Risks of Deflation Pt 94

Thrugelmir

HAMISH_MCTAVISH wrote: »

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.

Japan is totally different to the UK. As Japanese peple have a savings culture. :rolleyes:

Japanese national debt is a real burden to the economy. It’s a huge figure which means the government will be limited by debt repayments for many years.
However, there are two factors which make it more bearable. (Other countries may simply be unable to borrow so much)

1. The first factor is that the Japanese private sector have a large appetite for buying government bonds. This is because domestic savings are high. Therefore, people have spare cash to buy bonds and lend the government money. In a country with a very low saving rate, there would be less people willing / able to buy government debt.
2. The second factor is that interest rates in Japan are very low. (Central bank rate is 0.3%) bond yields are also very low. Therefore, the interest payments on the debt are relatively low. If interest rates in Japan were say 5%, the cost of servicing the national debt would be much higher.

Are the UK population going to buy gilts? No, we prefer property as its a better return. :rotfl:

Thrugelmir

michaels wrote: »

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'...

Good post. We have some difficult problems to deal with in the future. Particularly as we lag other other G20 countries coming out of the global recession.

Mr_Mumble

Deflation hyperbole Pt 94. CPI is, still, far nearer target than during the boom years. This despite huge falls in asset prices. Even the short-term dip lower may not play out as mainstream economists expect given the increase in energy and raw material pricing. Velocity is at roughly half its peak levels, that is far more troubling than stagnant money supply.

Generali, you should know that the BoE can print money for as long as they wish to keep serious deflation at bay (the proverbial chucking cash from helicopters - Bernanke's speech is referenced in the BoE's QE raison d'etre piece - final page). That you disagree/ignore Bernanke (and by extension Friedman) but agree with QE (and by extension Keynes - unfortunately along with Bernanke ) appalls me .

You don't give the idea that deflation may be good a first thought, why? Shouldn't those who were stupid enough to buy overpriced assets be hurt on the way down rather than being bailed out by socialising the losses through dilution of currency? And it is happening, most of that QE money is going into real assets - commodities and equities are going up thanks to the value of fiat currencies going down right now just as the BoE intends it to.

The scaremongering over the great depression and the spectre of deflation shouldn't be overblown by serious economists. We have deposit insurance, freer trade, central banks who will not follow policies that intentionally reduce money supply. Even the likes of Paul Krugman have favoured the Japan scenario (despite the humongous differences in demographics and culture) rather than tout 1932. In terms of real-output this recession is unlikely to be be as bad for the US as the recession(s) of 1980-1981 and, assuming a Q3 pick-up, perhaps even the 1957 recession.

purch wrote: »

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.

Still? We're only a couple of years from the very embryonic start of the crash, only 10 months ago the BoE still had interest rates at 4.5% and it's 9 months when economists usually say we feel the full affects from interest rate changes (and theoretically QE). It could well take a decade or two for everything to play out. There are always differing short-run and long-term consequences to egotists playing with the money supply. Your comment reminds me of the property bulls denigrating the bears in 2007 or perhaps 2006, 2005, 2004, 2003... having an irrational collective doesn't make the irrational right.

So far there has been no evidence to support this flawed theory, yet it is still being peddled as fact !!!

The 1970s didn't prove that theory in your eyes? Just because we had central bankers far more worried about a 1930s than 1970s scenario doesn't mean high-inflation isn't going to happen. Sure, the economists who didn't see this all coming may well steer a goldilocks path that amounts to gradual growth without an explosion in inflation... .

It is far easier to prevent the 1930s scenario of deflation than the 1970s one of inflation. At worst central bankers should leave us in a Japanese liquidity trap but that is the very worst considering the difference in economies. When it comes to the simple, but all important matter of incentives, anglosphere central bankers were always going to strongly favour publicising the 1930s scenario. Similarly it is no coincidence that the the Bundesbank dominated ECB were, and still are, publicly more worried about inflationary forces than most others.

The UK and USA can not continue to act like Argentina indefinitely since they will eventually become them.

mewbie_2

HAMISH_MCTAVISH wrote: »

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:

Is Japan what you would see as a success story?

Generali

Mr_Mumble wrote: »

Deflation hyperbole Pt 94. CPI is, still, far nearer target than during the boom years. This despite huge falls in asset prices. Even the short-term dip lower may not play out as mainstream economists expect given the increase in energy and raw material pricing. Velocity is at roughly half its peak levels, that is far more troubling than stagnant money supply.

