Are Britain and America turning Japanese?

Woman holding her head in front of screens with market prices Stocks around the world have fallen on continued fears about a global economic slowdown

The most worrying trend on markets in the past 24 hours has not been the collapse in share prices, but it has been the rise in the price of assets perceived by investors to be less risky: the sharp increase in the price of gold and in the prices of US, UK and German government bonds.

That's wonderful news if you happen to be stuffed to the gunnels with gold, gilts (UK government bonds) and treasuries (US government debt).

But for most of us, this isn't good news. When investors won't take risks, it is very hard for the economy to grow.

Here's the transmission mechanism between risk-aversion and recession.

As bond prices rise, the implicit cost of borrowing falls for the borrower that issues the bond.

So for the US government, according to Bank of England data, the price of borrowing for ten years is now at its lowest level for two centuries - and for the British government, the implicit interest rate it has to pay to borrow is lower than it has been since the end of the Victorian era.

Given how much debt is bearing down on the British and American governments, and the intractable nature of the country's respective deficits (the gap between what they spend and the revenue they take in from taxes), you would think the reduction in their costs to borrow would be a good thing.

And in one narrow sense, of course, it is.

Far better to be like the US and UK, trusted by investors and creditors, than to be like Italy and Spain, where government borrowing costs soared to levels that were almost unaffordable - and have only been staunched by the huge purchases of Spanish and Italian debt made in the past ten business days by the European Central Bank.

Just to remind you, the European Central Bank has itself said that there is a limit to how much it is prepared to in effect lend to Spain and Italy - that its exceptional purchases of their respective debts is not a permanent solution.

So although in that respect it is good to be Britain and America, the torrent of money going into putatively safe US and British government debt is redolent of a worrying trend - whose consequences for all of us could be seriously bad.

Japanese disease

As I have mentioned, it shows that the world's biggest investors and creditors do not want to take risks.

So when money is flooding into US Treasury bonds and British gilts, it means one of two things: either money tends to become harder to obtain by those in the private sector who take the risks which generate economic growth and wealth; or the climate of pervasive anxiety means that even when money is available to consumers and businesses, they don't want to spend or invest it.

Both trends are consistent with what has become known as the Japanese disease - the two-decade phenomenon in Japan of incredibly low growth caused initially by a mountain of debt bearing down on banks and property companies, and then by an entrenched and unbreakable propensity to hoard by all important economic players.

The UK and US haven't become Japanese yet - although, as you know, the recovery in most of the developed West since the Great Recession of 2008-9 has been far shallower and weaker than recoveries from other post-war recessions.

Market Data

Last Updated at 18:46 ET

Market index Current value Trend Variation % variation
Dow Jones 17804.80 Up 26.65 0.15%
Nasdaq 4765.38 Up 16.98 0.36%
S&P 500 2070.65 Up 9.42 0.46%
FTSE 100 6545.27 Up 79.27 1.23%
Dax 9786.96 Down -24.10 -0.25%
BBC Global 30 7737.66 Up 29.21 0.38%

Which is why the question of what to do to stimulate growth is such an important one.

Right now, the painful corollary of the alacrity with which creditors want to lend the US, UK and Germany is that they don't want to lend to the big banks of Southern Europe - where, as the US investment bank Morgan Stanley has pointed out, all the conditions are in place for a painful credit crunch.

Because international banks are so interconnected, big banks throughout the developed West would find it harder to borrower if a severe funding crisis ultimately afflicted the banks of Spain and Italy.

As you'll have heard me say for years in the manner of a robot whose speech programme has been corrupted and can say only one thing, when banks can't borrow, they can't lend.

You will have spotted the paradox in all of this. Because when the private sector won't spend and invest, surely the thing to do is for the public sector to spend and invest.

Doesn't that mean that the governments of the UK and US should take advantage of the fact that investors want to lend to them so cheaply, and should therefore borrow colossal amounts of new money to finance tax cuts or spending on new roads, railways, hospitals and schools?

