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Deflation or inflation?

Robert Peston | 09:39 UK time, Wednesday, 17 December 2008

The US Federal Reserve and the Bank of England regard the great threat right now as deflation.

Federal Reserve buildingIf they're right, deflation would be a disaster for our economies, for the reason set out in typically elegant fashion this morning by Martin Wolf in the Financial Times.

As I've been boring you rigid with for months and months now, the cause of our economic woes is that we borrowed too much - or financial institutions lent us too much (to digress for a second: there's a resonant unresolved issue of accountability and responsibility in these two ways of seeing the debt binge).

The sum of consumer and corporate borrowing in the UK is equivalent to something like 240% of our annual economic output in the UK, while US household and business debt is closer to 300% of that country's GDP. In cash money, that's about $45,000bn - or one of those big numbers that induces vertigo.

Which is quite a burden, and - as far as I can tell - a record-breaking mountain of debt for us to pay off.

The alarming and important point is that if deflation were to set in, if prices were to fall, the real burden of that debt would increase - thus prolonging and exacerbating the severe recessions that appear to be taking hold in both the US and the UK.

That's why the US Federal Reserve has set its policy interest rate as so close to bupkes or zero as makes no difference.

But, of course, the interest rates that businesses and consumers actually pay is much higher. So the Fed has embarked on a mission to bring the interest rates that participants in the real economy pay to as close to zero as it possibly can.

The Fed is doing this by spending hundreds of billions of dollars buying up US government debt and also loans to companies and householders - which has the effect of forcing down yields or interest rates.

By the time the US central bank is finished, it will have pumped trillions of dollars into the US economy in this way.

Over here, the Bank of England is preparing to do something similar, for the moment when its Bank Rate falls to nil (which may never come - but it would be foolish of the Bank of England to assume the zero hour will not arrive).

This process has the ghastly name of "quantitative easing". And it's not dissimilar to running the money printing presses at quadruple speed, filling up choppers with cash and then showering the population with greenbacks.

It's supposed to encourage businesses and consumers to spend rather than save, so that economic activity revives.

And it exposes the shocking paradox of our age: debt got us into this mess, but paying down that debt too quickly will only make the mess worse (or so the Federal Reserve and Bank of England believe - though I should point out that a growing number of economists are beginning to express fears that what the central banks are doing will prolong and exacerbate the crisis).

What is profoundly unsettling to central banks and governments is that growing numbers of businesses and consumers are opting to save rather than spend even as interest rates fall to these record lows.

Which is why those central banks and governments are taking ever more desperate steps to stimulate growth through increases in public spending and to make money as cheap as possible.

And that of course raises the question about whether the worst threat we currently face is deflation or inflation.

At the moment our economies turn, there's a genuine risk that central banks won't be able to drain all this cheap money from the system quickly enough to avert quite a surge in the inflation rate.

Against that background, I conducted an unscientific poll of leaders of some of our biggest multinational businesses at a lunch a few days ago.

I asked them to think about 2010, and whether they were planning for that to be a year of deflation or inflation.

To a man (this isn't me being sexist, it's that world: they were all men), they said they expected a sharp rise in the inflation rate.

They said this in a resigned way, as though it was the bill for a party that had been far too expensive and had gone on far too long.

UPDATE, 09:44 AM:

The Bank of England's monthly agents' survey of business conditions contains disturbing evidence of businesses turning down profitable orders because they're unable to obtain either loans from banks to finance the increase in working capital or insurance from specialist insurers to cover the risk of non payment.

There's also an alarming trend of businesses conserving cash and deferring or cancelling capital expenditure.

Comments

Page 1 of 5

  • Comment number 1.

    Robert

    I work in for a global supplier to the energy industry, we have slashed capital spending by 80% !!!

  • Comment number 2.

    It's not alraming - it is just the end of the daftness that has gone before.

    Having gourged on debt for decades people are now gourging on thrift. And no matter how much money we give to banks and how cheap we make it this will not alter.

    Unfortunately the central banks, economists and commentators are in a closed circle where only their experiences matter.

    There are only 2 questions that matter:

    Why are the authorities making the same mistakes that they made in the 1930s?

    Why are so many people congratulating the authorities for not making the same mistakes that they made in the 1930s?

  • Comment number 3.

    Why does anyone think that buying government debt will reduce yields? 3 month notes are already negative or as near as makes no difference. Buying corporate debt isn't an option for anyone that wants to see their money back, or at least that's what the insurers of such debt are saying. I appreciate that the authorities want to increase oney supply, but they ought to be looking at the velocity of the money that they already have. Money supply has grown hugely in the last 15 years, whilst velocity has decreased, largely because much of the money created sat in the one place in the form of loan of some sort. To grow supply further without at least attempting to improve velocity is short sighted.

  • Comment number 4.

    Deflation is (or was) for centuries a cycle of economies like every other. It has been not seen by anyone who is younger than 80 (except if you live in Japan).

    No wonder Roberts survey suggested everyone said 'inflation' for 2010.

    A problem I have trouble with is what inflation one is talking about. Consumer prices as per the ridiculous Government basket of goods - or one which includes some asset prices (that are part of living too). Asset price deflation is, it seems to me, the main problem at the moments, and that is going to take some working through unless sellers accept very quickly 50% upward falls in the value of every asset they own. We could see asset price deflation set in for more than just 2009..........

  • Comment number 5.

    It is understood I hope, that Capitalism as it has been known during the last 30 years is all but dead. An immensely painful transition is about to get underway in the western economies. As a nation we can embrace the changes and help it along, or we can resist, thereby making the transition even more painful than it needs to be. At the moment, and I fear for the next few years, it looks like we are going to resist. We will keep borrowing, keep pumping money into a dead economy, and we will keep digging this hole deeper and deeper.

    An enlightened government however would see the crass stupidity in this action and take a look to 10 or 20 years ahead and see where all this is leading and start planning for it now. For that is really what governments are for, the long term and not the short term, as unfortunately they all seem to be these days.

    In 10 or 20 years the market economy must cease to exist. If we artificially keep it alive, then as a nation, and as well as a race, we will plunge headlong into total economic and social collapse as the accelerating environmental changes take hold and demand impossible resources to deal with them, especially if we want to keep our present day levels of consumption and living standards. The eco system can no longer support us.

    So the future is a known quantity. It is a hot, hungry, dry and hard place to be. If the present way of life is to change, as it must, then it must change in a controlled way to meet the future we see coming. Economies, production methods, social systems and personal needs all have to be directed to a way of life that can be sustained.

    Money as King is a corpse. Profit as prince is dead. What we are seeing at the moment with the tax payer directly and visibly supporting the economy and thereby our society. This will continue and become the norm, expanding into all areas of money and material production. It will not be called Communism, but rather Socialised Capitalism.

    The trick will be to stop the taxpayer realising his power and keeping it in the hands of those who currently weld it. Until that trick is achieved, then the current pain will continue and deepen because the power welders will be scared of letting go and scared of change to the status quo.

    When the transition is completed, then accelerating competition can ease and our focus can be turned to the real issues. Our very survival.

    A tip for Christmas. Don’t wait any longer for more reductions in shop prices. There will not be any. The retail sector is calling your bluff and will increase all their prices before this weekend starts. They know you have been waiting and they know that this will be your last chance to get out there. So be warned. Most things will increase by several pounds.

  • Comment number 6.

    This is like one of those old films where they keep flashing up newspaper headlines showing the progress of something, invariably the hero making progress to the top of his achievement, (it's not me being sexist).

    So when hollywood makes a film of all this I wonder which headlines will make it, any suggestions?

  • Comment number 7.

    This is getting really scary. I just don't see any point in these actions (both pump-priming and cutting interest rates) except as a short term expedient, which will cost more in the long run.
    They all seem like more financial tricks to me without addressing the basic fact that we have spent beyond our means and will have to correct that.
    The choice seems to be stagnation for ten-twenty years a la Japan or a quick hosing of money to stave it off for a year or two followed by thirty years of paying it off.

    In this context, does anyone believe that the VAT cut (at a cost of £20 billion in one year) has made or will make any difference at all?

  • Comment number 8.

    If anyone remembers the articles that Samuel Brittan wrote for the FT in the late 90s, then they will realise that not everyone thinks that a year or two of deflation is really the scary monster that we are currently encouraged to believe.

