Jump to content
House Price Crash Forum
Sign in to follow this  
newbie

Austerity = Deflation

Recommended Posts

In Today's FT there's a story that deflation is threatening the Euro "Price falls in Spain revive deflation fears" - http://www.ft.com/cms/s/0/8caa382c-5f4c-11df-978c-00144feab49a.html

Is this not the natural outcome of the austerity measures that all the economists and finance commentators are getting so excited about at present?

How are countries to implement austerity measures without falling into a deflationary spiral? Will the solution be to print more money to give to the banks?

Austerity for some, QE for others. Net result = deflation and inflation in check. But the distribution in wealth in society will be rather more skewed as a result...

Share this post


Link to post
Share on other sites

I am trying to deflate my spending by doing things differently, will this cause austerity to others, I hope not, we are all in this together. ;)

Share this post


Link to post
Share on other sites

In Today's FT there's a story that deflation is threatening the Euro "Price falls in Spain revive deflation fears" - http://www.ft.com/cms/s/0/8caa382c-5f4c-11df-978c-00144feab49a.html

Is this not the natural outcome of the austerity measures that all the economists and finance commentators are getting so excited about at present?

How are countries to implement austerity measures without falling into a deflationary spiral? Will the solution be to print more money to give to the banks?

Austerity for some, QE for others. Net result = deflation and inflation in check. But the distribution in wealth in society will be rather more skewed as a result...

So long as the bankers get their wages and bonuses back to 2007 levels (and they aren't far) it doesn't matter what policy is used. I think we should all check our sofas again and do another whip round for them.

Share this post


Link to post
Share on other sites

In Today's FT there's a story that deflation is threatening the Euro "Price falls in Spain revive deflation fears" - http://www.ft.com/cms/s/0/8caa382c-5f4c-11df-978c-00144feab49a.html

Is this not the natural outcome of the austerity measures that all the economists and finance commentators are getting so excited about at present?

How are countries to implement austerity measures without falling into a deflationary spiral? Will the solution be to print more money to give to the banks?

Austerity for some, QE for others. Net result = deflation and inflation in check. But the distribution in wealth in society will be rather more skewed as a result...

I've been saying just that for a while now. and you have hit the only possible solution on the head.

The government have to cut the deficit (e.g spend less) But as GDP is calculated as

GDP = private consumption + gross investment + government spending + (exports − imports)

All other things being equal this will result in GDP collapse. In fact it has a multiplier effect so will be even worse. Under normal circumstances Government spending reductions would be off-set by tax cuts which therefore would / could create more private sector demand in the economy. However due to the debt spending cuts will not equal tax cuts - in fact taxes will probably rise taking even more money out of the equation.

This will kill out GDP.

On the other side is monetary policy, set by the bank of England. The one thing they will avoid at all costs is deflation, they will basically do anything possible to avoid it. The tools they have are to lower interest rates (basically impossible now due to ZIRP) or QE. So they will have to go with more QE to balance the money supply.

In summery you are right. The only option the government has is to implement cuts while at the same time applying monetary stimulus in the form of QE to try and balance it out.

Solution for your private finances is to sick your money in assets that protect from monetary expansion (i.e inflation) while at the same time praying to God that you do not loose your job.

Edited by Ben from Dover

Share this post


Link to post
Share on other sites

I've been saying just that for a while now. and you have hit the only possible solution on the head.

The government have to cut the deficit (e.g spend less) As GDP is calculated as

GDP = private consumption + gross investment + government spending + (exports − imports)

All other things being equal this will result in GDP collapse. In fact it has a multiplier effect so will be even worse. Under normal circumstances Government spending reductions would be off-set by tax cuts which therefore would / could create more private sector demand in the economy. However due to the debt spending cuts will not equal tax cuts - in fact taxes will probably rise taking even more money out of the equation.

This will kill out GDP.

On the other side is monetary policy, set by the bank of England. The one thing they will avoid at all costs is deflation, they will basically do anything possible to avoid it. The tools they have are to lower interest rates (basically impossible now due to ZIRP) or QE. So they will have to go with more QE to balance the money supply.

In summery you are right. The only option the government has is to implement cuts while at the same time applying monetary stimulus in the form of QE to try and balance it out.

Solution for your private finances is to sick your money in assets that protect from monetary expansion (i.e inflation) while at the same time praying to God that you do not loose your job.

Great summary. Essentially it's like saying to some families, "we are facing times of austerity and need to take food of your table" and at the same time saying to others, "here's some free food, we want you to have it so the farmers don't go bust".

