegoat Madoff. So the same scheme on EU taxpayers may be played out here too. At the moment the banksters have "only" limited themselves to printing money. Utterly immoral though, when for years they had been preaching the virtues of the free market, now when it's their turn to bite the bullet, suddenly they need a good bout of socialism. For years the free marketeers (and their green allies) have been preaching that in order to keep the books balanced there should be no investment in research, technology and infrastructure, and now they are printing enough money to feed the poor of the world many times over, just because they are themselves insolvent zombies, due to their sheer greed and speculation on derivatives. Any government which bows down to their requests and puts the welfare state at risk in trying to honour those derivatives bets, is guilty of treason against its own people. People's savings should be protected, day to day business transactions and loans should be protected. But the speculators and zombie banks should be shut. Let's create Good Banks with real assets, not bad zombie banks. And prohibit derivatives trading. Funny enough, it will be interesting to see what will come out of the G8 meeting in Italy, where our finance minister Giulio Tremonti who has been against the saving of zombie financial institutions from day one in 2007. In fact here he's signed into law regulations preventing the banksters from taking advantage of the situation on the skins of the ordinary citizen. It will be intersting for me to see how the upcoming G8 event chaired by him will be portrayed in the UK media. Most likely anything he says will be glossed over while Gordon Brown's pro-bank, pro-financier stance will be highlighted. I guess one of the reasons the financier-lobby sponsored G20 event is taking place ahead of the G8, in order to push the monetarist "solution" before any real Rooseveltian consensus is reached among the world's powers further down the line.
Right now the drive is to print money Weimar Style. Let us see the results down the line.
6. paul said...
Could I just point out a thoroughly dishonest, hyper-hypocritical about face by the BBC. The CPI is the official inflation measure, but since around October 2008, the only figure their articles talk about is RPI.
A good example is the BBC's inflation calculator which is now based on the RPI. Another exmaple is here where the BBC props up the case that we may have deflation by quoting the RPI, and not even mentioning the CPI.
I'm speechless at the way the government appears to have re-written the rule book and handed it to the referee in the final minutes of the game!
7. Sybil13 said...
Sounds like just the climate for the government to start giving 50% home loans(re government's new Home Buy Scheme) to FTB's to get on a hugely inflated property ladder doesn't it? Is 6 million in negative equity not enough for the government?
8. a saver said...
Interesting stuff, rotten tomato. "in Italy, where our finance minister Giulio Tremonti who has been against the saving of zombie financial institutions from day one in 2007. In fact here he's signed into law regulations preventing the banksters from taking advantage of the situation on the skins of the ordinary citizen". I like the sound of that, in the UK it feels like savers and taxpayers money is going straight into bankers' pockets - courtesy of our lying toady of a PM who seems obsessed with making ridiculously cheap mortgages available to all and sundry.
Isn't the plunge in RPI more to do with the housing and oil bubbles deflating? Certainly I'm finding life more expensive, with my rent having increased 3 times since Aug 2007 and energy bills and food way increased. And my savings income would have been slashed to almost nothing if I hadn't put most of my dosh into fixed term accounts yielding 5.5-7%. My mother is a pensioner and she is now getting zilch in bank interest.
9. drewster said...
qg,
The answer is maths. If prices rise from 100 to 120, that's inflation. If they then fall to 110 it's deflation, even though prices are higher than at the start.
Besides, some prices really are falling. Services in particular are badly hit. Car MOT and servicing costs seem to be falling. Private school fees will be falling too (in 2007 the Tgraph complained vociferously about the high costs). Major hotel chains and restaurants have constant special offers.
10. quiet guy said...
Drewster,
I suppose I'd better start by saying that my understanding of economics is weak. That said, my understanding is that there are two aspects to prices:
1. Money supply
2. Competition and productivity (or is that three? never mind)
We have seen some price falls but even those seem to be disapprearing fast from my perspective - my car service costs and grocery bills have risen substantially in the last two years.
As I'm sure you're aware, there are some commentators who say that the policies pursued by some big central banks are inflationary because they are increasing the money supply and there is nothing wrong with falling prices that are caused by productivity improvements. That's what I wanted to address. Computer prices have been falling steadily while getting more powerful for many years but no sane commentator would suggest that is a bad thing.
Inflation can be viewed as an alternative form of taxation and that's where I fear we are going next - whatever the Fed and BoE say publicly.
11. bellwether said...