    Ultimately the only people that inflation helps is the foolishly profligate. (Such as our friend, 'Flash').

  • Comment number 9.

    To see what deflation does - all you have to do is look at the housing market.

    However as the 1st rule people are taught in economics is the price-supply-demand curve I assume that eventually people will regard the utility of owning a property as greater than the utility of waiting to buy the property cheaper - and then start buying.

    The only problem is: when and at what level will this occur? Current forecasts are for another 15% fall in the housing market so we can expect a gradual reduction in the rate of price decline.

    However I would NOT expect rapid growth in house prices once people start buying - many will be too cautious having seen what has happened in the last year or so. This means that borrowing against appreciating assets (price bubble) will remain low.

  • Comment number 10.

    oh great we got the mpc minutes out....they did not want to hurt the pound so they left it at 2%...fantastic....so that didnt work either...why do we have to deal with these useless people at the bank of england.....so we have the pound sliding ...and yes hints of more interest rate cuts......great.....in the meantime what sort of bonus does king get? i bet its not peanuts.......just like the goldman sachs crowd 143000 each for failure. we really are getting ripped off in the uk...and more bad news(no not unemployment) the fact that brown is closing in the opinion polls...oh god help us....also wen the economy turns i bet brown then says its not the global economy its the british economy...

  • Comment number 11.

    6.So when hollywood makes a film of all this

    When was the last time you saw an economic disaster film?

    Yeh, my point exactly.

  • Comment number 12.

    At last we see the truth.

    Quantative easing forgets the basic fundamentals of economics, the habits of real people.

    Real peole who make decisions will now be risk averse and will save.

    This means that the printing presses will roll and the BOE and Feds will keep lowering interest rates so to force us to spend spend spend, which we will NOT

    Thus, inflation by 2010 will be almost a certainty, after a deflationary blip or drop off next Year.

    The only way out for Savers therefore, is reluctantly go into Gold or back into blue chip equity markets. stocks and shares. Cash in Banks will be worth less in 2011 onwards if inflation takes hold and the oil price plus commodity prices surge again.

    Warren Buffet is possibly right once again, buy stocks for the longer term

  • Comment number 13.

    Confused? Anxious? Forgetful?
    Don't get anything constructive done?
    Always making a mess of things?
    Paranoid and worried about what other people think of you?
    Constantly spouting meaningless rubbish in a loud voice?
    Repeatedly making contradictory statements?
    Always writing lists of things to do - and then not doing them?
    Not sure where you've come from or where you're going - or where you are right now ?
    Well, these are all symptons of ... er ... a government carrying out 'business as usual'.

    Well wake up! It's time to get tough on government and tough on the causes of government.

    I notice ever increasing use in this blog (and generally) of the terms 'statistics' and 'average' - as in 'average wage',

    'average house-price' etc. They seem to be used to support arguments or to prove a point. Governments, of course, use

    (and abuse) them all the time.
    As any fule kno 38.6% of all statistics are made up on the spot, 15.4% are added as an afterthought and the remaining 6%

    are added on for good will.
    As far as averages are concerned. "Things are worse today than they were yesterday, but better than they will be tomorrow

    - so on average there's no change." Hmmm...

    Neither banks nor governments have any money. Banks have, up till now, created the appearance of having money by

    inventing it - and taking obscene salaries and bonuses in the process. Every time a loan is made, money is magically

    created into existance - mortgages, business and personal loans, overdrafts, credit-card spending etc. etc. But

    fundamentally a bank note is merely a piece of paper; it has no value in itself nor is it supported by anything of value.

    Well that 'little' scam is now well and truely out in the open - that's why banks won't lend to each other any more.
    Governments are less subtle; they merely impose taxes. If you spend money it is taxed; if you earn money it is taxed;

    even when you die anything you leave behind is taxed. But why should members of government care? they're only in office

    for a few years - often only for a few months - then off to a bank or big Plc. directorship where they can get their

    snouts into the trough along with all the other greedy piggies and benefit directly from the policies they've just

    implemented.

    The present governments here and in the USA have now mortgaged future generations to the tune of TRILLIONS and will have

    to either claw it back from our children and grand-children or will write it off. Why the hell should future generations

    pay for our debts and profligacy? What on earth would they be able to pay with - even if they wanted to? What resources

    will they be able to draw upon to enable them to do anything at all? Oil? gas? coal? uranium? wood? fish? Hmmm...not much

    left. Maybe they too will be able to issue IOUs.

    All the talk I hear on these bolgs and generally in the press, of the 'housing market' and 'bottoming out', or a return

    to 'market normality' or 'business cycles' or the need to 'generate growth' is simply self-deluding hot air and

    meaningless twaddle.

    The current economic and finacial crisis is a not a problem that can be corrected. In fact it is not a 'problem' at all -

    'problems' can usually be 'fixed' if there is sufficient will and ingenuity. We have been blindly marching towards the

    current state of affairs for generations. The current 'crisis' is a symptom of a much deeper problem - and you can't fix

    symptoms. The problem is one of human greed coupled with the FACT that we have used up and are continuing to use up most

    of the world's non-renewable resources - oil, coal, minerals etc. That which remains still burried underground is

    becomming increasingly, in some cases, prohibitivly expensive to extract (why else would RTZ dump 14,000 jobs last week -

    'cos it costs too much to get it out), why else would the USA/UK have invaded Iraq? ('cos 60% of mid-East oil reserves

    lies safely burried underground...in Iraq).

    Ponder for a moment that in the 1780s the building of a single 74-gun 3-deck, battle-ship consumed 2,000 (two thousand)

    oak trees (HMS Victory, a 100-gun ship consumed even more). All those ships have long gone - the oak trees were not

    replaced; we turned to coal and produced iron and steel with which we created the horror and destruction of the First

    World War. Hitler's march through Europe was made possible 'cos of oil; the USA in Vietnam likewise depended on oil.

    Nothing usefull was created - nothing at all - just a continuous squandering of un-replaced or irreplaceable natural

    resources.
    A return to 'business as usual' (whatever that means) is neither possible nor justifiable.
    Population in India and China over 1 billion each and growing EXPOENTIALLY - not sustainable.

    The failure of successive governments to recognise the impossibility of continual 'growth' and the danger of exponential

    growth is a shocking and morally criminal dereliction of their duty. Their current mantra that 'growth should be

    stimulated' is even worse and must stop.

    Those on these blogs who don't yet understand where money comes from (and all those who keep asking where it's gone)

    should watch the Paul Grignon video 'Money As Debt' on GoogleVideo

    Money As Debt

    Then take it further and watch the 'Crash Course' on Chris Martenson's excellent web site:

    http://www.ChrisMartenson.com

    While it is great that this site (Peston's blog) exists and that the BBC is still prepared to allow it - so far; it is

    suspiciously worrying that Peston has yet to discuss Fractional Reserve Banking, the dangers of the Exponential Curve or

    Peak Oil - all three of which have been fundamental to 20-century business and banking. Discussed them - he hasn't even

    mentioned them. Either he doesn't know about them, which is hard to believe of a highly educated Business Editor of an

    international media outlet; or he is not prepared, or is forbiden from talking about them - which is extremely worrying.


    Old Groucho

  • Comment number 14.

    We are beyond medium term forecasting. We are stuck in the middle of a minefield with only a stick to help us get out unscathed.

    I haven't a clue what is going to happen and neither does anyone else. I am saving my spare cash even though I get nothing in return from the banks in which I store it. It is the rainy day syndrome.

    Commercially, we are doing the same thing as well: batten down the hatches and if we can stay where we are then all well and good.

    We are into survivor economics and forget the big picture. It is hunkering down time.

    I am scared that after a very brief spasm of deflation, inflation will kick in and destroy the value of all that has been saved. None of us have any real clue that this will happen. It might; but we could be so broke by then that it won't matter.

    Even the time-scales are uncertain. It took inflation about five years to kick in after the Wilson devaluation in 1967 but that was only after the Heath government started what later became known as the Barber boom.

    If that scenario repeats there will have to be very serious cuts in public spending to prevent inflation becoming institutionalised.

    There is no quick fix, it is going to be uncertain for a very long time and the government should stop pretending otherwise.

  • Comment number 15.

    Re 11 'When was the last time you saw an economic idssater movie'

    There was plenty about the 19030's depression and the war that got us out of it.

  • Comment number 16.