Generali, you should know that the BoE can print money for as long as they wish to keep serious deflation at bay (the proverbial chucking cash from helicopters - Bernanke's speech is referenced in the BoE's QE raison d'etre piece - final page). That you disagree/ignore Bernanke (and by extension Friedman) but agree with QE (and by extension Keynes - unfortunately along with Bernanke ) appalls me .

You don't give the idea that deflation may be good a first thought, why? Shouldn't those who were stupid enough to buy overpriced assets be hurt on the way down rather than being bailed out by socialising the losses through dilution of currency? And it is happening, most of that QE money is going into real assets - commodities and equities are going up thanks to the value of fiat currencies going down right now just as the BoE intends it to.

The scaremongering over the great depression and the spectre of deflation shouldn't be overblown by serious economists. We have deposit insurance, freer trade, central banks who will not follow policies that intentionally reduce money supply. Even the likes of Paul Krugman have favoured the Japan scenario (despite the humongous differences in demographics and culture) rather than tout 1932. In terms of real-output this recession is unlikely to be be as bad for the US as the recession(s) of 1980-1981 and, assuming a Q3 pick-up, perhaps even the 1957 recession.


Still? We're only a couple of years from the very embryonic start of the crash, only 10 months ago the BoE still had interest rates at 4.5% and it's 9 months when economists usually say we feel the full affects from interest rate changes (and theoretically QE). It could well take a decade or two for everything to play out. There are always differing short-run and long-term consequences to egotists playing with the money supply. Your comment reminds me of the property bulls denigrating the bears in 2007 or perhaps 2006, 2005, 2004, 2003... having an irrational collective doesn't make the irrational right.

The 1970s didn't prove that theory in your eyes? Just because we had central bankers far more worried about a 1930s than 1970s scenario doesn't mean high-inflation isn't going to happen. Sure, the economists who didn't see this all coming may well steer a goldilocks path that amounts to gradual growth without an explosion in inflation... .

It is far easier to prevent the 1930s scenario of deflation than the 1970s one of inflation. At worst central bankers should leave us in a Japanese liquidity trap but that is the very worst considering the difference in economies. When it comes to the simple, but all important matter of incentives, anglosphere central bankers were always going to strongly favour publicising the 1930s scenario. Similarly it is no coincidence that the the Bundesbank dominated ECB were, and still are, publicly more worried about inflationary forces than most others.

The UK and USA can not continue to act like Argentina indefinitely since they will eventually become them.

It's not really a case of ignoring anyone. If M4 is flat despite all the QE that's been thrown at the money supply, then that suggests to me a risk of deflation. Especially as QE is meant to be completed now as a program (?).

I don't recall saying anywhere in my post whether deflation was a good or a bad thing BTW.

sabretoothtigger

Ive also heard a few places a few clever people say that asset devaluation is the next risk and the dollar will become stronger.
I dont really understand it though and my brain starts to smoke if I try too hard

Thats a great sig btw, Ive not heard that one before. Quite relevant also it seems to me, I dont think many see clearly the consequences

Especially as QE is meant to be completed now as a program (?).

QE is winding down in USA but in the UK they have opted to renew the scheme afaik

BoE plans new 50 billion pound boost for UK economy

Thu Aug 6, 2009

http://www.reuters.com/article/businessNews/idUSTRE57522C20090806

Proportionally we are more into this then the USA, Keynes was one of ours after all I guess. UK will be the greatest modern demonstration of just how bad or good this policy is or so Ive read.


Roubini wrote a good article in the FT recently outling side effects of these extra ordinary manoeuvres.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

http://www.ft.com/cms/s/90227fdc-900d-11de-bc59-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F90227fdc-900d-11de-bc59-00144feabdc0.html&_i_referer=http%3A%2F%2Ftwitter.com%2F


Maybe like Japan the money will go abroad instead of creating inflation at home.
An advantage of a long term weaker currency is for forex traders to take that currency and invest elsewhere with no fear of losing money on the rate increasing against them whilst the money is out of the country.

So why not invest in australia or new zealand with their higher rates, cheap credit at home means there is money made on the difference.
I can take my cheap british money to australia, buy some BHP stock. Service the chinese economy with commoditys they cannot grow without, get a dividend, get some capital growth and on top I will probably gain a greater exchange rate on my Australian dollar vs the British pound whose bank will have printed another load of money to replace the ones I removed from the country .
It seems to work out a great policy

Commoditys are a good hedge against inflation, I think looser currency means greater investment here too and longer term higher average prices for everyone but especially those at home with the weak currency.