That would be the traditional so-called Keynesian remedy: the public sector would be generating jobs and economic activity, to compensate for the failure of the private sector to do so.

Many, including the Chancellor, George Osborne, would say that the traditional Keynesian remedy is not available.

They and he would argue that the only reason the UK can borrow so cheaply is because of the steep cuts in public spending and sharp increases in taxes, designed to close the gap between what the UK government spends and what tax revenues bring in.

Low growth forecast

Mr Osborne would say that if investors became concerned that his commitment was wavering in his battle to cut a deficit equivalent to 10% of GDP since the Great Recession - and perceived by investors to be unsustainably huge - then Britain would be herded into the club of countries whose borrowing costs approach dangerous levels.

"Do you really want to be like Italy and Spain?" he would say. "Because if that's what you want..."

So does that mean that he is powerless to do more to significantly improve the growth prospects of the UK in the next year or two?

Bar of gold The price of gold has hit a new record high of $1,833.81 an ounce

Are investors condemning the UK and US to years of Japanese low growth?

Well, first of all we have to be careful not to paint the US and UK as being in worse economic shape than they actually are.

Investors may be behaving as though a return to recession is almost a sure thing. What the data shows right now is a slowdown in growth, not a contraction of the economy.

But what if the worst happens? Is there nothing that the UK authorities can do?

Well there is an extreme remedy, which policy-makers have muttered about to me.

I should say at this point - because it is the sort of remedy which will upset lots of people - that I am not saying this will happen.

But you probably need to know what theoretical treatments are left in the armoury if the patient - the British economy - were to go on the critical list.

The Bank of England could engage in an extreme form of quantitative easing.

It could purchase a sizeable amount of British government debt and then announce that the debt was being cancelled, that it never needed to be repaid.

It would therefore be dropping cash into the economy, it would be pure helicopter money, to use the phrase beloved of economists.

And if those who received the money didn't want to spend it, if they hoarded it, the government could in those circumstances cut taxes or increase public spending to stimulate demand - because the consequential increase in the government's deficit would not be leading to any increase in the national debt (remember that in this hypothetical case, the Bank of England has told the government it never needs to repay a big chunk of what it owes).

Now you probably don't need to be told that creating money in this way would be fraught with risks. Confidence in the value of the currency and in the credit-worthiness of the British government might collapse.

It might in a micro-second take the UK from deflationary low growth into conditions of hyper-inflation and soaring interest rates.

So extreme QE may best be seen as the anxious musing of British officials, who fear that the UK economy is in a Doris Day phase ("que sera sera, whatever will be, will be") and that the best hope for the over-indebted West would be a pact with the financially stronger, surplus countries such as China and Germany that they'll stimulate their domestic consumption and buy more of what we produce (I wrote about this remedy recently).

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 375.


    "Inequality may now have grown to the point where it threatens the stability of the capitalist system."

    Completely agree. Nobody who is paid, say, £1m in SALARY and bonus is worth 40 times what average teacher is paid. Do they work 40 times as hard? Do they work 40 times as long? Do they add 40 times as much to GDP of the country - I mean as an individual and not as a collective?

    The rich at the top of the PAYE scale should be taxed accordingly - that is well in excess of 50% that Osborne is trying to abolish. Will they leave the country in such circumstances? I doubt it - but our spineless politicians are too scared to call their bluff or perhaps they have vested interests in the status quo.

    Our politicians confuse entrepreneurs with "salarymen". Whilst I have nothing against the former (like Dyson) earning millions and keeping them I don't really think any EMPLOYEE (like Bob Diamond) should be paid more than 20 times average wage.

  • rate this

    Comment number 374.