    #9 1st rule in economics!!!! i didnt know there was any rules...i thought it was think of a number and double it. if king and his crowd were engineers would really would be in trouble. scrap all these useless economists and get some proper experienced business men and engineers in, then we may have a chance.

  • Comment number 17.

    Dear Robert
    " Will some one tell me why Gordon Brown is obssessed with raids on Pension schemes, Why is he ripping people off Pensions must be Ring fenced to keep the tax man away and GOVERNEMNTS from wrecking peoples retirements. "
    Delation is now certain in the USA, whose economy is at breaking point, what happens so they happens here, but that is political propaganda, Brown could stop it if he wanted to, there is absolutely no reason what so ever, for Bristish Domestic policy to follow the rest of the world.

  • Comment number 18.

    The worst threat we face is that the same incompetents remain in charge of the banking system.

    The more Mr Peston and his cronies hype the crisis, the closer to their chests people will keep their hard-earned cash.

    The upside of this story is that a recession wil reduce our carbon footprint.

  • Comment number 19.

    It seems that the central banks believe that the best cure for a hangover is "hair of the dog". The party is over, so they are trying to pursuade us to go straight back to the pub and get drunk again. That might work in the short term but, as we all now, it just puts off the inevitable and the next day we'll end up with an even bigger headache.

    It certainly seems that people in the real economy realise this and are refusing to go on another spending spree. I'm using the hundreds of pounds a month that the rate cuts have saved me to pay capital off my mortgage instead of getting a new car. To continue the analogy, my hangover cure will be to go back to bed and sleep it off. I don't think there will be many other prople in the pub anyway!

  • Comment number 20.

    Quoting Robert

    "They said this in a resigned way, as though it was the bill for a party that had been far too expensive and had gone on far too long."

    Since the Labour party seem to like to call the Conservatives the "do nothing" party would now be an appropriate time to sum up New Labour's stewardship of Great Britain over the last 11 years as

    "Do nothing but party"

  • Comment number 21.

    #2

    The authorities are making the same mistake because they are being advised by the same people who got us into this mess - and those people have huge vested interests.

    For the present they have persuaded the authorities that those interests have to be protected for the common good.

    This is also why it won't work. Far from freeing people from debt, and empowering them to spend, the current "solution"is only adding to the collective debt burden - pumping air into a burst bubble.

    I am struck by the fact that the Government is now spending, in one way or another, more money than the total sum of outstanding mortgage debt in the UK.

    What might have happened if, instead of chucking huge sums at the banks, on a promise (unfulfilled) that they will lend, the billions had been used to pay off the grossly inflated mortgages. Ther banks would have got the money to pay off their debts; the people would have been freed of the largest item in their debt burden (and might have felt able to spend a bit more); and the money could have been recovered in taxation (perhaps a property tax directed towards those same mortgagees) at our convenience.

    As it is, the punters still have their grossly inflated mortgages; they will sonn have agrossly inflated tax burden; and the only beneficiaries are the bankers who win both ways.

    This is no remedy, it's part of the same illness and can only make matters worse.

  • Comment number 22.

    I think this is a turning point. With inflation properly under control and interest rates at record lows, credit will become cheap. We should see a return of the credit card wars in which 0% 12-month rates etc are commonplace - this will allow people to borrow the deposit they need for a house, and house prices will rise again and we'll all be ok.

  • Comment number 23.

    Maybe I'm naive,but are the central banks telling us that the only solution is to spend our way out of this crisis? Won't that simply make the mountain of debt that much higher? If they do want higher consumer spending then rather than give interest relief to the high street bank who is obviously rather parsimonious in its desire to pass it on to the consumer,why not simply provide direct,risk free cash to the public that they can spend without fear of incurring debt? This would take the form of propping up employers wont to shed jobs,guaranteeing pay hikes,revamping public services such as the NHS into totally free institutions that they once were,slashing VAT and fuel taxes,ending tragically expensive overseas military ventures,reducing the Armed Forces even,massive infrastructure spending and the creation of employment rather than allowing its reduction. In other words a return to the softer,fairer Britain that we all remember as a distant past. The time is nigh for a paradigm shift in thought .Traditional ,stodgy modes of thinking will only lead us into an abyss from which there may be no escape.

  • Comment number 24.

    #13 OldGroucho Many good points, especially this one: "The failure of successive governments to recognise the impossibility of continual 'growth' and the danger of exponential growth is a shocking and morally criminal dereliction of their duty. Their current mantra that 'growth should be stimulated' is even worse and must stop."

    As for statisticians, I have taught statistics, and I always give the following advice. The first question anyone should ask when reading a statistical analysis is "Who's paying the statistician's salary?"* This will determine the nature of the questions asked, and where the burden of proof is placed. At the heart of any statistical analysis, there is always a set of assumptions like "Guilty 'til proved innocent" or vice versa. This is true with other scientists too sometimes. I'm afraid there are many forms of prostitution, and selling one's body is far less dishonourable (if at all) than selling one's soul.

    *The same question should be asked of economists too actually

  • Comment number 25.

    For the majority of the periods of recession/depression before 1970, deflation was in fact the prime characteristic of the downturn. Governments (largely influenced by the crude monetarism of the 1970s on the one hand and a conservative polemic on the other) regarded the stagflation of the 1980s as the ultimate curse. Since then, any government (even a Labour one, or perhaps especially a Labour one...) has thought it prudent to target inflation first. Remember the Conservative mantra that unemployment was ' a price well worth paying' for lower inflation? Labour, if not entirely convinced that this is the right language, is convinced that the 'curse of Callaghan' would return to shake them from office if inflation reached dizzying heights.

    Well, that political obsession with inflation management as a supposed alternative to demand management has just come to a shuddering end. Also going down the tubes with it is the comfortable - but stunningly stupid - notion that macroeconomic policy can be, very simply, interest rate policy alone. If the Fed reduces rates to 0.25% and there is still no effect on aggregate demand and output, will anyone be daft enough to maintain that a sophisticated economy like that of the UK can continue to rely on the MPC steering interest rates as the main (or only) plank of macroeconomic policy?

    What is now happening (through 'easing', efforts to 'loosen the corset' in all but name, fiscal stimuli, recapitalisation, nationalisation and the rest) is a belated recognition that inflation management has failed as the instrument for macroeconomic policy. We are returning to the kind of interventionism that was common before 1974, but in a much exaggerated form.

    Economists now have to start thinking well outside the box. What will an economy with 15% unemployment, 0% interest rates, asset values at 30% of their pre-bust value and investment at 50% of pre-bust values look like? How will it operate? What stimuli will work in that environment? Will export stimulus measures help enough? How can a near enough 50% government share of GDP be financed? All of this against a background of failing real prices and, for those in work, static or rising real wages, but with a lower propensity to consume.

    We need ideas here. Come on, HMT. Think radically.

  • Comment number 26.

    #13 OldGroucho
    Many good points, especially this one: "The failure of successive governments to recognise the impossibility of continual 'growth' and the danger of exponential growth is a shocking and morally criminal dereliction of their duty. Their current mantra that 'growth should be stimulated' is even worse and must stop."

    As for statisticians, I have taught statistics, and I always give the following advice. The first question anyone should ask when reading a statistical analysis is "Who's paying the statistician's salary?"* This will determine the nature of the questions asked, and where the burden of proof is placed. At the heart of any statistical analysis, there is always a set of assumptions like "Guilty 'til proved innocent" or vice versa. This is true with other scientists too sometimes. I'm afraid there are many forms of prostitution, and selling one's body is far less dishonourable (if at all) than selling one's soul.

    *The same question should be asked of economists too actually

  • Comment number 27.

    I can't quite grasp why Deflation increases Debt despite reading the FT article and would really appreciate an explanation from the consumer / layman perspective.

    Regarding consumer reluctance to spend I can't see why anyone is surprised by this.

    As Robert points out there are huge levels of debt and people either can't or won't take on any more.

  • Comment number 28.

    Robert

    On the inflation/deflation debate, I'm fairly certain that it will be the latter. The weak pound will contribute to this as the real cost of our imports increase. Interestingly, the inflation figures published yesterday showed that food inflation had increased. The fact that we import so much of (and produce so little of) the essentials such as food will exacerbate the problem.

