The case for deflation

[BillyStubbsTears]

BFYP

1) I'm not sure what you mean by the surplus argument. We hadn't built a surplus in 1950, but Keynesian policies still worked. In 2007, we had a Govt debt level that was extremely low by historical levels. (In fact, it still is today). There is an honest political argument to be had over whether it should have been lower. I respect people with a different view on that topic, although my take is that period of slightly rising  Govt debt (and it DID only rise slightly from 97-07) was necessary to re-build our public infrastructure and services after two decades of them being starved.

That is irrelevant to the economics of the current situation. I'm happy to explain further when I have more time.

2) you say I am obsessed with Keynes. If that is so, it is because he uncovered great truths about how macro economics works. In my professional life, you might equally say that I am "obsessed" with Isaac Newton. I apply his theories every day, and would sack any employee who claimed that his ideas were 300 years old and the world has since moved on. The terrifying thing about economic policy over the last few years is that Keynes's theories have been wilfully ignored by many politicians. Not because they ate demonstrably incorrect. Because they are politically inconvenient.

3) You say there are no disasters going on. What a smug, ridiculously ignorant thing to say. Greece and Spain are being systematically destroyed by policies which insist that Keynesian approaches cannot be countenanced. Both countries have Great Depression levels of unemployment. You say that is not a disaster?

Meanwhile, the evidence is perfectly clear that America, which ran a stronger stimulus for longer than we did, is doing far, far better than we are. I've posted the evidence before - I can do it again if you have forgotten. This is a crucial and historical issue. We (Austerity-mad UK & Europe) have already fallen behind America by several percentage points in our growth. That will take many, many years to claw back. Effectively, we have chosen to have a worse economic outlook than America. We will pay the penalty in a poorer standard of living for a long, long time.

[mjdgreg]

Ah but the Western economies missed out one key part of Keynes studies - build a surplus when times are good, what happened to that?  You seem a little obsessed with one study, the guy was revolutionary for his time, we're in a different world now, there's not one approach in my view that takes into account all the current pressures economically because we're in a situation never seen before and that seems to be a crucial thing you've both missed.

Neither economies who have stimulated or cut have seen massive boosts or disasters this time round, as the world is no longer balanced in the favour of countries like ours.  Far more important than any of the theories is this key point, there is too much technology and globalisation to meet the demands of the workforce....

I don't believe I've missed it. Billy certainly has. You speak a lot of sense. All I'm doing in this thread is pointing out the huge deflationary effect an ageing population has on an economy.

Add in further advances in technology and globalisation and this will also add to deflationary pressures. There are other factors as well that make deflation an inevitability.

[mjdgreg]

You consider the IMF to be nutters until they say something that you agree with, then you think they are correct.

You consider inflation to be a horrific problem until YOU change your mind, without presenting the evidence to explain why you change your mind.

It's all and always about what YOU think mjdgreg.

Now YOU tell us that, in your opinion, the combination of a huge debt burden and the demographic trends means that deflation is hard-wired and we can't escape it. That's fine. As an opinion.

But what we do in grown-up land is to see how our ideas and opinions fare when they are tested against the facts. I realise that every nerve in your egotistical body is now screaming "NO!!!!", but that's what the rest of the world does mjdgreg.

All I've said about the IMF is that I agree with C. Lagarde that It would have been a disaster if Labour had got in. So no great surprise there. They may get most other things wrong but they got that one right. You're the one that slags them off an then eulogises over a report when it suits your point of view.

'High' inflation is an horrific problem so is deflation. Ideally we need low inflation.

What do you think my first post in this thread is? it's a reasoned argument as to why deflation is on the way. It is not just my opinion. It is backed up with a lot of facts. As you know I only deal in facts.

[BillyStubbsTears]

Mick

Opinion again. You agree with Lagarde on that one point because it suits your opinion. You do not provide EVIDENCE for why they are correct on that one and wrong on other things. Is it so difficult to understand the difference between evidence-based analysis and personal opinion.

That is why I've been pushing you for the evidence on demographic-driven deflation. The evidence that you have found since July that led you to entirely change your opinion. If you don't provide that evidence, all you are saying is that you changed your mind. The rest of us are unable to assess whether your personal conversion is something that we should all take note of, or just a whim.

Evidence Mick. It is vital. That is why I provided historical evidence of a case when we got out of a combination of high debt and difficult demographics. something which you claim cannot be done.

When I've got a few minutes, I'll give you further evidence about why Keynes's analysis shows us why further Govt spending is the way out of the current deflation threat.

EVIDENCE Mick. It's what you need to draw robust conclusions. Opinions are like arseholes. We've all got one and most of them are full of shit. That's why I ignore opinions that don't offer detailed supporting evidence.

[wilts rover]

And so oh great one, if you only deal in facts when will this fact of a deflation be happening? Before Christmas? Next year? In the next Olympic cycle? By 2020? By the time I retire? Never? Just to enlighten you, facts are things which have happened. Projections are things which have yet to happen. Made up rubbish is what you are talking.

[mjdgreg]

And so oh great one, if you only deal in facts when will this fact of a deflation be happening? Before Christmas? Next year? In the next Olympic cycle? By 2020? By the time I retire? Never? Just to enlighten you, facts are things which have happened. Projections are things which have yet to happen. Made up rubbish is what you are talking.

The deflationary process has already started. What do you think is happening to house prices at the moment? What effect do you think this will have on people with large mortgages? What is happening to wages? Are they going up in line with inflation or below inflation? Is the population ageing or not? Are people's savings going up by more than inflation or by less? Are consumers more inclined to spend or reduce their debts? I could go on, but by now I'm sure you're getting my drift.

