Inflation V Deflation.

[watchinandwaiting]

I’m no expert, but it seems to me that the Weston World is walking a precipice. On the one hand higher interest rates could push us into recession, depression, or slump. On the other hand lower rates could lead us into inflation or hyperinflation.

For those in debt the former would be a catastrophe, the latter a godsend.

For those with savings the reverse is true.

IMO the governments and bankers can only react as events unfold.

Which way does history tell us it will go?

What do you think?

[charmer]

I’m no expert, but it seems to me that the Weston World is walking a precipice. On the one hand higher interest rates could push us into recession, depression, or slump. On the other hand lower rates could lead us into inflation or hyperinflation.

For those in debt the former would be a catastrophe, the latter a godsend.

For those with savings the reverse is true.

IMO the governments and bankers can only react as events unfold.

Which way does history tell us it will go?

What do you think?

Stagflation is the name of the game. Supply side shock...we've had a supply side bonus from China for the last few years and I think we've (well Gordon Brown) has taken it for granted. Suddnely a shock hits and he looks clueless (but it's not his fault apparently, well actually Gordon, the shock isn't your fault, but a failure to prepare the economy is. Numpty)

[Magpie]

I don't agree that depression or recession is a godsend for those with savings, a disaster for those in debt. Recession is bad for anyone, with or without savings, who loses their job or has their earnings cut as a result.

(Presumably you're meaning deflation rather than simple recession, as in the thread title, in which case it is a more complicated question, though it's unlikely to occur without being accompanied by recession)

Also inflation is only a godsend for those in debt if wage inflation keeps pace with price inflation, unlikely in these times.

So I don't really agree with the question. But for what it's worth I think we might manage a bit of both, inflation with recession = stagflation.

[Duplex]

I’m no expert, but it seems to me that the Weston World is walking a precipice. On the one hand higher interest rates could push us into recession, depression, or slump. On the other hand lower rates could lead us into inflation or hyperinflation.

For those in debt the former would be a catastrophe, the latter a godsend.

For those with savings the reverse is true.

IMO the governments and bankers can only react as events unfold.

Which way does history tell us it will go?

What do you think?

The Western Worlds central banks have employed a inflationary policies to avert deflation.

They will fail however because the the west is presently unable to compete with low wage, low regulation economies; they (the central banks) have caused asset bubbles because the cheap money has found it difficult to find productive investment opportunities in the West.

[MarkG]

they (the central banks) have caused asset bubbles because the cheap money has found it difficult to find productive investment opportunities in the West.

Bingo. In the past cheap money may have helped the economy by allowing people to invest in profitable new industries which were unaffordable before, but today there aren't many that can compete with Chinese and Indian wage levels, so the money is just going into absurd asset price bubbles that make us all poorer.

Just more proof, if you needed any, that the people running Western governments are utterly clueless.

[watchinandwaiting]

I don't agree that depression or recession is a godsend for those with savings, a disaster for those in debt. Recession is bad for anyone, with or without savings, who loses their job or has their earnings cut as a result.

(Presumably you're meaning deflation rather than simple recession, as in the thread title, in which case it is a more complicated question, though it's unlikely to occur without being accompanied by recession)

Also inflation is only a godsend for those in debt if wage inflation keeps pace with price inflation, unlikely in these times.

So I don't really agree with the question. But for what it's worth I think we might manage a bit of both, inflation with recession = stagflation.

Not so sure!

many people do very well in a recession! Bailiffs, Debt collectors, Solicitors, Auction houses, Pawn brokers, etc etc.

But which will it be?

[Guest]

Also inflation is only a godsend for those in debt if wage inflation keeps pace with price inflation, unlikely in these times.

The Western Worlds central banks have employed a inflationary policies to avert deflation.

They will fail however because the the west is presently unable to compete with low wage (snip)

This is the very thing I am concerned about as the outcome of Bernanke's seeming desire to try to inflate out of this mess.

The inflation of the money supply in the past five years has found its way into houses but NOT into wages. So why should I believe that we suddenly will see wage rises if they inflate some more?

I believe property has already hit the buffers with respect to the extent that it can "protect" it owner from further inflation, because wages are a ball and chain for both OOs and BTLs.

Also, if they push up the prices of "other stuff", which causes prices in shops to rise, I don't understand why this won't just bust people, particularly the more recent home buyers.

For this reason I would expect to see Bernanke Inflation = house prices coming down + shop prices going up.

I think about this 'reinflation' issue a lot, especially as they're talking about it a lot on www.FinancialSense.com and elsewhere.

I really don't understand how it can be a success for the average Joe, so why would they do it?