Im not sure if that will be the consequences exactly but this free money will go somewhere as sure as a leaky bucket gets your feet wet. I dont think it'll benefit uk that much because an investor will place money where the real growth in demand (purchasing power) is.
Too much money supply, weakened demand?

tommy75

less deep:
Asda smart price vodka went up £1 per bottle last week and as for that pesky petrol... :rolleyes:

Anybody notice that pretty much everything is getting put in smaller and smaller packaging but the price is the same or increasing?

Only thing deflating is my bldy wages!

Generali

sabretoothtigger wrote: »

Ive also heard a few places a few clever people say that asset devaluation is the next risk and the dollar will become stronger.
I dont really understand it though and my brain starts to smoke if I try too hard

Thats a great sig btw, Ive not heard that one before. Quite relevant also it seems to me, I dont think many see clearly the consequences


QE is winding down in USA but in the UK they have opted to renew the scheme afaik



http://www.reuters.com/article/businessNews/idUSTRE57522C20090806

Proportionally we are more into this then the USA, Keynes was one of ours after all I guess. UK will be the greatest modern demonstration of just how bad or good this policy is or so Ive read.


Roubini wrote a good article in the FT recently outling side effects of these extra ordinary manoeuvres.



http://www.ft.com/cms/s/90227fdc-900d-11de-bc59-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F90227fdc-900d-11de-bc59-00144feabdc0.html&_i_referer=http%3A%2F%2Ftwitter.com%2F


Maybe like Japan the money will go abroad instead of creating inflation at home.
An advantage of a long term weaker currency is for forex traders to take that currency and invest elsewhere with no fear of losing money on the rate increasing against them whilst the money is out of the country.

So why not invest in australia or new zealand with their higher rates, cheap credit at home means there is money made on the difference.
I can take my cheap british money to australia, buy some BHP stock. Service the chinese economy with commoditys they cannot grow without, get a dividend, get some capital growth and on top I will probably gain a greater exchange rate on my Australian dollar vs the British pound whose bank will have printed another load of money to replace the ones I removed from the country .
It seems to work out a great policy

Commoditys are a good hedge against inflation, I think looser currency means greater investment here too and longer term higher average prices for everyone but especially those at home with the weak currency.

Im not sure if that will be the consequences exactly but this free money will go somewhere as sure as a leaky bucket gets your feet wet. I dont think it'll benefit uk that much because an investor will place money where the real growth in demand (purchasing power) is.
Too much money supply, weakened demand?

That's a really interesting post, thanks. The Roubini article gives food for thought.

It is quite possible that the money currently being QE'd into the economy is going abroad for the reasons you suggest. IIRC, most of the first round of QE went to foreign holders of Gilts. Perhaps a bubble will spring up in Chinese and Aussie asset prices, especially as everyone knows that the Chinese are out looking to buy resources (eg this deal to supply China with huge quantities of LNG and people here are talking about Aus becoming the Saudi of the LNG market).

So what happens if the QE'd money mostly goes abroad? Presumably deflation in the UK coupled with a falling exchange rate - not a nice combination for an importing nation although one that could lead to a much stronger trading nation down the track.

Ultimately, the UK has too much going for her for these current problems to derail the economy entirely. I think things could be very unpleasant in the medium term though.

Degenerate

Generali wrote: »

So what happens if the QE'd money mostly goes abroad? Presumably deflation in the UK coupled with a falling exchange rate - not a nice combination for an importing nation although one that could lead to a much stronger trading nation down the track.

Except the falling exchange rate will generate inflationary pressure to counteract the deflation. Merv's already covered this one - he explicitly said the money going abroad would not be a problem as it would still create the desired effect via exchange rates.

The BOE's remit has not changed, they're still targeting a 2% positive inflation rate with this QE, and since our capability to debase the currency is limitless, I don't see why they won't achieve it.

Generali

Degenerate wrote: »

Except the falling exchange rate will generate inflationary pressure to counteract the deflation. Merv's already covered this one - he explicitly said the money going abroad would not be a problem as it would still create the desired effect via exchange rates.

The BOE's remit has not changed, they're still targeting a 2% positive inflation rate with this QE, and since our capability to debase the currency is limitless, I don't see why they won't achieve it.

The obvious way to fail is that nobody has an idea how much cash is needed to keep inflation in positive territory. Given the M4 figures for the past few months, the cash isn't flowing through and being spent.