China is suffering deflation, as has been reported this morning:
In Western economies, like the UK, we have an obsession with inflation because deflation is something that we know almost nothing about as a lived experience. However, we should be worried. Deflation is much more dangerous than inflation and is entirely possible in the UK in the next year or two.
Take a look at this chart, published in the FT this morning that suggests that a significant part of the economic impact of the interest-rate rises put in place by the Bank of England has yet to have an effect, even though we now know that from May this year onwards, inflation in the UK is expected to be less than 3% a year and to remain that way, at best.
High interest rates, which the Bank of England insist must persist, are intended to create a recession by reducing demand, increasing unemployment, and by increasing the cost cost of capital, which cuts the rate of investment. The result is supposed to be significant downward pressure on prices. However, what we know is that those price changes are already falling in scale, significantly. With much of the Bank's recession-creating effort still to have an impact, the chance that we will have deflation is quite high as a result.
Deflation is dangerous for three reasons.
First, the real cost of repaying loans increases, which penalises all businesses and households that are dependent upon loan finance to make their plans possible. They have to cut their expenditure as a result.
Second, falling prices discourage investment because people defer purchasing decisions in the hope that they can buy things more cheaply in the future.
Thirdly, these two factors do, in combination, put significant pressure on spending capacity, meaning that a steady downward spiral within the economy develops.
As I have long argued, the Bank of England never needed to increase interest rates to tackle inflation because the inflation we had was of a sort that would never have been addressed by interest rate rises and would, in any event, always have passed without any such changes. Now, though, we face the risk of a substantial overshoot by the Bank of England that is very likely to result in a serious recession and potentially in deflation as we follow the path that China is setting.
Economic incompetence of this magnitude takes some effort to deliver.
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My theory as to why bankers hate inflation so much, is that the real value of the money owed to them is reduced.
Last night I watched the party political broadcast by the Conservatives. Our banker PM claimed the £400 billion spent on the pandemic has to be paid back. From what I understand from your blog it does not.
Then he blamed the war for the energy prices rises and the need to fight inflation by raising interest rates. We know it had little or no influence on imported inflation.
Bankers should not be in charge of economic policy
I agree with your conclusion
I am not sure they hate inflation rather they see an opportunity for entrepreneurial money making and inflation gives them cover. All sold with a veneer of social responsibility for public service and the national interest. I am not sure if I dislike them more for their dishonesty or their false virtue.
Yes, I also saw that PP broadcast, and it was such obvious economic garbage. Yet thousands of people will probably believe it. Most staggering was he took credit for reducing inflation through raising interest rates, when interest rates are decided by the BoE independent of the government – supposedly. (Quite apart from the fact it wasn’t true anyway.)
I believe that there is general misconception, perhaps nurtured by politicians and employers, that a fall in the rate of inflation is the same thing as deflation.
This confusion can be used to reduce pay rises by saying that “inflation is falling”. Note the omission of the words “rate of”
I have been re-reading Ian Gilmour’s ‘Dancing with Dogma’ (1992) and the opening chapters seem relevant even today.
OK, so we have had Covid and the BREXIT debacle not to mention 2008 and all that but despite there being an assertion from the Tories that they either never tried or even abandoned monetarism I think that that is just big lie.
Clearly it is an independent BoE who are still addicted to monetarist principles and think that they will ‘steady the ship’. Indeed, it is capital itself I feel that knows that monetarism serves it the best.
So really, nothing has changed.. And the Tories still play their dirty games – in the 80’s it was watching unemployment rise on the back of dogma; today it is about beggaring public services whilst minting money for the CBRA for the financial sector.
So it is fair to say that the bad ideas have persisted – and have also seemingly been accepted by Labour.
It is remarkable the extent to which the Tories have been able to sweep under the carpet 2008 and all it revealed about the true relationship between the State and “Free Markets”.
At the time, City of London supporters of Neo-Liberalism were about as plentiful as the proverbial quantity of atheists in foxholes during the first World War.
Trying to have an intelligent discussion about political economy with the Tories is like trying to discuss the scientific method with a South Seas Cargo cult.
Richard
general question,please
Did Prem Sikka ever get a reply from Baroness Vere about why the state is paying interest to banks on money the state created? 30/11/23
Yes
But it was gibberish not worth sharing
The success of the policy seems to depend upon a sufficient number of suppliers remaining solvent and then reducing their prices over time in order to meet the engineered reduction in demand.
If this process is then compounded by the economic consequences of wars, a fact that our foreign policy makers seem blissfully unaware of, the assumption that Andrew Bailey will bring about a supply/demand equilibrium any time soon is remote.
Add to this the Labour Party’s committment to “sound finance” and it would appear that we are looking at another 10 years of austerity. As we saw during the Covid Inquiry political parties in government pay only lip service to the concept of risk – Osborne’s famous words “whats the point of having a risk register if you cant pay for it”.The risks associated with the further
deterioration of our key public services are now pulsating red.
An American story but a glimpse of the future?
https://kffhealthnews.org/morning-breakout/hospitals-are-in-peril-left-and-right/?utm_campaign=KHN%3A%20Daily%20Health%20Policy%20Report&utm_medium=email&_hsmi=292948939&_hsenc=p2ANqtz-8e-D90hvQs9K65qTsxsQxmoxO98C8WiztMDCnkPnfhc8cQW4PX-EKMNROYvqhWaVEQOjFlb5alOVCoKcbyzE3XjeV8hQ&utm_content=292948939&utm_source=hs_email
As the “factory of the world” Chinese inflation has a direct feed into UK inflation; so this matters.
