Britain faces deflation !!!

dopester

Prof. Krassimir Petrov

http://video.google.com/videoplay?docid=-2382683217626362775&q=krassimir+petrov

Well worth watching. Explains it very clearly.

dopester

Walletwatch wrote: »

Absolute nonsense in a thread that has had some rather forceful arguments so far. Will allow you the fact that you posted (or rather spewed) at 11:35 on a Saturday night, so were probably sloshed, but better come back and redeem yourselves with an explanation of exactly what you meant.

Thanks.

Very generous of you for the pass. You weren't that wrong, it was spewed and blunt and deliberately narky without offering anything - was tired and grumpy.

I'll allow others to add further indepth reasons for deflation, or any argument of inflation / stagflation / ect.

WTF?_2

Generali wrote: »

Deflation is a definite possibility from here although far from being a certainty IMO. It depends on whether businesses start borrowing from banks again to invest and thus employ people, especially in the US.

The Swiss used to charge people to save money when UK marginal tax rates were > 100%.

I have a feeling that the Swiss won't be charging people to hold their money this time around:



Not if they want to keep their economy safe from a banking collapse.....

baby_boomer

Nice chart. The Swiss one is not as big as Iceland, though. And I sort of still trust that the Swiss have more banking nous than the parvenu Icelanders. It's certainly one to watch.

More broadly.

I had always assumed that the larger role of the state in the 2000s as compared to the 1930s, combined with Keynesian economics which Gordon appears to be practising [no cuts in government on my watch even though I'm borrowing so much to save the banks] would work against deflation.

But I guess there can come a point where governments are so indebted and taxes already so high that they can't add their two-penn'orth to reflate an economy.

With so many homeowners, and other debtors, I have also assumed that there would be a democratic pressure to reflate - however much it might be resisted by pensioners and some baby_boomers.

In addition, government borrowing will hit the £, which will in turn add to inflationary pressures - think of all that imported energy in future years.

Sunday Telegraph link - Darling to spend his/our way out of recession

A Labour government determined to spend, will spend, and will be backed up by the BBC and only cautiously opposed by a timid Conservative Party.

Sunday Telegraph Comment

"...Borrowing and spending more today will only serve to build up inflation in future years. This was the lesson which Keynesians learnt to their cost, when the high-spending years of plenty were followed by the misery of the 1970s."

Then again:

Financial Mail - Economy set to shrink until 2010

Still about this one

jim83

dopester wrote:

The money supply actually increased in the US Great Depression.

Nope. It fell by 27%. (source)

There is a fundemental difference between 1929 and now - there was a gold standard back then. Printing money was a lot harder. Eventually they had to take the drastic action of confiscating gold from the general public to stop them hoarding it.

Now we have a situation where an unprecidented avalanche of money is hurtling towards general circulation. Graphs like this illustrate the scale of the problem (though as it was generated on 1/9/08, particular graph is out of date - the line should be about twice as high when it updates)

I accept that there is a current defaltionary atmosphere in the markets as institutions are selling off anything in order to achieve immediate liquidity for debt settlement, but it's only a matter of time before it swings in the opposite direction. The debtors will be taken out first, then the savers.

ixwood

http://www.fleetstreetinvest.co.uk/ is really good IMHO for understanding all this and getting the real picture. It's aimed at investors, but good for info. The free emails are normally pretty good and the daily reckoning is usually a good informed read.

They've been talking about the ongoing battle between inflation and deflation and the movement of wealth from the west for ages now. Much more informed than the regular press.

And http://www.moneyweek.com. For the couple of years I've been getting the emails from them both, they've been spot on about pretty much everything.

WTF?_2

jim83 wrote: »

Nope. It fell by 27%. (source)

There is a fundemental difference between 1929 and now - there was a gold standard back then. Printing money was a lot harder. Eventually they had to take the drastic action of confiscating gold from the general public to stop them hoarding it.

Now we have a situation where an unprecidented avalanche of money is hurtling towards general circulation. Graphs like this illustrate the scale of the problem (though as it was generated on 1/9/08, particular graph is out of date - the line should be about twice as high when it updates)

I accept that there is a current defaltionary atmosphere in the markets as institutions are selling off anything in order to achieve immediate liquidity for debt settlement, but it's only a matter of time before it swings in the opposite direction. The debtors will be taken out first, then the savers.

That's my thinking too - right now, deflation seems to be winning out. But sooner or later that tide of printed-up money (not literally, but through inflationary monetary policies and unlimited central bank 'loans' that endlessly roll over) is going to start to hit. At that time, better switch into inflation-proof things extremely quickly.