    On your update, the banking crisis is causing all sorts of problems over and above the simple shortage of credit. For example, in the oil and gas industry, operators in the North Sea have to provide letters of credit or bonds to cover the potential liabilities for the abandonment of wells. These need to be provided by institutions with triple A ratings. These are not do easy to find at the moment and many existing letters of credit which, at the point they were issued, were given by triple A institutions, no longer meet this requirement.

    My feeling is that there are going to lots of insolvencies and "fire sales" in the New Year as companies fail to meet their banking covenants at the year end and the banks are unwilling to support them. This will of course lead to even more job losses. The admintration of Woolies is just the tip of the iceberg.

  • Comment number 29.

    Robert,

    Your choice of alternatives is incorrect
    i.e. incomplete in the choice of alternatives

    The question is not should the Government go for Inflation as opposed to Deflation

    but the question should be

    Should the Government go for Stability (or sound economic management policy) as opposed to your alternatives of Inflation or Deflation.

    There are more losers under Inflation or Deflation as opposed to Stability, so what would your choice be ?

    Stability or an unplanned economic Madness unleashed on the Population for years and years to come?

  • Comment number 30.

    #22 what happens wen interest rates go thro the roof in a few years time? you thought that 1 out?

  • Comment number 31.

    Dear Robert
    The truth is that America has the ability to bring the world to the point of no return.
    For some inexplicable reason they can and will conjur up some plot to involve the rest of the world, in their woes,
    When America has an Interest rate at POINT 25% --- like Britain, Now, no one wants the pound which is in free fall, the Dollar has be ex communicated as the must have Currency, for the Euro. with that in mind there will be an event probably in ASia, that takes owr minds off the Monetary Problems, and focuses the Wests minds on a totally different threat.
    That threat will be Military.



  • Comment number 32.

    #6

    They did make that movie out of whatshisname at Barings.

    Mind you, the odd £800 million here and there is pretty small change now, eh?

    Any suggestions for a movie title (apart from 'Crash Gordon' obviously).

  • Comment number 33.

    Unfortunately it is not the end of capitalism - climate change will see to that.

    It is goodbye to monetarism at least as an economic tool. And what relevance now is the independence of the mpc and economic geeks fiddling with the central interest rate.

    As excess credit is now seen universally as what brought the world economy down so now the government wants to create more of it but not in a planned and controlled way.

    Surely there must now be draconian controls on the way banks and others (store cards) create credit.

    Perhaps as it is christmas some cold turkey is appropriate while economies recover from the hang over but where the vulnerable are protected - small businesses, pensioners, unemployed, poor etc.

    Finally does anyone really know where this is all leading us?

  • Comment number 34.

    Robert says "we borrowed too much "

    Come on Robert - not once have you stated that the "We" includes this current Government who have led the charge towards the precipice we are now at !!

  • Comment number 35.

    13. At 10:21am on 17 Dec 2008, oldgroucho wrote:

    "As any fule kno 38.6% of all statistics are made up on the spot, 15.4% are added as an afterthought and the remaining 6%
    are added on for good will."


    I am now confused - where is the other 40% ????!!!!!!!

  • Comment number 36.

    Deflation, inflation ?

    A more accurate of what we've got and are going to continue to have is instability...

    I'm expecting inflation to rocket back upwards at some stage, when interest rates rise again (as they will) and the oil prces rise again (as they will) when the recovery eventually gets under way.

    We're moaning about deflation now, but soon it'll be hyper-inflation that's the problem...

    Instability and uncertainty is the biggest of curse at the moment. Its very difficult to plan long-term for anything...

  • Comment number 37.

    On your last point, one of my firm's biggest customers has exactly that problem. They can now only get credit for a sale for 3 yrs, not the 7-8 previously, and they have to gurantee to pay up if their customer defaults on the loan. So the risk is all the suppliers and the profit goes to the finance house on its risk free lending. This is the situation a solvent and well established company now finds itself in- got the goods, got the customers but can't get the finance. Guess what- now they are not ordering fresh parts from their suppliers (like us). Result- bank induced hardship for other good businesses.
    Seems that there's cash for some in the banking business though, like Goldmans!
    Heads the banks win, tails we lose.

  • Comment number 38.

    Please don't include me in the "we" that is alleged to have borrowed too much.

    As a saver, I'm not responsible for this crisis.

    I'm just being ruined by it...

  • Comment number 39.

    I think this is a turning point. With inflation properly under control and interest rates at record lows, credit will become cheap. We should see a return of the credit card wars in which 0% 12-month rates etc are commonplace - this will allow people to borrow the deposit they need for a house, and house prices will rise again and we'll all be ok.............



    Sorry to burst your bubble Bob, but credit card companies are not making any money so are racking up their interest charges to offset their lossess. The credit card is now a broken toy.

  • Comment number 40.

    There was a famous investor in the 20's - maybe Jesse Livermore? who said that he knew it was time to sell the markets when the shoe-shine boys were giving share tips.

    Now we seem to have the reverse - with all and sundry predicting the end of the world as we know it. Witness Jeremy Clarkson on this site talking of "an economic end of days".

    To quote Rothschild, "Buy when there's blood in the streets, even if the blood is your own."

    The streets look to be getting bloodier by the day. Who's going to call the bottom - or was it FTSE at 3666 odd back in October?

  • Comment number 41.

    Robert,

    Are you saying certain chickens are coming home to roost?

    Except these chickens won't be laying eggs to help offset some of the problems.

    Or are we just in the hands of economic speculators?

    Maybe you should be asking those people who are furiously pulling unlabelled levers to see what happens.

    Then hopefully we can get someone with the vision to hold someone accountable.

  • Comment number 42.

    The reason financiers fear deflation is because there is no opportunity to make money when prices are reducing. As for the rest of us, it makes sense to reduce debt while the interest is low, against the day we know is coming when rates will rise again. That will be the time when the finance industry feels able to turn the screw once more. It is common sense to delay buying when prices are falling. Some things cannot be delayed, however, like food and fuel. I still have to buy the same amount of diesel every week to put in my car, but I love the fact its now less than a pound. So lets be honest, deflation is already here. Those who have most to fear don't want to recognise it, but its been going on for the last couple of months. It will continue until the true base level of consumption is reached.

  • Comment number 43.

    It’s now as clear as day that the folk who advocated against re inflating the burst DOTCOM bubble with low interest rates were right. Gordon Brown and BofE exacerbated the problem this side of the atlantic by firstly, keeping rates too low for too long, then keeping rates too high for too long. It was obvious to me from the very start (a non financial person) that LIBOR should have been killed off. We are in serious trouble, the only question is ‘How long will it last’?

    Judging by the actions taken by our respective incompetent leaders, quite some time methinks……….

  • Comment number 44.

    How's this for an ingenious solution? Take all non-delinquent mortgages/loans with say less than five to ten years left on them and simply pay them off on behalf of the mortgagee/borrower. No strings attached obviously. This would be cheaper than subsidising bad debt or painfully absorbing it when it does become delinquent It rewards people who are sound credit risks back into the market,releases billions in capital,doesn't rely on the slashing of interest rates ,(which is simply not working anyway ),to stimulate consumer spending because it provides instant disposable income to individuals proven to use it wisely. Then induce them to spend it rather than hoarding it by offering financial incentives to do so e.g. interest free home improvement loans etc. This would offset to a large degree the effects of bad and unrecoverable debt as it arises.Desperate times require desperate measures,I see no sense in waiting for disaster before dealing with it when the moment can be averted by some avant garde thinking.

  • Comment number 45.

    The real risk is neither inflation or deflation but a lack of momentum to the structural changes in the global business environment needed to provide a new focus to economic direction and recovery. There is still a huge inquest and, dare I say, holding to account that needs to take place over the coming months and years but this is secondary to the need to re-profile and accelerate a new and dynamic growth direction for the worlds economies. This will inevitably be different from what was in place before and will follow different goals and agendas. Banking and finance will still play a key part but will be servants of the process not the master - being beholden to the taxpayer has fundamentally changed the relationship,perhaps permanently. What is needed is global vision and leadership to align direction and expectation and to provide co-operative and collaborative efforts to inject momentum into the process. I fear that such leadership is still lacking as current efforts steer us in totally the wrong direction at present.

  • Comment number 46.

    Re: #22

    Apologies, but I can't decide between 'wrong' or 'sarcastic'.


    Truth is no one has a ladder big enough to get out of this hole, and even more apparent is that no one knows how to construct one large enough.