    The rise in the price of gold.
    Essentially, (except when the overall financial system has been so tampered with by idiotic "geniuses") gold largely maintains it's eternal value.
    It appears to rise in value during crises because the confidence in the fiat system is shaky, or your money cannot be invested advantageously elsewhere.
    Your monetary assets are depreciating, all those electronic zeroes and ones may turn out to be not very representative of anything useful at the particular instant in time that you require cash.
    The flight controllers are too busy looking after their own affairs for there to be any safe touchdowns.

  • rate this

    Comment number 373.

    363.All for All

    Wow, that was rather heavy. Big words, lots of innuendo, plenty of... well, exactly, what? Do you do that for living, by any chance? Way too complicated for me and, I respectfully suspect, quite a chunk of readership on this blog...

    So forgive me if I miss a point or two in your musings. I am reading them and I really struggle with what you are trying to add here. Pardon my ignorance.

    So, good leadership? Care expanding how do you propose we select good leadership? No nice neat theories please. How do you select good leader in PRACTICE? Is that the one who is shouting the loudest? Or perhaps the quietest one? Or do you set up multiple answers test? Perhaps a photo competition is appropriate? Maybe we all write an essay and somebody (who?) decides on the best outcome. How about a joust – some kind of knockout competition? OK, we vote – on what criteria? Based on experience? - who is going to be a leader in the meantime? See my point yet?

    Comparing beautiful theory with evident rule of Fear and Greed? By all means, please compare. But key is – what conclusions you come to? Is equality for all achievable? Can you definitely tell we will all work for the common good EQUALLY hard? For with rights come responsibilities – surely that fits your theory? If it doesn’t then it should. So, somebody who has never done an honest day’s work in their life is going suddenly feel “part of the society” and start working their socks off? Or the investment bankers realising errors of their ways decide to give up and re-distribute their ill-gotten wealth?

    Please. I stopped believing in fairies many years ago although it would appear on this blog there are plenty still stuck in their childhood dreams. The nirvana does not exist, has not and never will. We can all IMPROVE on our lot collectively and the current technologies available offer us great means of achieving that, perhaps uniquely in the history of the mankind. And rather than providing lots of empty philosophical phrases and false dreams lets come up with practical solutions - these are rather rare on this blog (Averagejoe and JfH’s ideas amongst the few notable exemptions)...

  • rate this

    Comment number 372.

    i'm gonna be bit radical and say none of them (rioters) had/have any faith wit cam'rom

  • rate this

    Comment number 371.

    bryhers @353

    Would you concede that OECD linkage of 'quality of life and social mobility' to compression rather than elimination of inequality, has much to do with the absence in our world of any trial ever of 'utopian socialism', other than in doomed tiny groups long ago?

    You persist in ignoring the significance of non-representative and in fact formally corrupt decision-making from top-to-bottom in an unequal society. Not only have we / are we / will we see wars and horror under the rule of Fear and Greed, we will also see 'leadership' by blind Mammon of humanity over the cliff.

    I long ago realised that there were those with 'epidemiological responsibility' long past remembering even the simplest of statistical principles. Can it be that there are economists unable to grasp the summation of an infinity of corruptions, some small and innocent, many significant and resigned, not a few quite deliberate?

    You surely must know the WEIGHT of FACT here: from disaffection at school and the workbench, through the ideological machinations of a press-politics axis, to the twisting of facts in 'the work' of sofa government, the casualties from Ruth Lea to hundreds of British dead and thousands of civilian 'deaths for democracy'.

    Why the use of 'flat earth', to characterise the relationship of equality, the foundation of personal and business commitments worldwide?

    If we are to wait for OECD evidence of observed benefit in advance of understanding and agreement and trial of democracy, we will have to wait a very long time!

    Of egalitarian democracy, do you mean 'impractical' or just unwelcome (to some)?

    Have you credible evidence for either view?

    If democracy is unwelcome just to an uncomprehending and fearful elite, should 'we' allow the mouthpieces of Mammon unopposed free rein in public debate?


Comments 5 of 375



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