It is also unclear what the Chinese authorities can do about it – and there has been much discussion.
3 year gilt yields are currently 4% – which (sort of) says that the market expects Base Rate to average 4% over the next 3 years. Given our starting point of 5.25% this implies substantial falls if 4% is to be the average.
Just a random but related query (which I’m sure you’ve probably addressed in books/other blog posts)
So, there’s a certain narrative that in 2023 the inflation we witnessed was “seller’s inflation” where, in response to cost shocks , corporations respond with price hikes, actually increasing their margins. Of course, price controls could be a response (of course a radical policy only employed by communists like Richard Nixon), but if we imagine the UK workforce was unionised and had bargaining power reminiscent of the 1970s, would that have worsened inflation or actually stabilised it? (As corporations wouldn’t be able to increase prices without being met with wage rises, whereas, due to multiple factors like deindustralisation, anti-trade union policies, privatisation etc, wages are inelastic relative to inflation)
I know it’s not a either/or situation, just wondering if you had any comments or further reading etc on that subject etc.
I did a long tweet thread on this
Syart with that https://twitter.com/RichardJMurphy/status/1601525205461250052
And Rishi’s claim doesn’t stack up when conveniently forgetting that a third of that spent will be recovered in tax and NI.
https://fullfact.org/economy/28-billion-public-sector-pay-increase/
Agreed
The world’s experts, traders in financial markets etc are forecasting inflation to average around 3.5% for the next 30 years. The pattern of inflation swaps suggests very gradual declines from current levels – a period of deflation is simply not credible in this context.
Of course the big advantage of highly liquid, two-way markets is the people with a massive outlier view point can seek to make money from that opinion.
Is that what you are going to do, and if so, how?
I am not a speculator.
But let me ask you a simple question. How often have long-term market expectations been wrong? Even short term,mifbyou like? More often than not? I thought so.
I expect the UK to follow China into deflation. Deflation from China will feed through to the UK. Oil and gas prices have returned to pre Ukraine war levels and are unlikely to increase. World food prices have reduced markedly from their peak. Supply shortages, and change in demand patterns, due to the pandemic, have abated. Inflation is, therefore tumbling quickly. The effects of excessive interest rates have yet to feed through; the Bank of England is likely to succeed in causing recession. I think it is too late to avoid this.
Around April, maybe May, it will be obvious we are entering an economic crisis. The BoE will then slash interest rates and rev up the QE printing press, but too late. The overreaction to the crisis will stoke the flames for the subsequent boom, then bust.
What a crazy way to run an economy.
Re TIM KENT’S “Around April, maybe May, it will be obvious we are entering an economic crisis. The BoE will then slash interest rates and rev up the QE printing press, but too late. The overreaction to the crisis will stoke the flames for the subsequent boom, then bust.
What a crazy way to run an economy.”
Lets be generous, assume they know something and want to be able to announce spending to get re-elected probably not, but possible thinking.. [support the banker-PM as central bank may wish..]
WHAT IF it was Possible to MAKE AVAILABLE via Regulator (of money, I e Treasury instruction to Bank of England) “Landlords, GET ’20-year money’ from commercial banks” at fixed 1.5% for Special Purpose “ULTRA-INSULATION (external insulation at least sides and rear) AND SOLAR WARMTH-STORES AS a GREENER DEAL”, WOULD THAT WORK IN TIME TO AVOID DEFLATION at least in a year’s time, from towards £40bn of real work each year and £600m gas savings year-on-year for 30 years? Less waste of warmth and waste less gas growing to £18bn p.a just off the gas imports. 20-year money is interest only then ends: as described by Bank of England website’s “cancellation.”
Suits UK-Gov to say “does not increase the deficit” doesn’t it? Money “by normal means” etc. No gobbledegook this time, they do not need to comment.
Landlords to pay the nominal £50.00 per month which comes off the tenants bill as Green Deal intended. Thats a minor fraction off their net £500 p month profit, typically (or could be for those owners over 65 or out of work to get rid of damp and cold). security for tenant 6 or 8 years (govt to decide). What do you think, Richard ? and thanks for all you do. Don’t we need mechanisms like that? best wishes to your readers, too.
I get what you are tring to do Ian.
I do not think that your scheme could work. Sorry…
The Bank of Japan has this week effectively said it can’t foresee anything on the horizon that would cause it to implement meaningful interest rate rises. In other words the BoJ has proven the case that rate rises were never needed to deal with the recent episode of inflation. All media should be shouting about this and holding the BoE, ECB and Fed to account for the death and destruction they’ve caused. Fat chance!
Deflation is inevitable. The recent fall in inflation is a waystation on the road to a serious, deflationary recession. Expect to hear cries of “It’s only a technical recession, the economy is fundamentally sound” this year, followed by mysterious discoveries of green shoots of recovery.
Although China is leading the way, central banks have made it worse with their boom and bust cycle (see my book The Financial System Limit about this). The total weight of private sector debt is three times government debt and costs far more to service. About one-fifth of all economic output is spent on interest. This cannot grow much further. but economic soothsayers argue that interest costs do not matter as they are just a transfer payment. I disagree.