    We might as well have Monster Raving Loony Party monetary policy in place (if such a thing exists).

  • Comment number 47.

    @11

    Keep watching TV this Christmas you will see a delightful movie entitled "Its a wonderful life"

  • Comment number 48.

    So they will just print money!

    I thought when they rescued the banks that the politicians had saved us from total economic meltdown but now I am not too sure. I think this mess is bigger than them and they are actually floundering.

    I am spending money. I am trying to reduce my future liabilities as much as possible and make sure I can live on very little. The Solar Heating man is coming this morning. When real interest rates are negative one is better off spending it now. I will keep a bit to put back into the stock market when it dips below 3200.

    I still regret not buying a vast quantity of decent claret when the Euro was only worth 60p.

    Keep keeping us informed Robert. Your daily update brightens my day. But then I have been saying this was going to happen for a very long time. Must go and feed the pigs!

  • Comment number 49.

    Dear Robert
    ALL*

    Its not BRITAIN------- THAT THE PROBLEM, ------

    NOR IS IT THE AMERICAN PEOPLE, -------
    ITS THE BANKERS AND THE POLITICIANS, ---- who are now fighting for survival,
    Domocracy is under direct threat, because of these two organsiations both want the power of Globalisation, and its now a fight ot the death one group will loose.

  • Comment number 50.

    "The government is to unveil a new training scheme for the unemployed. It has allocated £158m to help those who have been made redundant develop new skills. .."



    Yeah, for all those great jobs in all those thriving companies. Yo ho ho and a bottle of rum. A new skill presumably being actually an old one where the guy - doing that job before - lost it.



    Half* these people are going to end up picking sugar beet with their bare hands to scrape a living.

    GC


    *generalisation, I know.

  • Comment number 51.

    Well I am glad that these business leaders have more sense than the government and economists, since it is hyper-inflation Zimbabwe/Weimar style that will hit us in this spiral path to bankrupcy that our governments have created.

    The fact is that governments are borrowing even more than the interest payments on their current loans and are spending too much on the public sector in order to bribe votes and to remain elected. Instead of making painful cutbacks they are now printing money to pay for most of these non-jobs and workless.

    This is a path to our destruction and inflation destroys wealth and savings that would otherwise be deposited in banks nor relying of government borrowed money loans, whereas deflation is the lesser evil to correct the past inflationary mistakes.

    See http://www.marketoracle.co.uk/Article7526.html

  • Comment number 52.

    It seems to me that the notion of critical dampening is lost on our lords and masters.

    Crude and excessive measures are being used in an attempt to control an ever-worsening situation; this results in overshoot and more pain.

    Personally, I believe the threat of deflation is being used as a tool to justify measures that will eventually lead to hyperinflation (as the pound weakens / fails), which will in turn reduce the impact of the country's debt, facilitate the return to high asset prices, and return us to a debt based economy.

  • Comment number 53.

    I resell computer equipment, most of which I get from European distributors in Germany. My latest quotes for new stock are 10% up on what I got a month or two ago, purely from the weak pound. This will have to be passed on to customers.

    So although there may be asset (house) price deflation, the inflation most of us feel, what we consume, will continue to be high if it is sourced from Europe.

    Because trading is already hard before putting up prices 10%, I am having to conserve cash, stop capital investment, and even consider changing job altogether as next year is already looking very gloomy.

  • Comment number 54.

    you forgot to mention the exchange rate. rate cuts (actual and expected) will trash the pound against other currencies, esp the euro where the ecb does not seem too concerned about deflation at all (at least for now). given the reliance of our economy on imports, devaluing the pound will be the quickest way of stimulating inflation and heading off the spending slump.

    the usa is following the same policy (hence e.g. the unlimited cross currency swaps agreed with other major central banks), although it has to deal with impediments that the uk does not face, namely the countervailing interventions by mercantilist powers like china, and the fact that the us economy is relatively less sensitive to the terms of trade.

    obviously the trick for the central banks is to prevent a sustained depreciation turning into a rout (which could massively increase the cost of capital in this country). the fact that gilts continue to rally shows the boe is doing a good job so far.

  • Comment number 55.

    Of course savers are not spending. They are losing income monthly as rates fall. Why increase the rate of loss by dissipating the little money you may have put aside.

    Of course your straw poll looks to inflation, sterling is in freefall and we import far more than we export.

    Of course sterling is in freefall, all those migrant workers are shipping money home and out of sterling as fast as they possibly can and foreign investors are getting out as fast as they can.

    The unemployment figures are fabricated, for anyone with a pension equal to the job seekers allowance there is NO point in going through the hassle of registering.

    If there is one lesson coming out of this debacle it is that saving for the future is totally pointless.

    Batten down the hatches, make do and mend, dig for victory but for heavens sake do not trust politicians or economists.

    May history tell the truth about Gordon Brown.


  • Comment number 56.

    2008/2009
    Govt: pump it in, pump it in.
    People: horde it, horde it.

    2010
    Govt: keep pumping it in. It is not working.
    People: stuff this. Let's spend it all.

    The dam then bursts and Britain goes Weimar.

    Great. I cannot wait to see what other ingenious ideas these great financiers will have.

  • Comment number 57.

    Deflation is the main danger in the short and medium term.

    One of the big problems we have here is that the natural response to this crisis is to feel we deserve to suffer as a result of our previous profligacy, and that that suffering will somehow get us out of this mess. But if that suffering means "deferring or cancelling capital expenditure" on a massive scale then it won't help at all.

    What we really need to be doing is cutting back current expenditure in order to increase investment (capital programs infrastructure, training etc) so we can afford to pay off our international debts. Just cutting back current spending and sitting on the money, or worse still cutting back capital spending at this point will just cause deflation.

    US inflation has dropped from 4% to 1% in 2 months. Deflation is coming fast and presumably will arrive here shortly after. In response to this the government needs to print money - the whole point is to inflate the money supply to counter the deflation (the tricky part is to know when to stop). That money should then be used in the most efficient way, public infrastructure investment, subsidising capital investment by companies, or simply putting it into the hands of those most likely to spend it on British goods and services.

  • Comment number 58.

    I'm betting on inflation.

    Why?

    Remember that exchange rates do matter.

    (i) The weak pound means that everything we import into Briatin is now 30% more expensive than a year ago. We import food, energy, and manufactured goods. All these items are subject to upward price pressure from the pound's fall against the euro, dollar and the yen.
    Since 2001, our banks have borrowed money on the wholesale markets. These debts are denominated in foreign currencies, which mean the value of our banks' liabilities is increasing every time the pound falls.

    (ii) Monetarists, and history, teach us that increased government debt generally causes inflation. Think about Britain in the 1970s and Argentina in the 1980s.
    The UK governement is planning to borrow large amounts of money. The lenders will be foreign governments and foreign investors. These foreign investors won't want to put their money into sterling based assets, due the fall in value of sterling. This means the government will struggle to raise the money, unless it borrows it in dollars, the euro or the yen. It is also competing against America to attract foreign investors, as both our countries are having to borrow huge amounts of debt to bail out the banks. This competition for investors will eventually bid up UK interest rates.

  • Comment number 59.

    Thank you Robert for keeping us up to date. I can't be doing with those who accuse you of talking us into the downturn. What planet are they on?

    Lets cut to the chase- the root of the current financial crisis is the assumption that cheap energy and the rampant consumer society that is based on it will continue for ever.This is simply not going to be the case. 'Economic growth' cannot continue year on year. Peak Oil is upon us, and we all need to be aware of this, think about it, and consider how the future will be without oil.

    I highly recommend 'The Crash Course' on www.chrismartenson.com. He tells it how it is!

  • Comment number 60.

    By what method are they going to destroy all of this money and at what point in the future?

    At what stage before growth begings will they turn the taps off?

    This is fraud. At some point you have to stand up and pay back what you owe. Not just keep printing more.

    This is Fiat currency cancer and the tumor is grown faster and faster.

    These people are spending my grandchildren’s hard earned money and they are not even been born yet.

    Immoral hazard.

  • Comment number 61.

    Robert.

    Today you are telling us that Martin Wolf and various other irrelevent windbags including Anatole Kaletsky, David Smith and hundreds more, not one of which had a clue this storm was coming and consistantly denied we had any real problem, are now screaming about the terrors of deflation.

