Tuesday, May 25, 2010
CPI at 3.7%, RPI at 5.3%, yet deflation is our biggest risk?!
Telegraph: MPC's Adam Posen warns Britain at risk of Japan-style deflation
Britain is at risk of sliding into a Japan-style episode of deflation, and may be even worse-equipped to escape. Britain faces an uncomfortable trio of obstacles. Unlike Japan, Britain has to sell a large proportion of its debt to overseas investors, who are more likely to exit the market if they become scared of Britain's fiscal prospects. The UK also faces the challenge of having to boost a troubled manufacturing sector if it is to recover sufficiently. Unlike Japan, it does not have the luxury of having a worldwide market with a large and growing appetite for exports. He also warned that the banking system's continued troubles would undermine companies' abilities to raise funds, and pointed out that businesses already appeared to be hoarding savings - something which happened in Japan.
22 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. mark wadsworth said...
It is a perfectly plausible outcome. I fail to see how the UK's position (massive public sector deficits "financed" by QE at the top of a land price bubble; no currency controls; ageing population etc) is markedly different from Japan.
So I'll spend the next ten or twenty years fighting off Her Indoors' "nesting instinct" by pointing out that the £20,000 rent we paid in the previous year is only half of the amount by which the potential selling price of the house we occupy has fallen.
2. flashman said...
I’m not sure that comparisons with Japanese deflation are that valid. Japan was riding so much higher than anyone else and even after a sustained multi year dollop of deflation they are still riding higher than most. They ran the most stupendous post war surpluses and there was a very real fear in America (70s and 80's) that Japan would one day own everything in America. The 'coming' Japanese dominance became a national obsession. Asset prices rose meteorically in Japan because of their huge ascendancy and because their giant surpluses stayed in the country and chased assets. Their deflation was more a fall from a ridiculous ascendancy to a smaller ascendancy. In comparison, we have a tiny perch to fall off.
I am not saying that deflation isn't possible. It's more that Japanese comparisons are not that relevant to our situation
3. hpwatcher said...
I liked this comment at the bottom of the page:-
Deflation, pull the other one, the powers that be are trying their damdest to inflate their way out of their own hole at our expense.
Deflation is only bad for the indebted and the profligate.
Let them pay, it's not our problem.
Welcome deflation.
The deflation tale is absolute rubbish - is this was the case why is CPI at 3.7% ??????
4. cat and canary said...
whereas Houdini-Roubini is predicting future inflation..
"...The prognosis for the UK is, at least, a little less alarming. An independent currency gives it a few more levers to pull – quantitative easing means default is unlikely to be an issue. But that comes with its own challenges. "Eventually inflation will go up and that erodes the real value of public debt," Roubini says. "In that scenario the value of the pound will fall sharply. It could even become disorderly and that could damage the economy, the financial markets and also the role of the pound as a reserve currency."
http://www.telegraph.co.uk/finance/economics/7756684/Nouriel-Roubini-said-said-the-bubble-would-burst-and-it-did.-So-what-next.html
5. jack c said...
Bearing in mind the BOE/MPC main task is to keep CPI within a target range of 2% plus or minus 1% the figures for the last 5 months make interesting reading. CPI as follows - Dec 2009 sneaked in at 2.9% Jan 3.5% Feb 3.0% March 3.4% April 3.7%
Would it be fair to say the MPC are not doing a very good job, Mr King is writing too many excuse letters to the Chancellor and the repeated talk of deflation is a bit of a red herring or scare tactic?
6. Peter said...
This deflation talk is pure fantasy.
The authorities will always be able to create inflation if that is what they want. Remember Mr Benanke's comments about helicopters?
What will happen is that the government will use inflation to destroy its debts - and any saving you might have in the process. Be warned and take action before it is too late.
7. icarus said...
What is this 'large and growing' demand for exports? Exports may have made a weak recovery late last year but it was based on fairy dust and won't last.
In 2008-9 China went into stimulus and credit/bubble mode to offset declining exports. That helped exports to China but that's coming to an end - China is trying to deflate the realestate bubble caused by last year's massive stimulus package (fiscal and bank lending) and is tightening lending standards (rather than raising interest rates, which would strengthen the renminbi). Thus FTBs now need a 30% deposit and second-time buyers need a 50% deposit and pay higher mortgage rates. Third-time buyers - forget it. Plan A was exports, Plan B was a credit-fuelled bubble. They're both out of the window and there's no Plan C. The slowdown in China will reduce liquidity worldwide and this will hit Europe. Belt-tightening by the PIIGs (to protect the balance sheets of US and European banks with large exposure there) will also hit Germany's exports. Also, take away The US fiscal stimulus and inventory restocking and there's no growth in US consumption, and few prospects of any such growth, given a future of consumers' paying down debts and seeing no wage growth
Yes, the pressures are deflationary, but that doesn't prevent inflation in some goods. If banks can't make profits in the old-fashioned way - lending for productive investment - they can make it by speculating in assets and commodities, which may include driving up the price.
8. techieman said...
"Deflation is only bad for the indebted and the profligate" - erm nope very very incorrect. No real shock (it being incorrect) there then!
Now the argument as to whether or not we have or will have inflation or hyperinflation or deflation is one thing... but to say isnt universally bad is the same as saying that hyperinflation isnt universally bad.
Sorry if thats (very very) rude!