As unemployment rises people are generally prepared to work for less.
I actually think working out whether the environment is going to be hyper inflationary or deflationary is next to impossible and certainly I've been unable to convince myself to invest either way.
Arguments on site around the topic are probably born out of uncertainty. There is a comforting sense of certainty when you arguing with the opposite view.
12. uncle tom said...
Unless you can persuade the public sector to accept pay cuts (pigs might fly..) and find some way to cut business overheads and red tape by a substantial amount, then we are not going to see significant deflation.
Japan's deflation was a consequence of spending too little and saving too much - the problem now faced by the UK, USA, and much of the eurozone, is exactly the opposite.
The value of sterling and the greenback is going to fall, while commodity prices (in global terms) will start to rise. Most imports have already rocketed in price, thanks to the fall in the value of sterling, and this will only get worse..
13. crunchy said...
2. paul
Spot on.
This can only lead to inflation as it has in the past. Playing with fire for sure.
Exaspirating!
14. bellwether said...
UT do you have any savings? If so are they all invested in commodities. If not your statements are no more than idle speculation
15. doggett said...
Since Mike Shedlock (Mish) appears to have some credibility on this site I'll quote his definition of inflation / deflation;
"Inflation is a net increase in money supply and credit.
Deflation is a net decrease in money supply and credit."
(Full article is at; http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html)
If deflation is a net decrease in the supply of money and credit then 'price deflation', as in a fall in the (general) level of prices, is one of its effects. Other factors affect price levels however - the slump in the value of sterling, fluctuations in the price of commodities and raw materials, productivity, etc - so using 'deflation' in both senses leads to confusion and misunderstanding.
Monetary deflation causes a rise in the value of money, worsening the position of the indebted - banks, the Government, and, it seems, half the population - so inflation is required to reduce the value of their debt. Another problem is that our debt money system requires a constant increase in the supply of money to function, hence the BoE's targeting of a ~2% (price) inflation rate, presumably on the assumption that this would be the effect on prices of the required rate of monetary inflation.
The powers that be need inflation (preferably at a low level) and have pulled all the levers they would expect to work in a normal downturn to produce it. But they haven't worked, because it's not a normal downturn. Hence the panic, evident in their desperate attempts to counteract the deflationary pressures by pumping money. The trouble is that if this isn't expanded into credit money then the net effect will continue to be deflation. Are the banks going to lend? Who to? And who is going to borrow? I suspect the response won't be what they hope for, so they'll keep pumping as long as they can.
If they eventually get lucky, with all that base money sloshing around, we're probably in for really serious inflationary problems, but if they don't ... ?
Interesting times.
16. Mr G said...
Where are all these falling prices?
17. quiet guy said...
@bellwether
"UT do you have any savings? If so are they all invested in commodities."
I see your point but only the most optimistic investor/gambler would put the lot into one asset class. We can all be wrong and we should all have a plan B.
"Arguments on site around the topic are probably born out of uncertainty."
Which is why I have tried some basic hedging of my assets.
18. tinker said...
@ Paul, that is fascinating about the BBC's switch from CPI to RPI in their 'informed' analysis of the 'inflationary' impact of the crisis.
In the artificial boom, lower CPI hides inflation; in the slump lower RPI hides inflation.
Totally cynical and not very 'British'. The BBC are so on message now (economy, climate change, terror, MP's expenses), they clearly are politicised and a government tool.
It needs sorting out.
Over-priced assets are coming down in price - a good thing; day to day living expenses are going up - a bad thing. Let's devalue the currency and make things worse...!
19. bellwether said...
QG fine but unless posters are that committed to their strategy they should avoid absolute proclamations - if things were really that transparent we would all be very rich and very quickly.
20. bellwether said...
Doggett, the UK government could cause inflation but not via credit money which will almost certainly continue to contract, the illusions that allow people to feel secure when borrowing huge sums of money relative to income have gone.
The Government could of course cause inflation by handing out money - a lot of money as the contraction of credit money is enormous. A hundred thousand each would do it.
What is not clear is whether they or G.20 collectively will look to take such a step.
21. britishblue said...
the question was asked, whether there are any 'deflationists' out there. I wouldn't give myself this tag because up until six months ago this was just a theoretical term that I learned in economics A level and something that like communism I never expected to experience in life. But, if deflation can be roughly translated into reduced prices or consumers buying cheaper alternatives, then yes I am seeing many areas where there are deflationary pressures. I don't look at the general indexes of inflation, because we all know they have dubious accuracy.