    Let me get this straight a bag of rice which is now 90% more expensive than 1 year ago needs to be kept at this price because price falls are really bad. Our food & fuel bills that have stopped rising but are still way up on this time last year need to be fixed at this horrible level and paid for with a depreciating currency.

    Hello Mr Wolf - wake up - your not writing for idiots reading a student rag mag.

    Day after day he produces articles of breathtaking contradiction and banality devoid of any balance. No one knows what tomorrow will bring but millions of sane people who can pay of their debts will, millions more have already cut their spending to build a safety cushion. They know the end of the road is ruin so have made a u-turn. They know that our government lied about everything and predicted nothing. They know high taxes and inflation are just around the corner. They want to stay in their home and protect themselves against the possibility of unemployment. They suspect that printing money does not create jobs it destroys them and creates further instability. Most of all i suspect, like me, we are sick to the back teeth of the pundits turning common sense upside down, predicting the opposite to every outcome and yet maintaining with utter conviction academic concepts that never work in the real world becasue they all ignore human nature.

    90% of my cash is now in Euro's. It had been 50% until last week. It is clear that our currency is going to crash much further as well as the $US. Any further cash i get will go to rock solid defensive company bonds. Tesco etc. They are yielding 7% + and represent excellent value. I put my money into Euros not to speculate and make 10% in a month because i did not want to be forced to embrace further risk but have been forced to because our government is attempting to inflate away our savings so they can inflate away others debts including their own.

    Well it wont work Wolf.

    Most of these pundits have reputations that are already in tatters to say nothing of their personal over exposure to property investment. They only care about being right to save their own slippery skins.

    Ignore them.

  • Comment number 62.

    Are we now going to put Keynesianism to bed where it belongs.

    The thought that in some way 2006/7 were the norm and that a cash injection will stimulate not only growth but the deluded expectations of the general public are insulting to what, at the time, was a great piece of economic thinking.

    We have, unless you missed it, just lived through Keynesianism - although you need to replace Government with Banking as the source of the stimulus. And have built an economy it is impossible for us to support.

    (in the 1930's only at State level could money be used to affect the economy to such a level - now we know better, as we see banks losses running at almost National Debt levels)

    The solution isn't giving our Junkie Economy another syringe of heroin as the effects of the first are wearing off!

    It's cold turkey time..... or Methadone if you want drag it out longer!

  • Comment number 63.

    I highly recommend 'The Crash Course' on www.chrismartenson.com. He tells it how it is!

    Dito

  • Comment number 64.

    18 - That would only hold true if the majority of the population read this blog and the majority of the population follow economics and politics.

    The reverse is true. The overwhelming number of people who read this blog and follow this sort of thing are in the main reasonably educated and won't behave that way.

  • Comment number 65.

    #13

    A long but very good blog. Chris Martenson essential reading as stated.

    1) I would add repeal of the Federal Reserve Act and the assumption of the 'Fed' into the US Treasury as absolutely vital. Otherwise the Fed continues to have its vested interest in printing money. Educated US comment is very much aware that the Fed is a group of bankers, not some responsible US Government body. It must be reined in after 95 years of self interested non-accountable greed.

    2) Scale down the Offcial Secrets Act as a first step in a a return to accountability. There is a real culture change needed in UK attitudes to accountability which has been mentioned in earlier blogs. Whether it began with Blair or not is a moot point, but it clearly exists and rots the system from top leadership downwards. We won't climb back until there is some return to honesty and decency in public affairs.
    A typical recent example of unfairness... A few years ago the UK government was fined heavily for failing to give out farmer support in time. Pretty much alone in the EU it failed to allocate funds, and we paid over £100 million. Woops but swiftly forgotten.
    In the last few days it has been discovered that some farmers have subsequently been overpaid (generally around £1,300). In typical fashion the sum has been demanded back in 30 days, or over six equal payments.
    Many of us in public service over a lengthy period are only too aware that key sectors of the economy are subject to blundering, arrogant non-accountable bodies - and that it is getting worse.

    3) Build up genuinely elite education. This means a much improved curriculum which is much more demanding but also more educational. Comprehensives are often very good, but level of expectation, fuelled by outdated class concepts mean that we are just not demanding enough of our often very decent and capable young people. Otherwise we will go down the US route of creating an impoverished sub class - the young. And that would be truly irreparable for the future.

    And remember that we are talking culture change when it comes to banks. This only occurs when it is forced by circumstances. The status quo comfort zone won't have changed much at Goldman etc. and turning round that type of culture is far more difficult than turning round a super tanker.

  • Comment number 66.

    #13

    Spot on! Where is the media discussion on:

    1) Peak Oil

    2) Fractional Reserve Banking (Pyramid banking system)

    3) Global Food Crisis (trying farming without oil and oil based fertilizer)

    If you call for a discussion on the subjects you are labelled at best pessimistic or at worse apocoleptic.

    I believe we are in the final throws of the Industrial Age (made possible by cheap oil), we need to starting getting to grips with this as soon as possible and collectively get our heads out of the sand!

    That's my belief, I'm not saying I'm right but would appreciate the debate...

  • Comment number 67.

    My winternet is now in your internet. My winternet is my autumn and my summer and my winter and my springnet. My four season net are now in your internet.

    If you have something and they want, leave them take it, because they won't have it for long. So instead we should be creating love between the black and white so we can have a better nation. Because when black is working together, we are too greedy, and when white is working together, they are too greedy. But when we have black and white mix, then we all understand and have control and say "look, you are being too greedy, you are taking too much of mine, let's talk about it before we have a fight". So we can create a black and white nation in unity

  • Comment number 68.

    I have always wondered what it was like to live in the days of the Great Plague. When people stopped behaving rationally and were in total self fright. When trust was lost in the establishment because they promised to deliver an easy fix and couldnt. When the flagallists roamed wanting to whip themselves and anybody else thay came across, and hell fire and damnation was preached. When some people actually seemed to want the worst. When ethnic groups and migrants were targeted. Of course people were unsophisticated and superstitious in those days.

  • Comment number 69.

    22 - Do you not think that that is what got us into this mess in the first place?

    If you have to borrow the deposit for a house then you really shouldn't be buying one.

    You should SAVE the deposit for a house, not borrow it on a credit card.

    We should be like France where certain things like TVs can't be bought with credit cards or like Germany where only 1 adult in 20 has a credit card and their use is socially frowned on.

  • Comment number 70.

    The old addage used to be when your in a hole stop digging.........

    But NO

    Too much debt was the problem so lets lower interest rates, borrow more at less cost and spend like there is no tomorrow.

    When will we wake up and smell the roses

    but then again there is an election looming so get the feelgood factor at any cost.

    Short term thinking

  • Comment number 71.

    A manifestation of decadence. The addict can't survive without his fix. An elected government will not enforce discipline. Thatcher's legacy sqaundered.

    Managers no longer manage - they pay bonuses to all and sundry and help themselves for good measure; the shareholders acquiesce. Public sector employees also want bonuses and big salaries, regardless of results and their gold-plated pensions; the government acquiesces. MPs blatantly help themselves to public funds and to get re-elected bribe us with our own money. Hey ho - we take our lead from the top.

  • Comment number 72.

    "As I've been boring you rigid with for months and months now, the cause of our economic woes is that we borrowed too much"

    Has anybody told Gordon Brown this?

  • Comment number 73.

    Is deflation really bad for me or anyone on fixed income ? I have savings and things will get cheaper. I expect to buy a house at then end of next year for 30% less than i would have paid a year ago. I will pay cash.

    If huge debt generated this problem then the only way out is to pay down that debt with deflation or reward the debtors and have hyper inflation and devalue the debt to the point where those with variable incomes are earning so much dont care anymore and start running up new debt to pay for things..

    If the majority of voters are in debt I can see which way democracy will take us but are we really trying to discourage people from saving to the point of destroying the economy ?


  • Comment number 74.

    #46

    "We might as well have Monster Raving Loony Party monetary policy in place (if such a thing exists)."

    Oh, it exists allright.

  • Comment number 75.

    I hope all these printed banknotes are coming from trees from sustainable managed forests.


    GC

  • Comment number 76.

    Robert unless you have not noticed, the world is in a period of de-leveraging.

    It’s a return to thrift and prudent banking – a very good trend.

    And it makes no difference if yield on government bonds are falling towards zero as most people are concerned about a return of their capital rather than a return on their investment.

  • Comment number 77.