9. flashman said...
techie: We are right in the thick of it. Massive uncertainty about the effects of the UK austerity cuts. The Euro zone is ripping itself to shreds. Confidence in markets plummeting. Time to buy? I’m obviously being a bit tongue in cheek but I'm sure you, more than most, know what I mean.
10. flashman said...
It is easy to see inflation moderating, when you consider the following:
The Pound is widely expected to bump through the 1.18 level (Euro exchange rate) and maybe keep on going for a while. A substantial percentage of our imports come from our European trading partners and these imports will effectively become cheaper as a consequence of the improving exchange rate
11. techieman said...
flash: actually i have been selling the rallies but do expect to see a more substantive move back up soon in the stock markets, as targets have been met as far as im concerned. Thats not to say we wont have more downside -my views on that havent changed.
As for currencies you may be right but again the Euro v the greenback in particular looks oversold to me.... So im square.
12. 51ck-6-51x said...
flash, yet another reality check, thanks.
I for one can see why the BoE have been happy to write their letters acknowledging that inflation is over the target band: the negative shock shark has been swimming in the pond ever since it was known that the parcel would be passed to the player operating the radio [European sovereigns].
13. titaniccaptain said...
Hi Flash.....
I have been pondering how a weaker/stronger pound can be both good and bad for a country and I have come to the conclusion if the nations we are trading with are going down the tubes i.e. NEARLY EVERY ONE IN EUROPE lol ROFL....then exports may be affected by credit restrictions from the Euro zone.
What I am getting at is this.....If the pound is weak against the Euro then its offset by the credit availability within that country to purchase British goods.
And if the pound goes up against say a currency which has several sovereign nations under its wing to feed then won't the strength of the pound be canceled out by the restrictions in credit for business in Britain.
All this creating a weird sluggish stalemate/deflationary long-term trend
Just a though in between my mumblings and grumblings.
14. titaniccaptain said...
oooops....That should read:-
"And if the pound goes up against say a currency like the Euro which has several sovereign nations under its wing to feed then won't the strength of the pound be canceled out by the restrictions in credit for business in Britain for British importers"
15. ontheotherhand said...
Why is deflation so bad? I've heard that it creates unemployment because employees refuse to take nominal pay cuts as their real cost to the employer goes up. I think this is nonsense since even organised labour like JCB from the beginning of the recession was accepting cuts, and for that matter look what the Irish managed.
It also means that it's harder to encourage people to invest in enterprise when their money makes a real gain all on its own, but in the end it all depends on real interest rates and taxation. Right now we have negative real interest rates for savers so speculation is encouraged.
16. jack c said...
Having read the comments on this thread and also bearing in mind that this topic has been hotly debated before on several occasions, I'm inclined to say the most likely label to stick on the situation we have at the moment and going forward for the forseeable future is Stagflation.
17. flashman said...
Hi tc: Yes, there is a large element of 'balancing' where everything nets to zero. There are however little things that can be done to get a sneaky advantage. That’s why the European countries got so agitated a while back when the Pound first devalued. The Euro is much less nimble and they thought that we were effectively creating an unfair trade advantage. Before the crisis they were also annoyed that our interest rates were higher than theirs because we attracted more inward investment. Same thing with our (formerly) lower taxes and social costs. They thought we were being sneaky.
18. jack c said...
Flash - what are your thoughts on the disappearance of the Euro - I'm getting reliable info from contacts in Germany that the public simply dont support the idea of bailouts for the rest of Europe and as a consequence would like to see a return of the DM. Clearly this isnt going to happen overnight but given a bit more time it might become a reality. See www.guardian.co.uk/business/2010/may/09/angela-merkel-german-regional-election
19. flashman said...
Hi jack: I really can't see it happening. They are in a crisis now but the deeper consensus is that Europe needs to huddle together to maintain its place in the world. The grand plan was always to creep their way to central control of sovereign budgets and taxation. Without central control you get countries breaking the spending rules and threatening the stability of the Euro. The current political unpopularity of the Euro in Germany and other countries will cause the Brussels bureaucrats to go silent for a while but when the crisis calms down in a few years they will try again to take away sovereign control of budgets. The German people are really pissed off but deep down they probably know that they can’t turn back the clock to their DM glory days. Other world players have appeared since then and things are very different.
I actually think that the Brussels lot are quite naïve because there are not many governments that could get elected by handing over control of their budgets and taxation. My guess is that they will eventually impose massive penalties on anyone who breaks the spending rules, in future. The Germans and French broke the spending rules for years before the crisis, so they are not in a good position to preach
20. jack c said...
Flash - thanks for your input, much appreciated
21. drewster said...
flashman,
You say "when the crisis calms down in a few years".
(1) The best time to force changes is under great uncertainty (the Shock Doctrine). If they were going for a power-grab, now would be the best time. They'd be foolish to wait for later when now (or a few months from now) is clearly the best time to shoot.
(2) It's going to get a lot worse before it gets better. Greece looks like just the tip of the iceberg, with Portugal and Ireland not far behind. Sovereign debt fears could spread to Spain and Italy. It's not as if Greece is unique - not so long ago, Italy and Spain were bywords for tax-dodging citizens and bloated bureaucracies (we even have the phrase "spanish practices"). Even if the economic issues are papered over, there may well be social unrest - see my post at the top (FT: On the brink of a new age of rage). I don't think Brussels will get another chance at a power-grab if they don't grab now.
22. doggett said...
@ hpwatcher
"The deflation tale is absolute rubbish - is[sic] this was the case why is CPI at 3.7% ??????"
Because it's possible to have monetary deflation and price inflation at the same time.