The European Central Bank on Thursday responded to fears of deflation across the eurozone by unexpectedly cutting rates to a record low and insisting it had more weapons in its “artillery” to prevent price falls.
The threat from deflation has been a regular theme for discussion amongst the economists linked to the Green New Deal group over the last few years and rightly so. Deflation might appear to increase the value of wages, but the effect is to encourage people to defer investment in the belief that there will be a financial gain from doing so. The consequence is a drain on economic activity that would compound current woes and just at a time when what the economy needs most of all is investment on a sustainable future.
The ECB was right to act.
The Bank of England is instead clearly thinking about when rates might rise here because the pressure of the pocket of house price inflation in London. That's profoundly worrying when what we need are new housing, taxes to take the heat out of over-valued existing housing and long term stable and low real interest rates to encourage investment. Push too hard and we could easily end up with what the ECB fears.
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Let’s be blunt the central banks are fumbling around in the dark – their tool box is full of useless items. Governments relying on central banks to fix their problems – and I can think of one in particular – is the equivalent to a householder calling on an artist to fix their plumbing. The artist may paint a lovely portrait, but…..
If the ECB has more tools to fight deflation, could they please tell the Bank of Japan who seem to have tried most things with limited success over a very long period.
When you are caught in a liquidity trap, it is very difficult to climb out of it!
If the government put money into the pockets of ordinary working people and embarked on a building programme on the scale of the one post world war II (the country was absolutely broke at the time, remember) we have a real chance of climbing out of recession.
Instead pf throwing money at banks, put it into the real economy! God knows, there is plenty needs doing! There is a housing list of some 5 million and most of our infrastructure is falling apart too!
Do what the New Deal in America was starting to do in the 1930s; invest massively in the real economy! Indeed, this is the only proven route out of recession…outside of war, of course!
Stevo -agreed! But I’m afraid the neo-lib mentality will not yield until there is a war or civil strife of immense proportions. They will white knuckle their digital money until the very end.
lets, remember, Fred Goodwin slept at the Ritz before going ‘cap’ in hand to the Treasury for the bail out, he also breakfasted there. An executive room at the Ritz is £548 a night, I’m not sure how much breakfast is. To live like this whilst contributing to the wreck of the economy and then leave the scene with millions and live on a permanent free lunch should anger people-it hasn’t and this is what has given them the front to vilify the poor and needy and the unemployed in as vile and open a way as possible. At present, there is little hope of change unless a volcano is waiting to erupt whose forces are, as yet, invisible.
deflation is probably being hidden by the ‘free’ money the banks are given and retail Price indexes do not reflect the reality of energy and housing costs. people are clearly not spending which should threaten prices at some point.
Deflation is not the coming threat: deflation is already here and now.
And decreasing rates is only worsening the problem.
Deflation is hard to recognize on the day to day life, because SOME assets prices can indeed increase during deflation, and everybody is looking to these prices.
Decreasing rates means even more arbitrage to finance by debt only, then gives more debt burden; it means delaying investments to wait for even lower rates, i.e. decreasing investments; this is how lower rates is calling for even lower rates.
The biggest risk is not hyperinflation, it is hyperdeflation.
I don’t see deflation as a threat, but as a positive. Inflation increases consumption, deflation decreases consumption (why buy now when it’ll be cheaper next year?)
Since we need to dramatically decrease consumption to avoid destroying the planet, how can deflation be a bad thing?
The problem isn’t deflation but the allocation of resources. It can’t work while the top 1% or 10% insist on hanging on to their disproportionate slice of the cake.
I do think this illuminates a problem with Richard’s ideals, it is all well & good to talk about “a green new deal” but I haven’t heard a serious answer to how we can keep inflating the economy &, OTOH, save the planet. More consumption must mean more destruction.
It is entirely possible to cut working hours drastically and still produce more than we could possibly need.
But instead of the benefits of technology providing the bounty it should have, i.e, less working hours, better pay and a better society, it has instead been diverted into providing mega-profits and ever bigger mountains of private debt!
If we stopped the 1% conning all us out of the benefit that technology provides and properly redistributed the wealth produced, our lives will be very substantially improved!
Sadly, I can’t see this happening anytime soon!
Deflation is a bad thing! At least inflation has the benefit of cutting down the debt.
With deflation, there is less and less money produced and hence more and more businesses go under and the debt gets substantially bigger!
The top 1/2/5/10-% will always have their disproportionate slice, because in this form of democracy they OWN the government.
I do not think any solution exists as long as fractional reserve banking and manipulation of money by central banks continues.
Lower production, and lower consumption, would mean higher unemployment in the current system.
I will not be here in 100 years to see the decline into feudalism and anarchy, and war, that is virtually guaranteed by the system we have now.
JohnM
If we don’t curb consumption now then the position in 100 years is going to feature increasing numbers of human beings fighting for an ever-decreasing land-mass as large areas of currently usable land become waterlogged. So, while I accept that the consequences of rapidly decreased consumption will be painful, the consequences of NOT decreasing consumption will be far, far worse.
That assumes that those consequences are unwanted.
“We may get to the point where the only way of saving the world will be for industrial civilization to collapse”
Now……where are we with respect to the collapsometer?
Although if the ind-civ was to collapse, the consequences for the vast majority of the worlds population would be horrific.
Starvation and disease, along with massive conflict on a scale unseen before as evryone tried to get what remained.
StevO
I have a book from the early 60s in which Woodrow Wyatt, then a Labour MP, (afterwards he became a Tory zealot) quizzes the great sage, Betrand Russell. Now, BR was, by any way of measuring it, among the cleverest people ever. An exceptional mathematician, before he became the UK’s foremost philosopher & Wittgenstein’s mentor, his achievements knew no bounds.
BR said that the great thing about mechanisation & (the then young science of) computerisation was that it would free people. Production at the current level could be sustained by everyone only working 10-15 hours per week. We would all, said BR, be free to live the life previously only open to Squires like him. We’d spend a few hours at work each week & occupy our remaining time in (say) gardening, or researching unusual old texts, or playing golf, or improving our chess. Life would become wonderful.
What went wrong ? Marketing.
And interest – marketing fuelling indebtedness as the root to work slavery
Rack this one up as another victory for the neo-liberals:
“UK October inflation falls more than expected to 13-month low”
http://uk.reuters.com/article/2013/11/12/uk-britain-inflation-idUKBRE9AB0CS20131112