Share this post


Link to post
Share on other sites

The tools they have are to lower interest rates (basically impossible now due to ZIRP) or QE. So they will have to go with more QE to balance the money supply.

The mystery to me is how the QE'd dosh gets into the economy if the gov is cutting spending.

Share this post


Link to post
Share on other sites

The mystery to me is how the QE'd dosh gets into the economy if the gov is cutting spending.

Keep doing what's been done before, let banks swap their nearly worthless IOUs for QE'ed money at face value. Sorted.

Share this post


Link to post
Share on other sites

It all hinges on what combination of QE spending cuts and tax rises come in.

In the UK we will probably see more inflation than most and some heavy public spending cuts, but I am not optimistic that they will be able to avoid large tax increases.

Share this post


Link to post
Share on other sites

The mystery to me is how the QE'd dosh gets into the economy if the gov is cutting spending.

existing bonds are monetised to created the dosh. what is being cut is the level of NEW issuance of debt.

in theory the recovery of public finances goes like this:

while(deficit > 0) {

1. cut, cut, cut //causes deflation

2. monetise public debt, zirp //fights deflation, creates excess reserves (but excess reserves are costless at zirp

}

//cutting done, market confidence regained, inflation pressure returns

3. raise rates slightly, pay interest on bank reserves to contain inflation

while(remaining_debt==too_high) {

4. cut, cut, cut //causes deflation

5. monetise public debt, zirp //fights deflation, creates excess reserves (but excess reserves are costless at zirp

}

//debt now acceptable

6. re-issue excess reserves as bonds, once market confidence regained.

7. now worry about the demographics.

Share this post


Link to post
Share on other sites

existing bonds are monetised to created the dosh. what is being cut is the level of NEW issuance of debt.

in theory the recovery of public finances goes like this:

while(deficit > 0) {

1. cut, cut, cut //causes deflation

2. monetise public debt, zirp //fights deflation, creates excess reserves (but excess reserves are costless at zirp

}

//cutting done, market confidence regained, inflation pressure returns

3. raise rates slightly, pay interest on bank reserves to contain inflation

while(remaining_debt==too_high) {

4. cut, cut, cut //causes deflation

5. monetise public debt, zirp //fights deflation, creates excess reserves (but excess reserves are costless at zirp

}

//debt now acceptable

6. re-issue excess reserves as bonds, once market confidence regained.

7. now worry about the demographics.

damn it, ive spotted an intangible and unguaranteeable parameter , oh dear, its that pesky collective human nature variable again that simply cant be forced to go where you want it to

Edited by Tamara De Lempicka

Share this post


Link to post
Share on other sites

Posted on another thread:

I reckon Portillo had it the other day.

Taxes are going to rise more than people think, and we'll get stagnation.

The "measured inflation" this causes will do the BoE's job of keeping CPI positive without more QE.

The taxes will pay off the debt. And kill us all, of course.

It might just work.

Share this post


Link to post
Share on other sites

damn it, ive spotted an intangible and unguaranteeable parameter , oh dear, its that pesky collective human nature variable again that simply cant be forced to go where you want it to

quite right. Bug fixed:

while((deficit > 0) OR (market_confidence < 0)) {

cut, cut, cut;

monetise public debt, zirp;

last if (sterling stronger_than (dollar OR euro))

}

note the loop exits as soon as the pound threatens to regain some strength

Share this post


Link to post
Share on other sites

that will only work assuming unemployment is at sustainable levels, around 10% max.

But if they tax us to death and keep the civil service fully employed, then unemployment should stay artificially low...

Share this post


Link to post
Share on other sites

But if they tax us to death and keep the civil service fully employed, then unemployment should stay artificially low...

Not if half the comically overly indebted companies in the UK cant service it whilst the cuts are going on, people think the employment cull is coming from the public sector and the private sectors is done, i think the private sector cuts and corporate insolvencies have barely started to date

Edited by Tamara De Lempicka

Share this post


Link to post
Share on other sites

quite right. Bug fixed:

while((deficit > 0) OR (market_confidence < 0)) {

cut, cut, cut;

monetise public debt, zirp;

last if (sterling stronger_than (dollar OR euro))

