Monday, October 12, 2009

Deflation

The perils of deflation are still lurking

Roger Bootle wrote "The Death of Inflation" so perhaps his mind is a bit fixed, but he points out that globally prices have fallen more than the UK, we have only been spared through sterling devaluation. Also, he points out that in developed Western societies (he doesn't mention the UK specifically) underlying productivity growth is 2%, from that he suggests that any wage growth less than 2% is deflationary. Fair enough. The 2% value rang a bell though because that has been our inflation target, in which case with our productivity growth, we have been following a zero inflation policy? Doesn't mention asset prices or debt. Conclusion is deflation will be waiting in the wings over the next few years.

Posted by stillthinking @ 07:58 PM (1498 views)
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19 thoughts on “Deflation

  • I sense another round of QE coming. The softening up process begins.

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  • The Bank of England will desperately try to prevent the pound in people’s pockets gaining in value with deflation by printing money and devaluing the pound but ostensibly the cast is set. Once you’ve had an inflationary boom, you can’t create another one by gaming the system again or fiddling the numbers.

    It should never be forgotten that the defalationary spiral (which is now inevitable – it is locked in) was created because the Bank of England studiously ignored house price inflation. Although they will insist that is a ‘global phenomenon’, history will judge in retrospect that the Bank created the rod for their own backs, guided by a mixture of laissez-faire blind market faith, boom-time haymaking mentality and a sprinkling of baby-boomer self-interest.

    In centuries past, Bank officials would have been publicly pilloried, paraded along the Thames and strung up in the tower for such corruption.

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  • 2. paul said…In centuries past, Bank officials would have been publicly pilloried, paraded along the Thames and strung up in the tower for such corruption.

    paul can you see where the problem is? You have countered everything you said in that last sentence.

    Inflationary bust for some.

    Deflationary boom for others.

    Like the overly fussy holiday painter, they can’t stop meddling.

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  • Don’t follow where you think I’ve gone wrong there but whatever.

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  • 4. paul

    No “inflationary boom.” Hey, but whatever. lol

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  • paul….When the BOE keeps rates this low and hopes to keep them low untill 2011 and then @ 2% by 2014 and Brown running around like a headless chicken raiding assets what do you expect. Sterlings is going down. Need I say more.

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  • Average wages have stagnated – deflated according to the 2% model – over the last 20 years, meanwhile a money-as-debt credit explosion occurred in the housing and financial markets – inflationary albeit not recorded as such by the statisticians (they prefer to measure the amount you pay on a mortgage monthly as the measure, not the cost of the underlying asset. Odd that they don’t price the food basket in terms of the credit card expenses…)

    I’m really not sure what deflation means any longer, the figures are so manipulated – does it mean wages will continue to stagnate? It might be argued they’ve already deflated relative to policy inflation. Denominated in pounds? what is a pound sterling worth? manipulated. It seems to me the bubble was housing and financial/corporate equity and debt, and if these deflate enormously, what is the problem, if they remain as isolated from the real economy (where wages stagnate) as they have been until now. Any talk of wage inflation is always stamped on hard by the authorities but they allowed a debt-leveraged inflationary explosion to occur in the housing market as a matter of policy (Tory and Zanulabour) I think if housing and corporate balance sheets shrank in a deflationary way, whilst labour costs remained about the same, that would be an ideal outcome, probably by reversing some immigration to create local skills shortages that will force employers to pay for labour at a steady rate even as their asset-side gets marked-to-market in the downward, deflationary direction.

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  • paul ” that the defalationary spiral (which is now inevitable – it is locked in) ” – have you moved over to the deflationary side? Just wondered because you were an inflationist before ….have i got that right?

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  • Le Crunch “Sterling[s] is going down. Need I say more.” well probably not this time but you are normally mr opaque. Down to what Le Crunch, against what? C’mon lets have your head on the block with an unambiguous posting……

    Yesterday the $ was finished now the £s finished, any advance on those two? So is the yen and euro to stay (relatively) strong?

    All this “read between the lines” is a bit nonsensical to me who deals in absolutes. I cant say “oh its going down, its finished without selling, having a target and a stop in case i am wrong”….

    Oh but hold on silly me – le crunch is never wrong ! :-).

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  • techieman

    I’ve never been on the inflationary side. I’ve always insisted that the UK is following the Japanese model almost to the letter.

    The difference is the government’s (I’m including the ‘independent’ Bank of England there too) appetite for systemically destroying the pound’s value in order to support domestic house prices by attracting foreign buyers. However it will be mostly for nowt – it’ll only succeed in locking out more of the UK population from owning property as the deflationary trend is locked in.

    This is what’s happening now – most of the UK is looking on in horror as house prices appear to be rising further but only because the pound is falling Zimbabwe-style.

    Labour is doomed.

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  • perhaps i am confusing you with someone else then…… apologies.

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  • 9. techieman

    I am a technical trader and as such trade purely what I see. That means I will trade short or long on any pair as long as it remains

    profitable to do so. The dollar is finished as a reserve currency.( hint look at Iran) It will be dropped. I am not even going to bother to

    explain why.

    Waste of my time as it is conspiraloon stuff. “So is the yen and euro to stay (relatively) strong?” As you should know techie one always

    trades the strongest with the weakest currencies on a week to week basis. As to which of these will be strongest in the future I don’t know.

    I would not bank purely on the Yen personally and would prefer to spread my risk.

    Why should I give you all the information I have. I spend quiet some time diggin my fundamentals out.

    The devil is always in the detail anyway. “le crunch is never wrong” Not true, but I am right enought times to remain a trader and firmly in

    the Conspirallon Club on fundamentals and my MOJO MAC/D is still working for me. Maybe that’s the problem.

    I posted a link yesterday http://www.youtube.com/watch?v=Xylr3awjI9E

    Yes that’s my attitude of late. Take it or leave it!

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  • Boody hell crunchy, where’d all that come from?!? lol.

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  • Nearly forgot crunchy. Missed your post on Friday “this is a one off kid” – got a link?

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  • come on le crunch – its good to share . You do make me smile , reading your posts is like a cold reading ! I have never seen you post anything concrete . Just a few generalities 🙂

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  • LOL You tell someone the dollar is finished and that’s not news.

    Sorry non believers but you don’t deserve even that information.

    He who laughs last and all that techie and rumble. LOVE IT!! : )

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  • Techie I told you to buy oil @ $35 Remember! and you were unsure. So what’s the point.

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  • Le crunch – fairs fair you did say to buy Oil @ around $35, but no stop no target so in fact no trade. I was unsure? Yep you are right i was unsure but then again [email protected] works a bit better with a cover @ 54 scale down. So no i decided to leave that one alone. As for the dollar …. we shall see. Its always the turns that are difficle mon amie. Not the continuations.

    So now where to sell Oil? Now $100 $200??? please do tell. Oh and dont be so defensive, im only saying anyone can play with MACD thats a bit b-o-r-ing, i was doing that 25years ago, and its no fun or challenge too mechanical :-).

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  • So what’s the point.

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