At the age of 55 I have never lived in an economy facing deflation. I have only known inflation. And I have only known the political ogre that has been made of inflation when it comes to rhetoric on the importance of stable prices.
That's what makes Christine Lagarde's warnings on deflation, as reported here by the BBC, so important and also discordant:
The head of the International Monetary Fund has warned about the risks to global economic recovery of deflation.
Christine Lagarde said that "optimism is in the air" about growth, but the recovery is still "fragile".
"If inflation is the genie, then deflation is the ogre that must be fought decisively," she said in a speech in Washington.
Earlier, the World Bank said that the global economy was at a "turning point" but "remained vulnerable".
"We see rising risks of deflation, which could prove disastrous for the recovery," Ms Lagarde said at the National Press.
She is right to issue the warning. Inflation is falling fast, even in the UK. With almost no wage pressure in the economy that may be inevitable. It is also serious.
When there is deflation people don't borrow because what they have to repay goes up in value, and not down, over time. Implicitly real interest rates become very high and there is nothing government can do about it when notional rates are already near zero, apart from printing money.
Deflation also encourages the deferral of spending and investment: it will be cheaper in the future.
And in a downside, which is what deflation feels like, businesses and their managers, raised on the idea of growth, have no idea how to manage.
Losses are also likely as wages are (as we have see in this recession) downwardly sticky.
So, businesses fail, jobs are lost, investment falls, real interest rates rise, wealth disparities increase dramatically as those in debt are increasingly indebted and those with wealth get increasingly rich, and government finds itself with falling incomes and increasing commitments.
Deflation is, as Lagarde says, to be feared.
We need to have printing presses at the ready.
More importantly, the printing of cash has to be focussed. It has to be spent into the economy. The risk of deflation increases the need for a Green New Deal and Green Quantitative Easing. Their time has come.
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You make good points Richard – after all it was deflation that created the Great Depression though I suspect that “the ogre that must be fought decisively” is Lagarde herself and the ECB which is forcing disastrous austerity on Greece and Spain.
QE, as NEF has pointed out, could be used for a Green Deal involving real solutions to housing issues but without LVT and an end to wealth syphoning mortgage scams and bankster speculation this will not happen -Lagarde is part of this corruption herself and is not to be trusted
I don’t dispute Lagarde and I may have very different motives
“I suspect that “the ogre that must be fought decisively” is Lagarde herself and the ECB which is forcing disastrous austerity on Greece and Spain.”
But Spain and Greece wanted to be part of the Euro – what did they think would happen to themselves in the bad times when they produce almost nothing of value and have serious problems with corruption and terrible productivity?
Sorry, the people of Greece and Spain wanted to be in the EU and the Euro – they enjoyed spending other taxpayers cash – now those other taxpayers want some of it back.
Of course one solution would be to get rid of Spain and Greece from the Euro and the EU.
The 1929 Crash was triggered by gross inflation of share prices on Wall Street and elsewhere leading to a deflationary bust. Previously the Weimar Inflation had damaged Germany and the inflationary instability of the French franc was another problem. In the UK unluckily Montague Norman at the B of E was fiddling the figures. But there was a degree of inflation in property prices and rentals which lead to diversion of capital and savings. During the 19th Century when the UK was largely free from inflation how come did we have all that growth and massive raising of capital and savings?
Actually a very good question…
I think a good part of the answer to that is to be found in a very interesting book I am reading right now. William Bagehot’s Lombard Street. The savings were mainly used in Britain taking a dominant position in international trade finance through its virtual monopoly on international banking. Yes banks! Maybe a little too liberal for some to read, but very interesting nevertheless!
PS: for thise not knowing who he is… He was the editor of the vile Economist
I don’t understand. Are you not aware of Japan?? So you are aware of deflation.
I have not lived in Japan
I have no experience of its economy
True but it is on the news. It has or still going through what we experienced. High house prices being one major key.
No money is entering the productive economy. Money from QE is causing inflated asset bubbles, but the real economy is still bumping along the bottom. Deflation is still a risk in the real productive economy!
I might ask, why is it those that caused the problem being helped out with more than a trillion pounds in loans from initiatives like the Special Liquidity Scheme and £375 billion from an injection of QE?
Why isn’t QE and loans being diverted to ordinary working people to pay off their debts? Paying off people’s mortgages and clearing their loans would leave people with enough spare money to spend on goods and services, It would provide a massive boost to the economy and would probably work out cheaper and infinitely more productive than bailing out the banks and financial sector.
Also, why can’t students lend at the same 0.5% the banks can? Indeed, why can’t small businesses or anyone from the productive economy? Why should the 0.5% rate be just for the banks and financial institutions?
Put money into the pockets of ordinary people and watch the economy thrive!
The USA in the late 19th century suffered deflation. Money was based on gold. People like William Jennings Bryant wanted to monetize silver to fight deflation which was ruining small tradesmen and farmers. The bankers wanted to just have “sound money” i.e. based on gold alone.
The Wizard of OZ by Baum was a story based on opposition to those bankers whom he saw as the powerful OZ but was really an old man pulling levers and bluffing the people!
Jennings said “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.” He wanted to oppose the bankers but failed. The issues are not quite the same but there are some very recognizable features.
My comment isn’t relevant to today but it might prove interesting to some.
Jennings also took part on the Scopes trial where a school teacher went on trial (he deliberately provoked the situation hoping to overturn laws banning the teaching of evolution in the state of Tennessee schools). Jennings was against evolution and died shortly afterwards. But he was a champion of the common man.
You make a very good point – the stimulus, if employed, has to be spent and not merely absorbed into one of the many asset price bubbles (i.e you can’t administer it through the existing banking sector)that seem to be proliferating across both the UK and elsewhere in the globe.
Your prior correspondent mentioned the example of Japan. I think Japan has some lessons for policy makers but there were unique cultural factors which are not as applicable to the UK.(A persistent cultural inclination to save even with interest rates at zero for nearly two decades which deflation buttressed) One phenomenon, however, that has been a recurrent factor in the sluggish Japan recovery is so-called ‘Zombie’ banks, which are laden with debts/loans that are unpayable (and whose size is ironically actually increasing in real terms in a deflationary environment) The UK’s private debt is huge, and tackling this would have to be considered when loooking at a strategy to curb deflationary pressure. What’s your strategy to tackle the debt of private individuals?
Wrong question
What is the mechanism for tackling the owners of that debt
Answer, a wealth tax
I forgot – you don’t recognize the concept of disincentives
You forget the proven power of equality
And remind me, why is tax a disincentive only for the rich?
I advocate taking as many people out of the taxation net as possible – especially the poor who are paying huge marginal rates – I am delighted you feel the same !
I disagree
Those who advocate this follow it with suggestion that only taxpayers vote
No thank you
Yep….pay to play. If you want a say in taxation and public spending priorities, it’s only fair that you chip in as well.
Which is why I’d forbid any one holding honours to make any attempt to minimise their tax bill. If they want the honours from HMG, they can pay in full to play….or take the choice to avoid tax and lose the honour.
Wonder how Lady Green might take that idea….
http://www.dailymail.co.uk/news/article-1339026/Britains-biggest-firms-moving-offshore-denying-UK-exchequer-100s-millions.html
There’s no way anyone I know would seriously advocate a return to franchise restriction based on payment of tax – that is utterly and completely outrageous and I join you in condemning such a proposal as obscene.