[watchinandwaiting]

This is the very thing I am concerned about as the outcome of Bernanke's seeming desire to try to inflate out of this mess.

The inflation of the money supply in the past five years has found its way into houses but NOT into wages. So why should I believe that we suddenly will see wage rises if they inflate some more?

I believe property has already hit the buffers with respect to the extent that it can "protect" it owner from further inflation, because wages are a ball and chain for both OOs and BTLs.

Also, if they push up the prices of "other stuff", which causes prices in shops to rise, I don't understand why this won't just bust people, particularly the more recent home buyers.

For this reason I would expect to see Bernanke Inflation = house prices coming down + shop prices going up.

I think about this 'reinflation' issue a lot, especially as they're talking about it a lot on www.FinancialSense.com and elsewhere.

I really don't understand how it can be a success for the average Joe, so why would they do it?

In early May 2006, Zimbabwe's government began rolling the printing presses (once again) to produce about 60 trillion Zimbabwean dollars. The additional currency was required to finance the recent 300% increase in salaries for soldiers and policemen and 200% for other civil servants

[MarkG]

I really don't understand how it can be a success for the average Joe, so why would they do it?

IMHO it's not meant to 'help the average Joe', it's meant to push Western wages and standard of living down to Chinese levels.

Of course I don't see how that can happen in a democracy, either, unless it's as corrupt as ours where most votes don't matter and the winner is decided by a few contested seats.

Either way, I'd say the situation has got so out of whack with reality now that there's no way for the government to 'fix' it. No matter what they do a large fraction of the population will be screwed, and they're not going to be happy about it.

[Guest]

watchin - I meant here

[Magpie]

IMHO it's not meant to 'help the average Joe', it's meant to push Western wages and standard of living down to Chinese levels.

Of course I don't see how that can happen in a democracy, either, unless it's as corrupt as ours where most votes don't matter and the winner is decided by a few contested seats.

Either way, I'd say the situation has got so out of whack with reality now that there's no way for the government to 'fix' it. No matter what they do a large fraction of the population will be screwed, and they're not going to be happy about it.

One thing I don't see talked about much is the possibility that the whole free trade and globalisation thing will come under more serious question. It was a common debate in past eras, how much protectionism to apply to economies. Obviously the lack of free trade was sometimes damaging. But it now seems to be completely accepted that free trade is an inviolable principle (I know there are minor ways in which protectionism operates now, but basically we have pretty free international trade in most product areas).

It seems fairly inevitable that this will result in a degree of levelling down - corporate industry of course likes that, but it's not so hot for the "average Joe". If we start seeing more serious economic problems resulting from current imbalances, isn't it likely that the debate about free trade will become a bit more intense?

Edited May 25, 2006 by Magpie

[munimula]

IMHO it's not meant to 'help the average Joe', it's meant to push Western wages and standard of living down to Chinese levels.

Of course I don't see how that can happen in a democracy, either, unless it's as corrupt as ours where most votes don't matter and the winner is decided by a few contested seats.

Either way, I'd say the situation has got so out of whack with reality now that there's no way for the government to 'fix' it. No matter what they do a large fraction of the population will be screwed, and they're not going to be happy about it.

Reading something recently that pointed out that it is only in the last 300 years that the earnings of an average man in the west increased from those in the east.

This is now being unwound, the west can't justify higher wages anymore, while the wages in the east (and rest of the developing world) play catch up there is massive pressure to keep wages in the west down. They can't go up because we are already massively uncompetitive.

Last year it was reported that average UK wages actually went down for the first time.

[Guest]

Last year it was reported that average UK wages actually went down for the first time.

Was it? Do you have a link? That's big news.

[watchinandwaiting]

watchin - I meant here

Yes I realise that, but ultimately if your 9 to 5 job will not cover the cost of living, will you carry on working?

[non-FTBer]

One thing I don't see talked about much is the possibility that the whole free trade and globalisation thing will come under more serious question. It was a common debate in past eras, how much protectionism to apply to economies. Obviously the lack of free trade was sometimes damaging. But it now seems to be completely accepted that free trade is an inviolable principle (I know there are minor ways in which protectionism operates now, but basically we have pretty free international trade in most product areas).

It seems fairly inevitable that this will result in a degree of levelling down - corporate industry of course likes that, but it's not so hot for the "average Joe". If we start seeing more serious economic problems resulting from current imbalances, isn't it likely that the debate about free trade will become a bit more intense?

Absolutely.

You only have to look to France to see protectionism creeping back in gradually (I don't think they ever adopted a real free market approach anyway) in response to economic troubles.

