Deflation on the prowl as Bernanke shuts down his printing press

sabretoothtigger

True, but the flip of deflation is the base rate will be very low (like now).

I think thats only true this time because government made it that way but its not always down to them what rates the country pays a bit like keeping the pound in the ERM wasnt just their decision

marklv

stueyhants wrote: »

It is bad for those who have debts. In a deflationary environment it is likley wages would be cut, however the debt you have isn't cut and it gets harder to service that debt.

Well, wages are being cut now and we are in an inflationary environment! :mad:

I don't actually believe that wages would be automatically cut in a deflation - it depends on many different interlocking factors.

Kohoutek

We should be a deflationary environment - because the amount of bank credit, which is one the main drivers of inflation, has retracted significantly. Thus it's harder to borrow money to buy a house or a car, so the demand for those assets will fall, therefore prices will fall. However, as we've covered in great detail on this board, the housing market is resilient for now.

The inflation in consumer products at the moment is caused by the price of oil increasing according to the Bank of England has said, since oil is the most important commodity used in the economy and will affect not just petrol but also food prices, for example.

In the long term, we may have asset price deflation and consumer product inflation (if oil continues its climb, or the pound weakens).

Degenerate

marklv wrote: »

I doubt it. RPI is currently 3.7%, well above the BoE's target rate of 2%.

The BOE doesn't target RPI. CPI, at 3.0%, is now within the 1% tolerance band of the 2% target.

Quantitative easing was a totally misconceived idea and will backfire, and the maintenance of below inflation interest rates can only fuel inflation further.

The whole point of those low interest rates and QE was to fuel inflation. Without it we would have spent most of last year in deflation, like the Euro-zone.

I don't know why there is such a fear of deflation - why is it so bad? It makes debts go down faster, does it not?

As others have pointed out, you have this totally back to front. Deflation makes those sitting on cash richer, those with debts poorer. If you have cash in the bank and wages and prices reduce then it will go further. If you have a debt, you still have to pay back the same nominal sum on your lower income. Worst of all, this serves as a disincentive to spend money. Thereby it further subdues demand, which creates further downward price-pressure due to oversupply, a positive feedback loop that can be severely damaging to an economy.

Generali

marklv wrote: »

I don't actually believe that wages would be automatically cut in a deflation - it depends on many different interlocking factors.

The usual mechanism is that people lose their jobs and can only find one paying less to replace it.

The pragmatism being shown by a lot of workers over the past couple of years in taking pay cuts rather than redundancy is highly unusual IME.

Wookster

Generali wrote: »

The usual mechanism is that people lose their jobs and can only find one paying less to replace it.

The pragmatism being shown by a lot of workers over the past couple of years in taking pay cuts rather than redundancy is highly unusual IME.

Maybe that's down to down to the gravity of this recession? It doesn't seem like things will be improving significantly in the next year or two (hope I'm wrong on that) and people feel their interests are better served in a job, albeit with a pay cut, than without a job.

I have had to take a fairly chunky pay cut in my the job I should start in a couple of weeks, still its better to be adding to my CV (and bank account) than not at all.

Generali

Wookster wrote: »

Maybe that's down to down to the gravity of this recession? It doesn't seem like things will be improving significantly in the next year or two (hope I'm wrong on that) and people feel their interests are better served in a job, albeit with a pay cut, than without a job.

I have had to take a fairly chunky pay cut in my the job I should start in a couple of weeks, still its better to be adding to my CV (and bank account) than not at all.

I suspect that's a part of it. I also wonder whether personal debt also plays a part. If you don't have debt you can survive a few months on the dole: it's not much fun but you can do it.

If you have even a hundred pounds a month to find in debt repayments on top of that then things start looking bleak pretty quickly. As the late payment fees start piling up.

globalds

Generali wrote: »

If consumers don't start to consume, deflation is the logical outcome.

What if those consumers only represent a small part of the picture.

Would a huge increase in consumption in one place ...For example China...Stop deflation in another ..Say UK.
I'm thinking simply though the cost of Oil , iron ore ,etc...If the demand for those commodities does not fall , or even rises ..How does that affect the area that has slowed .

Generali

globalds wrote: »

What if those consumers only represent a small part of the picture.

Would a huge increase in consumption in one place ...For example China...Stop deflation in another ..Say UK.
I'm thinking simply though the cost of Oil , iron ore ,etc...If the demand for those commodities does not fall , or even rises ..How does that affect the area that has slowed .

To some extent that would work as it would remove excess supply of goods. The only problem that (presumably) wouldn't be addressed is the excess supply of services - haircuts and plumbing are hard to export (not impossible, pace the ubiquitous Polish plumber if he sends money back to Poland that is effectively an export for Poland).