The really scary thing is what happens after the inflationary boom turns to all-out, unstoppable deflationary death-spiral bust, which it surely must.

We've had years of inflation - money being created out of thin air with no corresponding useful product in the economy and the bubble blown up and up beyond belief. The markets are now trying to correct that with a very sharp deflationary 'bursting'. But our governments are doing everything they can to prevent the correction. It seems that with modern fiscal policy they can much more easily flood the market with liquidity than they could in the 1930s, who knows what the results are going to be when all that new money comes home to roost?

baby_boomer

Did governments attempt to get out of the 1930s deflation by printing money? Not according to:

kennyboy66 wrote: »

as far as I was aware money supply (as measured by M1 or M2) declined from in 1930 and subsuquently declined in 1931, 1932 and 1933.

Deposits declined in each of those 3 years also. The fall in M1, M2 and deposits from 1929 levels was approx 30-35%.

It was only the amount of currency in circulation that stayed roughly the same.

who supports

jim83 wrote: »

[The Money supply] fell by 27% [in the Great Depression]. (source)

I have no doubt that our own Labour government under Gordon will be less shy in pulling every string available, including the money supply. The debate would seem to centre around whether their sphere of action will be more constrained than they imagine.

kennyboy66_2

Here are the US money supply stats;

http://www.sjsu.edu/faculty/watkins/depmon.htm

Jim83's "source" link is particularly good - especially the wisdom of government spending programmes. Perhaps we could have some prime ministers heads carved into stone somewhere.

dopester

jim83 wrote: »

Nope. It fell by 27%. (source)

There is a fundemental difference between 1929 and now - there was a gold standard back then. Printing money was a lot harder. Eventually they had to take the drastic action of confiscating gold from the general public to stop them hoarding it.

Now we have a situation where an unprecidented avalanche of money is hurtling towards general circulation. Graphs like this illustrate the scale of the problem (though as it was generated on 1/9/08, particular graph is out of date - the line should be about twice as high when it updates)

I accept that there is a current defaltionary atmosphere in the markets as institutions are selling off anything in order to achieve immediate liquidity for debt settlement, but it's only a matter of time before it swings in the opposite direction. The debtors will be taken out first, then the savers.

I get your point - but I think we are looking at it from different angles.

I argue the money supply increased... but it didn't get out in to the economy proper for any effect - just like it won't this time. Also there was a strong public-demand for no-leverage money (cash.. and credit revulsion too from those who still could borrow) to manage and guard their own savings - but not necessarily to spend it with wild freedom in the economy. Consumer retrenchment!

Following the stock market crash in 1929, currency grew by 16 percent annually until 1933. This was a contributing factor to the shrinkage of the overall money supply. Deflation happened in spite of the fact that the Fed, by the account its chief economist, "embarked on a policy of easy money which it pursued through the depression." The Fed kept the monetary base expanding at a 4 percent annual rate from 1929 through 1933, yet the overall money supply collapsed, partly because of strong demand for no-leverage money.

-William Rees-Mogg & James Dale Davidson (1994)

Deflation is multi-pronged. We are trapped in the pincers. Banks want to lend but only to good credit risks with good prospects... who themselves don't want to borrow due to uncertainty. Banks want their money bank and will refuse loans and credit to individuals and businesses with poor credit or negative prospects.

You can't just give cash/credit money away... else anyone who holds gilts and treasuries (government debt) would sell them and it to safety elsewhere.. which can be done in an instant via a computer trade. Obviously you would if you saw the value of your investment being destroyed with such actions, unless, with the Chinese for example allowing such huge generosity to see their investment cut in value.

If not shifting the money to other currencies because of equally negative conditions - it would shift it in to precious metal coins hoards and jewellery and art ect.. and anything that might hold value - making the government even less creditworthy, pushing up interest rates.

Enterprise is collapsing due to the peak having been reached of an amazing debt fuelled bubble with complicated financial instruments - many of which have either collapsed in value or not tradable. You just can't keep the boom going or manage a wonderful recovery... nor a gentle slowdown. Deflation is complicated. Deflation like that scene in Matrix 2 and 3 where Neo is fighting hundreds/thousands of Mr.Smiths (Deflation).



Except our Gordon "Neo" Brown and all his advisers are going to get exhausted and confused just a quarter of the way in to battle. Deflation is too much to deal with and comes at you from all angles. It can't be fought.

It would be so much more honest and realistic were they to recognise the markets (including property) have massively topped out on years of cheap credit. That the economy needs to go through a slump for the transition and for the excesses and the rot to be dealt with - except politicians won't say that willingly - they will be forced in to allowing it eventually.