However, consider the following:
a. House prices dropping 20% a year. This is deflationary whether recorded by an index or not.
b. Piles of new cars sloshing around the world that have to be sold at some time. (I accept that some manufacturers put their official UK prices up - like Right Move with their housing index- but inflation is looking forward for the next months/ years, not what prices are today or have been for the past few months and these cars have to sell sometime probably at a lower price).
c. Building contract rates. Some developers are now paying subcontractors such as bricklayers, carpenters, electricians at 1998 rates. You will now find that the local builder, plumber, etc who you may have had difficulty getting to call you back in the boom times is now sharpening his pencil.
d. A decline in the usage of more expensive supermarkets and a more general use of the discounters like Lidl and Aldi
e. Conservatory, kitchen and other home improvement companies buying business to stay afloat
f. An influx of UK residents applying for factory jobs who in the past five years have mainly employed migrant labour.
g. Reductions in overtime work across British industry and subdued negotiation on pay rises in the private sector.
h. Decreases in rents (very apparent in London where I sold to rent), where landlords are hit by both outward migration and increase in rental properties.
i. Outward migration to former Eastern European countries as casual work decreases in the UK (I am sitting in Poland as i write this and believe me it is happening in large numbers. Just as the inward migration was hopelessly underestimated so is the outward migration).
j. A changing mood to debt as houses can no longer be relied on as a cashpoint.
k. I have noticed coffee shops and restaurants in London increasing special offers.One local to me offers reduced price 'credit crunch' lunches
l. I have friends who run removal businesses. They are achieving rates at 20% less than they were 2 years ago.
But one that hasn't readily been discussed is the the Pound/ Euro. Europe, one of our major trading partners now has one of the most over valued currencies in the world. The pound depreciation (which was hugely inflationary in the last 18 months) may have run its course against the Euro on a moving average basis. The Swiss another country with a major currency are actively trying to depreciate as are the Japanese. The quantitative easing in the US is so huge that the dollar could start devaluing at quite a speed.
The high Euro is killing the eurozone, they simply cannot afford to have the currency at the level it is against other world currencies and if the dollar starts to erode as the appetite for American debts reduces, at some stage this year we may start to see the Eurozone take active steps to weaken the Euro. This may mean that in the next twelve months sterling could rise (from its lowly base) against a basket of currencies. This is in effect deflationary.
A year ago we had one of the highest inflation rates for many years, well in double figures. But now i think there are some deflationary factors in the economy.
22. last_days_of_disco said...
@britishblue
Exactly, we are experiencing deflation but its hard to put your finger on it because people really struggle to admit it. Its like asking prices on houses extended to everything. I am seeing the same thing for rates on IT contracting. People are just not willing to pay the rates of two years ago. Also everyone wants deflation to happen to everyone else, not them. So people don't want to be employed for less but want to enjoy the cheaper prices, as the jokey bank add went, "It doesn't work like that".
Also we are now in mortal danger of Hyper inflation. This is because in their effort to reverse deflation the state will print too much money. The problem is because people are in debt and facing deflation they will use every penny they can lay their hands on to pay down debt which means the money in circulation will still be shrinking, it won't be circulating in the economy its just a private version of the toxic asset purchase thing. Additionally deflation, even with zero percent interest rates will make saving appear a good idea, so all that printed money will just get stashed away. And then comes the hyper-inflation kicker.
The government will finally re-ignite inflation but of course at that point everyone will realise that they are holding a bunch of paper money which is becoming less valuable. So suddenly everyone will want to buy other assets which will suddenly look much better than paper money. That will devalue paper money incredibly quickly, the BOE needs to be in hair trigger mode for when that moment comes.
To prevent this the BOE at that point will be forced to raise interest rates dramatically (like to 20% or something like that) to prevent all that money coming flooding out of savings accounts, etc and destroying the currency and when I say destroy, think Zimbabwe.
So its all about getting the amount of QE right and then making sure you get the timing right on stepping up interest rates from 0% to 10% or something in one day. Its one of those moments, I hope they have someone with a clue coordinating this lot. And their are going to be lots of casualties. So much for a smooth ten years deflation.
23. crunchy said...
Show me the day we have negative inflation and I will believe it.
This has not happened since 1960. nearly 50 years ago.
Go figure!