}

note the loop exits as soon as the pound threatens to regain some strength

mmm sounds like a plan im sure these geniuses are more than capable of reacting quickly enough to keep this fine equilibrium going, they didnt even notice the biggest economic collapse in half a century until months after it had happened and this is why i (answering a post of yours on another thread) think therell be a massive morph into inflation at some point, because they will never be sure that enough debt has defaulted, theyll hold off and hold off just to make sure because just like they were too optimistic going into it, they will be way to pessimistic coming out of it after the oncoming battering to the downside, it will be 20%+ before they realise its changed

Edited by Tamara De Lempicka

Share this post


Link to post
Share on other sites

But if they tax us to death and keep the civil service fully employed, then unemployment should stay artificially low...

if this approach is fully funded, then its not artificial employment is it? but cammers isn't going to do that in any case is he? He's going to start chopping until the deficit is gone.

its all very well upping VAT etc to cause headline inflation but consumption (and income) tax increases are not easily going to beat deflation when most of the population public and private are fearing for their jobs.

plus what portillo is missing is that taxes which are used to retire public debt reduce the money supply twofold, first when bank reserves get deleted when the bond is paid off using taxes, and secondly by reducing the stock of long duration government debt (which as I always point out is effectively money), which is needed for pensions etc.

it is completely impossible to pay off even a small amount of our debt (as opposed to just eliminate the deficit) at the same time the private sector is stagnant or shrinking, without unleashing extremely powerful deflation.

Share this post


Link to post
Share on other sites

Taxy taxy ---> seizy seizy.

See Greece for details.

It's alot easier than cutting and less chance of you getting stabbed.

Share this post


Link to post
Share on other sites

In Today's FT there's a story that deflation is threatening the Euro "Price falls in Spain revive deflation fears" - http://www.ft.com/cms/s/0/8caa382c-5f4c-11df-978c-00144feab49a.html

Is this not the natural outcome of the austerity measures that all the economists and finance commentators are getting so excited about at present?

How are countries to implement austerity measures without falling into a deflationary spiral? Will the solution be to print more money to give to the banks?

Austerity for some, QE for others. Net result = deflation and inflation in check. But the distribution in wealth in society will be rather more skewed as a result...

It is just spin to excuse printing money

Did austerity cause deflation in the 1930's?

I don't think wheel barrows full of money counts as deflation

:blink:

Share this post


Link to post
Share on other sites

if this approach is fully funded, then its not artificial employment is it? but cammers isn't going to do that in any case is he? He's going to start chopping until the deficit is gone.

its all very well upping VAT etc to cause headline inflation but consumption (and income) tax increases are not easily going to beat deflation when most of the population public and private are fearing for their jobs.

plus what portillo is missing is that taxes which are used to retire public debt reduce the money supply twofold, first when bank reserves get deleted when the bond is paid off using taxes, and secondly by reducing the stock of long duration government debt (which as I always point out is effectively money), which is needed for pensions etc.

it is completely impossible to pay off even a small amount of our debt (as opposed to just eliminate the deficit) at the same time the private sector is stagnant or shrinking, without unleashing extremely powerful deflation.

We are not going to get deflation - unless you are including house prices and share prices

Even the fiddled figure is 4%+ and interest rates are also rising

What we are going to get if we are not very, very careful is STAGFLATION

Share this post


Link to post
Share on other sites

What we are going to get if we are not very, very careful is STAGFLATION

No, that is what we are going to get if we (the powers that be) ARE very careful. It's the least bad option overall, once you ignore moral hazard, which of course they completely have.

Share this post


Link to post
Share on other sites

No, that is what we are going to get if we (the powers that be) ARE very careful. It's the least bad option overall, once you ignore moral hazard, which of course they completely have.

Well whatever the possible outcomes - deflation sure as Hell isn't one of them.

:)

Share this post


Link to post
Share on other sites

In Today's FT there's a story that deflation is threatening the Euro "Price falls in Spain revive deflation fears" - http://www.ft.com/cms/s/0/8caa382c-5f4c-11df-978c-00144feab49a.html

Is this not the natural outcome of the austerity measures that all the economists and finance commentators are getting so excited about at present?

How are countries to implement austerity measures without falling into a deflationary spiral? Will the solution be to print more money to give to the banks?

Austerity for some, QE for others. Net result = deflation and inflation in check. But the distribution in wealth in society will be rather more skewed as a result...

It's deflation for eurozone countries with large deficits and which have to drastically introduce austerity measures. The solution might be QE, but that ain't happening while Germany is in the eurozone. All the club med countries are expecting Germany to pull them out of recession when they start spending again. When it becomes apparent that Germany won't start spending again then the horror of their situation will become apparent and it will get seriously nasty.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.