Risks of Deflation Pt 94

Mr_Mumble

Generali wrote: »

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.

It does if the BoE didn't act but they can and do. Based on Friedman's want for a 5% k-percent rule money (iirc BoE considers a 7.5%pa expansion optimum) supply is closer to the optimum at 0% than it was in the crazy boom days where touching 20%.

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

Nope

35 The Committee agreed to spread the additional purchases of £50 billion evenly over three
months so that their completion would coincide with the preparation of the November Inflation Report
projections. Nevertheless, the scale of the asset purchase programme would continue to be reviewed
every month in the light of economic developments. The Committee noted that the increase in the
scale of its asset purchase programme required an increase in the range of maturities of government
debt that the Bank was willing to acquire to include all conventional gilts with a minimum residual
maturity of greater than three years.

With 3 members wanting an extra £75bn rather than £50bn in the August meeting the BoE can continue on this course, its not as if any politician has seriously questioned the scheme.

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

Probably a little presumptive of me to consider "risks" as a negative all the time but a person saying there is a "risk of England winning the Ashes" rarely wants it to happen unless said in jest.

baileysbattlebus

Thrugelmir wrote: »

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

Quote:
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:

It's difficult to equate Japan with the west - although we all do try to.

One of the reasons the public buy bonds, is that the gov't advertise them, you can buy them from about $100 and the returns are better than savings rates. That and the fact their culture is totally different to our own.

The relationship between state and the individual is very different in Japan - in the past there was no individual as such, - they were members of an ie (family), it was very ordered and structured, with set roles for family members, even the dead, the younger members of the ie, saw their duty to the house as "loyalty to their parents for benevolence received".

The ie was abolished as a legal entity after WW2 by the allies, not surprising really, after the loyalty shown by the Japanese people to the emporor etc. But this was a system that evolved over hundreds of years - and is not going to disappear in 50 or 60 years regardless of the law.

The ie is still in Japanese society - putting the "family" before self - to a lot of Japanes the ie is now the company they work for. If the ie need help they will help, if they need help the ie will help them.

You can see the concept of the ie if you ever watch something like Power Rangers - it's about group unity, working together and the needs of the group take precedence over individual needs and accomplishments.

Japanese society functions in a way that would be totally alien to us - I used to work for Panasonic and the Japanese who came to the UK to work with us had to go on a course to try and understand why we could be argumentative or a bit confrontational at work, even with your boss if you disagreed with him. It was a concept totally alien to them.

So I'm not surprised that Japanese people buy government bonds.

Japan has one big problem that any amount of bond buying is not going to make disappear. That of a rapidly aging population. They have a high capital expenditure / high saving / low consumer economy, and who are probably the lowest consumers and need the highest amount of capital expenditure - the older members of society. So Japan is very reliant on exporting their excess - and really exposed to the whims of global consumerism.

As the population decreases by 30 or so million over the next 40 years and the ratio of workers to retired becomes smaller than it is now - it's a problem that is going to get worse. So their national debt will probably not shrink anytime soon. And the publc will probably carry on buying bonds.

Their retirement age is currently 62 - most women leave work on marriage or on the birth of their first child. So they really need to get women to stay in the workplace. There is an election on the 30th of this month - the opposition party is promising fairly large payments to families including help with childcare - to encourage them to have children.

Jonbvn

baileysbattlebus wrote: »

It's difficult to equate Japan with the west - although we all do try to.

Good post BB. Having worked in Japan and worked for one of the big keiretsu's for several years I confirm what you have posted.

It was actually quite strange when I left this big company. They accused me of betraying them.:p

baileysbattlebus

Jonbvn wrote: »

Good post BB. Having worked in Japan and worked for one of the big keiretsu's for several years I confirm what you have posted.

It was actually quite strange when I left this big company. They accused me of betraying them.:p

Yes, I can believe it - some of the guys we had from Japan had a pretty tough time when they went back - it had been looked on as a form of betrayal to leave the plant they were in and come to the UK.

The keiretsu is another concept totally alien to us and I don't think there is an equivalent in the west. The incestuous relationships between banks/companies/government are unknown to us. It's almost like a government sponsored cartel.

So IMHO, trying to draw parallels between the west and Japan is virtually impossible.

Count_Dante

Isn't the Japanese government advertising bonds just like the UK government advertising NS&I? Other than the superficial difference between government savings schemes and bonds, what is the difference?

sabretoothtigger

Its probably closer to war bonds, not just an investment but 'do your duty' and support your country

Jonbvn

baileysbattlebus wrote: »

The keiretsu is another concept totally alien to us and I don't think there is an equivalent in the west. The incestuous relationships between banks/companies/government are unknown to us. It's almost like a government sponsored cartel.

S. Korea has something similar (Chaebol). I found it staggering that I was working on multi-bullion $ international projects that were all financed by JBIC. Of course everything except manpower came from Japan. It was just blatant gov't support of their heavy industry.

TBH, the blinkered Japanese world view drove me nuts and I had to leave.

Generali

Robert Peston seems to agree with me, at least in part:

link

If you want to know why quantitative easing may not be working - in the sense that it hasn't led to a conspicuous increase in lending - this morning's financial results from Royal Bank of Scotland give a pretty good clue.
I'll explain.

In simplified terms, quantitative easing is the process of buying gilts from investors - to date some £122bn of them.

Let's assume, which isn't necessarily the case, that when the Bank of England buys gilts from investors the cash ends up in the British banking system.

Well, if the cash is classified by the banks as a customer deposit, which it might be if the investor that has sold gilts to the Bank of England happens to be a relatively small and unsophisticated institution, then the banks say "yippee".

Because that deposit increases the ratio of supposedly stable customer deposits to loans and advances: it reduces the banks' dangerous dependence on flighty, unreliable wholesale funds.

Which genuinely matters, because - as you'll recall - one of the reasons our banking system came so close to collapse last autumn is that our banks had become too dependent on wholesale sources of funds, which dried up after the collapse of Lehman Brothers when investors took fright and took flight.


Take Royal Bank of Scotland. Today, its chief executive has set a target to reduce its ratio of loans to deposits from 156% to around 100% by 2013.


That will require it to reduce its dependence on wholesale sources of funds by not far off £200bn over the same time period.


So when cash deposits come in, the instinct of Royal Bank of Scotland - and of other banks - is to say "thank you very much" and just sit on the cash, rather than lend it out...

Jonbvn

It seems like Merv is now considering negative interest rates to force the banks to lend.

http://www.ft.com/cms/s/0/f5f21ed4-8c1c-11de-b14f-00144feabdc0.html

mbga9pgf

And the minute he does, watch every hardcore saver pull every pound they have out of UK banks. It will be Northern Rock Redux. They will regret having only one pound on deposit for every one lent when the population causes a run on the banks.