[MarkG]

One thing I don't see talked about much is the possibility that the whole free trade and globalisation thing will come under more serious question.

Well, I think it's pretty clear that 'globalisation' in its current form is doomed: Blair ain't going to find too many 'lazy' British workers voting NuLab if their jobs have been taken by cheap immigrants or shipped abroad, and there's a limit as to how many Brown can hire as 'diversity counsellors' or stick on disability benefit.

The question is what replaces it. My fear is that we'll see a BNP-style 'nationalist' government in a decade or two with Bliar's police state in their sticky little fingers and eager to use it against all immigrants... if neither Labour or Tories will take a step back from rampant globalism, I think that's a strong possibility as people get increasingly frustrated with the 'moderate' parties ignoring them.

In fact, I wouldn't be surprised to see neo-Nazis running countries across Europe before 2050: the whole 'multicultural' thing has been a dismal failure and the backlash could get extreme. Just another reason why I want to get out as soon as I can.

Was it? Do you have a link? That's big news.

Don't know about average wages, but I certainly remember stories saying that disposable income had dropped for the first time in decades.

[watchinandwaiting]

Inflation or Deflation? any takers?

[MarkG]

Inflation of prices, deflation of disposable income, at least for workers: as I said, the goal is to bring British wages down to Chinese levels so we can 'compete' again.

[watchinandwaiting]

Inflation of prices, deflation of disposable income, at least for workers: as I said, the goal is to bring British wages down to Chinese levels so we can 'compete' again.

I dont thik you can have it both ways.

[Magpie]

Well, I think it's pretty clear that 'globalisation' in its current form is doomed.

The question is what replaces it. My fear is that we'll see a BNP-style 'nationalist' government in a decade or two with Bliar's police state in their sticky little fingers and eager to use it against all immigrants... if neither Labour or Tories will take a step back from rampant globalism, I think that's a strong possibility as people get increasingly frustrated with the 'moderate' parties ignoring them.

In fact, I wouldn't be surprised to see neo-Nazis running countries across Europe before 2050...

Unfortunately I agree. I certainly think the idea that globalisation is the answer to everything is a bit of a con, and will be seen as such more and more. And if governments and major parties don't adapt to that it could become a schismatic problem. Anything where you get the far left and far right uniting with a general feeling of dissatisfaction in the country is potentially exposive, and the globalisation issue is likely to grow if we have recession.

The thing I most despise about this government is their idiotic failure to understand that all the freedoms they are throwing away, all the controls they are putting in place will be there for all future governments, potentially including some (even more) horrific ones. It takes centuries to win freedoms, and then you chuck them all away in a burst of trying to use the home office to win votes with crap like ID cards.

I dont thik you can have it both ways.

Why not. All it takes is price rise to outpace wage rises. And that's pretty likely given the weakness of unions and other groups representing workers.

[watchinandwaiting]

Sound familiar?

Debt

Macroeconomists, including Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher. In the 1920s, the widespread use of the home mortgage and credit purchases of automobiles and furniture boosted spending but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble --even if they kept their jobs--and risked default. Indeed, prices and incomes fell 20-50%, but the debts remained at the same dollar amount. As the debtors tightened their belts, consumer spending fell, and the whole economy weakened. With future profits looking poor, capital investment slowed or stopped. In the face of bad loans and worsening future prospects, banks became more conservative. They built up their reserves, which intensified the deflationary pressures. The downward spiral sped up. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression

[watchinandwaiting]

Snip

Why not. All it takes is price rise to outpace wage rises. And that's pretty likely given the weakness of unions and other groups representing workers.

The government have to keep paying essential workers an amount that allows them to live, or they will not work. They may not care if Joe Public does'nt turn up to work at McD's, but when the police won't get out of bed then they have a real problem. GB get the presses rolling!

edit

of course we could end up with an East European police force etc.

Edited May 25, 2006 by watchinandwaiting

[MarkG]

The government have to keep paying essential workers an amount that allows them to live, or they will not work.

Why? What else are they going to do?

[watchinandwaiting]

Why? What else are they going to do?

IMHO people can only tighten their belts so far. if prices rise to the point where going to work will not pay for all the necessities, then one will look for alternatives, ie the black market economy. From memory before the fall of apartheid in South Africa the black market accounted for 50% of GDP.

[Duplex]

We will see wage deflation in real terms. Adam Smith once wrote 'labour is cheap when it is plentiful'.

And globalisation isn't a choice, the term is a misnomer. China and India are just getting their act together. Give Chinese workers a ton of steel and they will make a greater profit with it than a group of American or European workers.