    There are 2 disaster movies playing in my head.
    The first is the prosaic one that comes from having lost a large proportion of the savings that were intended to make retirement comfortable and interesting.

    The second is a real nightmare in which the conjunction of peak oil and runaway climate change makes modern civilisation (oxymoron?) a treasured memory. Within 2 decades we are likely to face sharply declining availability of oil. In all probablility, desperate governments will seek to make up the energy shortfall by burning more coal, probably without carbon capture, and the upshot will be a rapid rise in carbon dioxide emissions and an acceleration of climate change with an attendant increase in frequency of extreme weather events, droughts, floods, food shortages and global misery.

    It needn't be like this, but for 20 years governments have been putting off to tomorrow the prophylactic action that should have been taken yesterday. The UK government talks a good talk on climate change, but instead of fiddling about with barely noticeable cuts in VAT, it needs to embark on a massive redirection of national effort toward energy conservation and the construction of the new energy (renewables, nuclear) and transport infrastructure that will be necessary to give the UK some resilience in the dark days to come. Anything less is dereliction of duty.

  • Comment number 78.

    #76

    "
    "We might as well have Monster Raving Loony Party monetary policy in place (if such a thing exists)."

    Oh, it exists allright."

    I think it was something brilliant like:

    "Climb the butter mountain and ski down the debt mountain!"

  • Comment number 79.

    Deflation occurs where people wait for things to get cheaper for buying them, therefore stagnating the economy... Yes I can see this is a problem. I personally am putting off buying food for my family until the price comes down, and no one is allowed to use the car until petrol is cheap again.

  • Comment number 80.

    #74 it certainly exists.........another point here,how long will it take for the economists and the government to realise that what they are doing wont work?. 2 years ago everybody and i mean everybody knew that the credit bubble was going to burst!!! except for king the mpc the fsa and the treasury.does that say something about who should be getting the uk out of the mess were in.

  • Comment number 81.

    We have become embroiled deeper in this mess than many other developed economies because we have followed the American model so slavishly.

    It does not appear likely that following their ideas for a solution to these woes is likely to result in deliverance either.

    The admiration of America and its ways by Gordon Brown and other Labour politicians, like Jack Straw, seems a little unwarranted.

    Further cuts in interest rates are unlikely to have any significant stimulating effect on growth with existing personal and household debt so high. Furthermore deflation is inevitable in the short term as the carcases of failed businesses are picked over in 2009.

    The real price of many goods is set to plummet. I expect to see rich pickings in the vast halls devoted to buy-out stock at the NEC spring retail fair in February. Hang on to your money - get it all much cheaper soon!

  • Comment number 82.

    The problem with the US and UK is not too little demand, but too much. The present policy of pushing interest rates to nil is suicidal. It will cause hyperinflation and the collapse of the economy. The only alternatives that would work are politically unacceptable. Produce more, export more, consume less (ie lower wages / higher taxes), that's the real way out. Now try to sell that to spoiled Americans and Britons who kept consuming more than they produced for more than 20 years.

  • Comment number 83.

    "There's also an alarming trend of businesses conserving cash"

    Not businesses saving??!?! Ahh...lock them up and throw away the key!

    It's their duty don't they know to spend, spend, spend. There is no tomorrow so best get on with it!

  • Comment number 84.

    When the professionals at the coal face (estate agents stock brockers money dealers retailers car dealers etc...)and then the economists and the bank of england (not the government as their word is untrusted"spundle" ) and then the media and then the public think that we have just about hit the capital deflationary bottom with an increasde money supply via the so called quantative easing then watch out as the inflation muck hits the fan again. It will be like trying to ride a bucking bronco.

    This will start in the housing market with a pent up first time buyer demand and undersupplied house bank(all development has stopped dead) then with very low interest rates and some debt paid back and deposits saved even with another 1M extra unemployed it will rip and retailing will follow.

    This quantive easing formula is made and promoted by politicians who are desperate to try anything to get them out of the crass borrowing seriously bust deflationary dooda.

    Instead of walking and talking "Prudence"and getting a sound base to rebuild the economy, with of course economic pain, they want the magic wand option which will end in economic tears.

    They have no real perception of risk and are happy to gamble on the long shot outsider and we all know (perhaps not so the hedge fund industry and the banking industry) that it is likely that the outsider will fall second or third fence out.

  • Comment number 85.

    The way I see prices going is as follows:

    The prices for things people don't really need to buy, like cars and duvets, will continue to drop for now, until the mountain of unsold stock has been got rid of at distressed prices.

    Once all the stock has gone prices will rise, basically because no one will be making them any more and the imported materials to make them will become more expensive.

    Basic items (e.g food) which people need, especially those which are imported, will soon start to rise, and keep going up while the pound continues to drop.

    Oil will go down to around $30 and remain there until the deferment of new projects causes a supply squeeze, at which point it will rise sharply in sterling terms and keep on going up. This is probably 2 years away.

    As the Govt continue to print money it is inevitable that inflation will rise. This will continue until the pound becomes worthless. People will switch to either using euros, or go back to barter/gold.

    Those with sterling savings/pensions will be ruined, and those with debts will see their net worth return to zero. The only ones to benefit will be those with foreign currency or gold reserves.

    Perhaps it won't be too long before we get the updated remake of 'the Grapes of Wrath'.

  • Comment number 86.

    First Off:

    Have really found the blog and comments useful in understanding some of what's going on in the economic world from my non economist's viewpoint.

    Thanks to Robert and those generally commenting.

    I just wanted to offer an observation based on my own spending circumstances.

    Before the crisis I spent X pounds per month of diposable income.

    During the crisis I have been spending X pounds per month of disposable income.

    After the crisis (whenever that will be) I will be spending X pounds of disposable income.

    What I can't fathom is what there is out there that's wirth spending any money on anyway? What are people spending on and why?

    Interest rate reductions have freed up my mortgage payments by around £250 per month. VAT reductions make a comparatively tiny tiny incentive to spend compared the interest reductions on what is a modest an magageable debt.

    I used to enjoy internet poker. I got very much into the mathematics of the game and the various earnings expectation of different scenarios.

    The similarity between that game theory and what we are seeing now is that (in my opinion) the margins of expectation for any given scenario are insufficient to provide adequate returns in monetary terms unless sufficient capital is at risk.

    On a long enough timeline the expectation of facing ruin will become certain - whether you can then recapitalise and start playing agin or indeed whtehr you'd even want to play the same game is debateable.

    At the moment risk is higher, margins are lower and we're all expected to alter our spending habits to keep institutions playing a high risk low margin losing game.

    Personally I (am doubtless many people like me) have enough pending landfill in my home. I don't need any more I don't want any more and shifting VAT or interest rates won't encourage me to get any more.

    However if the government were to increase my tax rate by 5% and then give it back to me as a 5% rebate in the form of vouchers with an expiry date an a limited number of things I could spend it on you can bet your ass it would get spent.

    After all, nothing motivates me more than the prospect of someone taking physical money out of my hand.

  • Comment number 87.

    chriss-w is correct in comment 21. I said it in here several times and it still holds true. people will not spend while their house is at risk.

    The money should have been redirected at repaying mortgages, and putting money into the hands of the people so they could spend it.

    Next on the list is job security. The dutch are subsidising firms to keep them going and we need to do likewise if a firm has long term viability.

    Finally we need income security. For years the level of benefits have been way below what is required to live an acceptable quality of life in a developed country. This has, i think, been deliberate government policy to encourage the black economy and reduce labour costs.

    What we need is benefits and a national minimum wage set at a realistic level, not just paying lipsrevice to the idea. Once people know there house is secure and they will be able to live rather than barely exist if they lose their jobs then they will spend.

    All the money thrown at the banks is doing nothing. Cutting interest rates is doing nothing because we all know they will go up again rapidly when the recovery begins so you would be foolish to borrow £50,000 at 2% knowing it will be at 10% within 5 years. The government is guilty of gross hypocrisy telling banks to reduce their interest rates while still charging 8% on legal aid bills and no doubt other debts to the government. They should lead by example and cut their own criminally high rates.

    The money needs to be directed at those who have not been racking up huge debts. The often mocked working classes who struggles to make ends meet on a daily basis. It does not need to be directed at fatcat bankers and governemtn officials.

    If companies are asking their employees to take pay cuts to preverve jobs, then perhaps the Houses of parliament should follow suit. They set themselves up with some very nice high pay rises in the bubble years and are vey bit as fat a cat as any banker.