Warning Signs of deflation
-Continued shrinkage of M-2 as a multiple of the monetary base.
-Continued, double-digit increases in the portion of money supply that is held as cash.
-A flight from high-risk instruments such as jumbo CDs.
-A dramatic drop in the market price of freely trading instruments that mimic the value of bank collateral.
-Falling commodity prices.
-Continued declines in real estate, in spite of "easy money."
-A fall in loan demand in the face of falling interest rates.

This last point is part is particularly important. The Fed immediately dropped the discount rate in 1929 from 6 percent to 5 percent. Within 2 weeks, the rate had been pushed down to 4.5 percent. By March 13 of 1930, it stood at 3.5 percent. In the weeks after the crash, "the system expanded credit enormously."

Nonetheless, after the crisis subsided, falling interest rates were not accompanied by a growth of money aggregates. A repeat of this would be an early confirmation of a coming deflationary collapse.

-William Rees-Mogg & James Dale Davidson (1994)

Even good credit risks didn't want to borrow. Less money (cash and credit) circulating in the economy for all the items out there business is selling.. forcing prices down and increasing competition for the available money.

The timidity of the banking system appears to have been general and widespread. Indeed, the 1939 survey found that over half the reasons given for credit refusals by banks were "bank policy"; only a third were because of "the condition of the borrowing concern."

-Michael A.Bernstein
The Great Depression

For bad credit risks and those businesses with negative coming down from the boom.. credit restricted.

Newspapers of 1930:

Extraordinary easy money and stability in the commodity markets are important factors working to that end [making for prosperity]. - Wall Street Journal (April 1930)

...fundamental credit conditions have undergone a marked change for ease not only in this country but all over the world. - New York Times (April 1930)

"`An outstanding development is the sharp drop in interest rates, marking the end of a period of credit strain and bringing rates to the lowest point in several years. In its bearing on general business conditions the advent of really cheap money has been widely heralded, and rightly so, as the most important and promising feature in the general situation. That cheap money is a tonic for the recuperation of business has been proven by long experience.'" - New York Times (April 1930) - quoting April bulletin of the National City Bank.

"Money rates declined rapidly to the lowest levels since early 1925, the April 1 review of the Federal Reserve Bank of New York states, and accompanying this ease in money, the bond market in March made a vigorous recovery." - New York Times (April 1930)

Also notice the recurring references to monetary policy. Contrary to the current wisdom that stupidly tight money turned the '29 stock market crash into depression, accounts of 1930 speak of "extremely easy money."

What what seemed to be easy money at the time was denounced later as "too tight" may only show that the dynamic of contraction works behind the scenes. More muscular attempts to counter that dynamic process by inflating faster would paradoxically strengthen the deflationary impulse.

-William Rees-Mogg & James Dale Davidson (1994)

Lower rates and easy money.. but money available but only to sound credit risks due to enterprise collapsing coming down from the peak of a boom. Credit restricted to those individuals and businesses of negative prospects. And credit not wanted (in general terms) by those who could even qualify for credit.

A loan given has a value on a bank's books. Banks even sell loan-books on to other banks - or they did. They don't happily do that at a loss.

No bank is going to really want to lend for an asset purchase or to a business, and write a £1000 loan which is reassessed at £600 on the books some 12/24/36 months later. You could take more chances with some riskier loans in the boom (not that I would) and sell off poor performing loan books for a loss... as profits in other books great and make up for it. Banks will be ultra wary when all loans are under pressure.

“...The notion that easy money is a magic tonic that can counter the forces of contraction is likely to seem alluring as an argument than it proves to be a fact. In 1929, neither the Federal Reserve nor the Bank of England could overcome the worldwide forces making for contraction just by manipulating numbers on their balance sheets. Economic historian Joseph W. Davis put it this way:
“A careful reading of a mass of contemporary literature and an analysis of economic and financial developments in 1930 yield little or no support for the views (a) that Federal Reserve policy in that year was open to serious criticism, or (b) that flooding of the money supply by the Federal Reserve System would have effectively checked the contraction or moderated the current and ensuing collapse. With enterprise "collapsed," the forces making for contraction were too strong to be overcome by the stimulus of artificial reducing short-term money rates below the very low levels actually reached” (Davidson & Rees-Mogg, p.350).

“"The Federal Reserve policy of cheapening credit through the purchase of government bonds has been unable to make a dent in the conservatism of borrower or bank lender, in short, every anti-deflationary effort has yet to provide positive results"” (Editorial, Barron’s, July 11, 1932)