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Risks of Deflation Pt 94
Generali
Posts: 36,411 Forumite
The Bank of England released a report a few days ago detailing the current outlook for lending in the UK.
Unless consumers can be persuaded to start borrowing and banks to lend at much higher levels deflation is very much on the cards IMV.
Net lending to business was negative, -£900,000,000, net mortgage lending in June was £300,000,000 and net lending to consumers was £100,000,000. Assuming the Bank of England stops QE any time soon, it is hard to see what is going to maintain the money supply where it is and prevent deflation.
As much as it sticks in my throat, QE is probably the best of a lot of very unpalatable choices. That the choices need to be made can be blamed on the Labour Government's policies of increasing the size of the state at the expense of the productive parts of the economy but a choice has to be made and this is probably the best one (albeit that I would use QE along with slashing the size of the state and taxes too).
Sleep well!
In 2009 Q2 official data showed that total net lending to businesses fell across all the main industrial sectors. The major UK
lenders reported that the stock of lending decreased again in July. By contrast, capital market issuance has been very strong.
Companies have raised equity to repair their balance sheets, and turned to the bond markets in the face of constraints on
longer-term bank lending. The major UK lenders reported that capital market issuance had contributed to weak net bank lending
and expected issuance to remain strong in the second half of the year. The availability of finance for smaller businesses, without
access to the capital markets, remained more subdued. The major UK lenders confirmed the view they expressed last month that
spreads on new loans had plateaued, with some signs of renewed competition to lend.
Official data for June showed that the flow of total net mortgage lending remained close to its lowest level since the monthly
series began in April 1993. And the major UK lenders reported that weak net lending continued into July. In line with rising
mortgage approvals, gross lending for house purchase has continued its recovery since the beginning of the year, but remortgaging
activity remains very subdued. The major UK lenders reported that over the past month there had been no further increase in their
appetite to lend at high LTVs. Several lenders thought that increased competition to lend might lead to some compression of
spreads in the second half of the year.
Total net consumer credit flows appear to have stabilised at very low levels. The major UK lenders had yet to detect any
significant signs of an increase in demand for consumer credit. And the proportion of applications accepted by the major UK
lenders fell further in July. There was a further widening in the spread over Libor on credit card lending in July, partly reflecting
increases in actual and expected default rates, as reported by lenders in the Q2 Credit Conditions Survey.
Unless consumers can be persuaded to start borrowing and banks to lend at much higher levels deflation is very much on the cards IMV.
Net lending to business was negative, -£900,000,000, net mortgage lending in June was £300,000,000 and net lending to consumers was £100,000,000. Assuming the Bank of England stops QE any time soon, it is hard to see what is going to maintain the money supply where it is and prevent deflation.
As much as it sticks in my throat, QE is probably the best of a lot of very unpalatable choices. That the choices need to be made can be blamed on the Labour Government's policies of increasing the size of the state at the expense of the productive parts of the economy but a choice has to be made and this is probably the best one (albeit that I would use QE along with slashing the size of the state and taxes too).
Sleep well!
0
Comments
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I agree. But how much more QE will the bond market accept?0
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I agree. But how much more QE will the bond market accept?
Japan had almost 3 times the national debt of the UK, and still has twice todays national debt, and they've been QE-ing for a decade or more.:rolleyes:
There will be no "bond strike". Give it up.
Oh, and you still haven't responded to my post proving the point about 70% vs 45% of income. I was right, and you've run away.
Funny that.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
I agree. But how much more QE will the bond market accept?
It's a good question and nobody knows the answer. I don't really see why QE per se would lead to bond investors refusing to buy Gilts, it's only the inflation that could result that would cause that to happen.
As M4 (a measure of the money supply which includes money creation due to fractional reserve banking) is basically flat over the past few months (link - click the image to enlarge it):
then the possibility of deflation is definitely there. Don't forget the flat M4 figures will include QE in the change in money supply calculation, so you need to adjust the big rise in July for that.
Deflation doesn't necessarily mean that house prices will fall in real or even nominal terms of course. It does increase the possibility however.0 -
and nobody knows the answer
Unfortunately there are still many who adopt the knee jerk reaction that the only possible outcome to the massive QE programs adopted by the U.K., U.S.A., and EUR is a Bond strike, and the results of the program are doomed to be Inflationary and Unsustainable.
So far there has been no evidence to support this flawed theory, yet it is still being peddled as fact !!!'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
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I can't see how an annualised money supply growth of 14% o
is supposed to be a good thing....0 -
Where does the commodities cycle (or super-cycle if you are in to such things) fit in with deflation linked to a contraction in the money supply. Oil and other commodity prices are already well off their lows, shipping is up etc, there doesn't seem to be so much upside for sterling left so we could see more 'import inflation' in the prices of traded goods especially if world GDP growth rebounds strongly led by developing countries. We then have two powerful forces pushing in opposite directions and limited policy responses available with monetary policy already as relaxed as it can be and further easing liable to damage the currency and the room for fiscal manoeuvre being shall we say 'constrained'...I think....0
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Unfortunately there are still many who adopt the knee jerk reaction that the only possible outcome to the massive QE programs adopted by the U.K., U.S.A., and EUR is a Bond strike, and the results of the program are doomed to be Inflationary and Unsustainable.
So far there has been no evidence to support this flawed theory, yet it is still being peddled as fact !!!
Only because they've given up on the Weimar Republic/Zimbabwe/Argentina arguments!“I could see that, if not actually disgruntled, he was far from being gruntled.” - P.G. Wodehouse0 -
I can't see how an annualised money supply growth of 14% o
is supposed to be a good thing....
I can't see why I should be ar*ed to explain that the Velocity of MS being a far more important factor !!!'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
I can't see why I should be ar*ed to explain that the Velocity of MS being a far more important factor !!!
La la la Bamber Gascoigne (for it is he): Your starter for 10.
If net private sector lending is negative is velocity of circulation likely to be rising or falling?
<<bzzzzzz>>
MSE College, purch.....0
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