  • Comment number 88.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 89.

    here in splendid essex all the manufacturing has gone.....we are left with all the big stores selling gear thats made overseas.....we need to educate people to make things..and produce things. education is the key here..the message sent out by brown is its fine to borrow buy what you like dont worry about the bills......all completely alien to most decent british people...sort out the education in the uk....thats the start......nothings going to be solved here overnight.

  • Comment number 90.

    @77 Chazz
    wrote "The second is a real nightmare in which the conjunction of peak oil and runaway climate change makes modern civilisation (oxymoron?) a treasured memory. Within 2 decades we are likely to face sharply declining availability of oil. In all probablility, desperate governments will seek to make up the energy shortfall by burning more coal, probably without carbon capture, and the upshot will be a rapid rise in carbon dioxide emissions and an acceleration of climate change with an attendant increase in frequency of extreme weather events, droughts, floods, food shortages and global misery."

    Sounds like a remake of Mad Max, Mel Gibson will be pleased

  • Comment number 91.

    #35. Antonio59
    " I am now confused - where is the other 40% ????!!!!!!! "

    You're confused ? You are not alone. So is the Government, and everyone else in the finance sector - except the fat-cats at the top. Joe Public is too stupid to be confused (lucky him); but he's been feeling the pinch for the past year and knows that it's cold outside.
    The missing 40% is of course a 'one-off statistical anomaly' that has not yet been 'seasonally adjusted' to give the real picture - which should emerge towards the fourth-quarter of a non-specific date sometime in the not too distant future when those charged with leadership will be well clear of the fireing line.

    Wake Up. The game of musical chairs is well and truely over. The music stopped over a year ago. Northern Wreck was a clear indication that the music had stopped. If you have a chair to sit on be thankfull and pray that the legs don't have wood-worm. The fools are still trying to dance, but they'll never find a seat; the record is broken, the needle is blunt and it won't be long before the plug is pulled out of the socket.

    Brown, Darling, Paulson, Bernanke et.al. are desperately trying to pump air into a baloon that has burst - can't you hear the air gushing out?
    The only people who have secure 'jobs' are probably the police - they'll be needed to control the rioting masses.
    Note today's news that troops will be pulled out of Iraq next year (bet it happens sooner than we expect), they too will be used to back up the police. They've had very usefull 'training' in dealing with civil innsurection.
    Look at Zimbabwe, look at Greece.

    If you want more coherent explanation see the links at bottom of my post #13

    Post #5 PeterBaldwin is absolutely right in all he says.

    Old Groucho.

  • Comment number 92.

    Here’s an idea if we think negative inflation is coming and banks and people are hoarding cash:

    Make and distribute 500£ worth of shopping voucher per person. The voucher can be valid in any shop/business, and valid until 1 April 2009 to force people to use it now (unlike cash!)

    Use the electoral voting system/councils or something to distribute fairly.

    Surely this will make people buy laptops, food, insurance, electricity etc! no?

    Maybe I'm wrong and they probably did this is the 30s which caused disaster!

    I want to buy a cheap new, UK made Vauxhall, but my survival instinct says wait a few more months/years!

    Support Tax-payers instead of giving banks our money to lend to Tax-payers!

  • Comment number 93.

    #86 you sum up whats wrong with the uk....Iam all right jack...why should people have to give you an extra 250 a month, when ,with due respect, you borrowed to much in the first place. but its ok the people that have saved and been sensible are subsidising people like you who probobly have a few quid anyway.

  • Comment number 94.

    69 red lenin

    The deposit for a house is mainly due to the bank wanting a buffer to cover the cost of repo if things go wrong. That is the reason it is there and that is the reason in a declining market that the requested deposit has grown in size. There is a case that people who have equity try to make a bad situation work to avoid the loss of capital but a deposit has little to do with affordability. First time buyers are still finding it difficult to save enough deposit and are also finding a lack of suitable property on the market as those owners who can, decide not to sell but sit tight. You are right there is a cultural problem - Thatcher was the first major British politician to adulate and glorify using the small print of a deal to avoid a moral business obligation as being smart. That mentality has never gone away, and has been extended. Unfortunately a return to reality is painful for some. Some of the basic problems that encouraged the use of complex credit packages will not go away though. When the property market bottoms out then the deposit size requested will shrink as a percent, mortgage money will flow and despite mortgage availibility or criteria being tight there will inevitably be upward pressure and a huge danger of a return to the cycle. I am afraid people quickly forget, that is the evidence. Even with limited mortgage supply and low LTV ratios booms have occurred inthe past, usually after a drought of some sort.

  • Comment number 95.

    Wavering between hysterical laughter at the humour in some of the comments and morbid depression at some of the pessimistic views and predictions.
    I'm wondering who has got the answer to the economic woes- if there is one.
    Perhaps Dickens got it right with Mr. McCawber. If so, current plans are way off the mark.

  • Comment number 96.

    Quantitative Easing success relies on certain assumptions about individuals and companies which may not be true. The basic assumption is that if you can reduce debt costs and reduce the costs of credit people will take on more debt. It is not an unreasonable assumption on the face of it especially considering the consumers behaviour up to now. By using quantitative easing the government assumes that the economy is made up of greedy selfish people who will ignore all risks and are incapable of change.

    Let me ask you though what you view of the economy and your bank is if you see big loans being given to Johnny no income no job. If everyone has access to easy credit and bailout money from the government how do you know which companies and individuals are really solvent. What you get is a version of the Japanese experience where things go nowhere because nobody really can tell what is viable and what is not. Lets remember that actually Japanese society and economy started from a much better position than the UK before they went down this route and all it did was postpone the inevitable till now.

    Your government has taken the choice for you and has decided to coddle and nanny us. Rather than a quick very deep recession where lots of companies fail to be quickly replaced, we get a lingering recession where zombie companies survive on drip feeds from the tax payer. This rather like everything else the government does where everything has a safety net and is protected but we remove all accountability and expectation at the same time. Whether it is bankers who keep their jobs or youths who were never expected to pass exams or get a job, a silent part of the electorate up to now will have their say eventually. Whether it is the hard working tax payer of foreign investor somebody is going to demand rather more for there money than they get now.

    I still think it is a moot consideration for the UK because the government will at some point will find no takers for its debt and currency depreciation will force a change of attitude. In retrospect this might be looked on as fortunate when the US’s plight is fully understood in the future (hyper inflation eventaully). 1 in 10 mortgages are behind in the US and 1 in 5 people are behind with either there utility bills or car payments which shows how much worse it is over there. Rebalancing our economy for the future should be our objective and the reality is that we are not in a bad position to achieve that providing the government does not interfere with the likes of quantitative easing.

  • Comment number 97.

    Wow....this is crazy.

    It really is time to step back and to do some thinking....the whole notion of "we have to do something" is in my miniscule opinion WRONG HEADED.

    The world is in trouble...but IT IS NOT IN MORTAL DANGER....we are NOT looking at the 1943/44 siege of Stalingrad or anything remotely approaching that.

    The UK is a resourceful country and will get through this.....people must help out where they can...that might mean the "haves" needing to help the "no-longer-haves" It might also mean reducing the country's support of the unproductive part of our adult population.

    At the end of this grim episode however we are still going to need money.....not confetti, but money.

    PLEASE CENTRAL BANKERS IF YOU ARE LISTENING, STOP THE CONFETTI-FICATION OF MONEY

  • Comment number 98.

    #68
    Good point but it's 'flagellants'. . Main point about the great Plague was its recurrence 1348, 1361 > 1665 + etc etc., until it burnt itself out / rational scientific investigation then isolated the cause.
    Still - most of this is all about misuse of world resources not rats and fleas

  • Comment number 99.

    Come on.
    I cant be the only one that has more than one property on a tracker who is laughing all the way to the bank each month.
    Rental margins are fantastic now if you have your mortgage(s) on an interest only tracker.

    I'm not the only one I know. Its just not the done thing to admit to being in a position where your debt is nicely under control and also not be losing out by being a saver.

    There is a comfortable position in the middle ground (The third way). And to those who will come back saying "you're making a loss as the property values are dropping" I say to you "you're thinking too short term as did most buy to letters".

  • Comment number 100.

    My impression of the city is it is based on the suit you wear and how your hair is groomed. There is too much emphasis on designer gear.

 

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