Deflation doesn't just happen overnight. It's a gradual process and the evidence is all around you if only you would care to look for it. Making an accurate prediction as to when the CPI will turn negative is not easy. We are in uncharted territory. However I will stick my neck on the block and predict the CPI will have turned negative by July 17th 2014.

 

[wilts rover]

No we are not in uncharted territory - BST and I have given you the example of the policy of the Labour government in the late 1940's, when the welfare state and proper pension arrangements for old people, were first created - which did not lead to deflation - but an economic boom.

And where do you get you figures from? House prices are going up.

A buoyant London property market helped cushion the blow (of the month-by-month fall in November following the big rise in October) in what is traditionally a quiet time of year for buying activity. Despite the monthly fall, the average property price across England and Wales is 2pc higher year-on-year at £236,761 – the largest annual rise since 2007.
http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/9687490/House-prices-drop-2.6pc-in-November.html

as is demand...
http://www.telegraph.co.uk/finance/economics/9673215/Housebuyer-demand-hits-three-year-high.html

and mortgage lending...
http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/9671899/Mortgage-lending-ticks-up-in-third-quarter.html

With regard to wages it does of course vary as to which sector/industry/business you work in, financial services for instance is very different to the public sector, but as your Tory chums have a policy of pushing down wages for as many ordinary people as possible - thats what they are doing. I am sure you however, like any good boss, would give all your Polish employees inflation linked rises.

[mjdgreg]

And where do you get you figures from? House prices are going up.

That's the biggest laugh I've had for ages. Just shows how little you know. Let's just conveniently ignore inflation. Let's also ignore the distortion to the average price by the London property bubble. Unbelievable.

The average price may have gone up by 2% but because inflation has been higher they have gone down in real terms. Interest rates being held lower than they should be is also distorting the market. The long-term trend in declining house prices is fact.

[Glyn_Wigley]

Let's just conveniently ignore inflation.

Why not? You have. According to you we can have deflation and inflation at the same time. Unbelievable.

[BillyStubbsTears]

Mick

If we are facing deflation, why should interest rates naturally be high?

Have you re-invented monetary theory? If so, I really do hope you haven't lost the piece if paper containing your thoughts down the back if the sofa, along with that astonishing evidence.

Let's have a little think. The rate of interest is essentially the price of money. It is how much you need to pay to borrow money. Now, in a buoyant, growing economy, lots of people want to borrow money. Maybe families wanting to buy a house. Maybe companies wanting to buy new plant or premises to enable them to capitalise on the growing market. So the interest rate should go up.

Of course, the BoE controls interest rates. If they don't raise rates in such a scenario, what happens? Too many people borrow money and there is consequently too much competition for goods (those houses or business equipments have too many people chasing them, with easily borrowed money in their pockets, so the price goes up).

Conversely, when the economy hits the rocks, no-one wants to borrow. People want to tighten their belts. The monetary response is to reduce interest rates -make it easier to borrow, encourage people and companies to take a punt.

When we are facing deflation, (and you, yourself say that we are on every score Mick, including on house prices) it is the economics of the madhouse to increase interest rates. That would drive deflation into a death spiral. Somehow it doesn't surprise me that you of all people are advocating that approach Mick.

Now. Why is Keynes so important?

He realised back in 1933 that there is a natural limit to what you can do with interest rates. If you reduce rates effectively to zero and people STILL don't want to borrow, you are screwed. There's nothing more you can do to use interest rates to boost the economy. It's called the Zero Lower Bound (go Google it).

Once you hit the ZLB, you are in a circle of hell. Central Banks have then lost control of economic policy. They have the bug stick of interest rates, but they are simply not working. So they go to Plan B. if they can't lower rates any further, they can make interest rates effectively negative by increasing inflation. (Because if inflation is 2% but interest rates only 1%, the EEFECTIVE interest rate is negative.) in such a scenario, they can try to persuade people that they are better off spending than saving, and hence kick start the economy. QE is intended to raise inflationary expectations to do just that. It's worked slightly, but has been nowhere near enough to convince people and companies to spend.

Why? Because people and companies are too scared of the future. So they prefer to hang onto their cash, even if they are getting negative interest.

Keynes knew all about this in the 1930s. His beautiful theory says this. In such a scenario, when no-one is spending (even though it would be in their best interests to spend) because they have no confidence in the future, it is essential that Govts step in and spend. Spend on beneficial things like roads, airports, railways, schools, fibre optic links. Spend. Get money circulating. Get people working and spending on private industry goods. And give private industry confidence that they will have growing markets.

THEN Govts can tighten their belts and pay down their debts when the private sector is chugging along nicely.

The Right says:You can't do this. No-one will lend to Govts. But that is demonstrably untrue. 10 year (TEN YEAR!!) Govt bonds are at their lowest rates in history. Effectively, the world money markets are chucking money at our Govt -long term money- and saying: Have it. We want you to borrow. We trust you regardless of you already having a huge debt.

The Right says: Ah yeah, but what if they change their minds and put bond rates up?
Well that goes against experience, where the bond rates of monetarily independent countries have crashed just as their debts were exploding. And that is because bond rates of sovereign countries have NOTHING to do with debt levels[1]. They are a reflection of long term inflation expectations. So, within limits, our Govt can borrow what it likes without fear of bond rates exploding. It is criminally smug not to do so - to accept the alternative if long term stagnation/deflation. Yet that us what we are doing. Keynes would be screaming from the rooftops were he alive today.


The Right also says that the extra interest payments would cripple us. But a senior UK economist pointed out earlier this year that we could borrow £30bn and the interest would be less than that planned to be raised by the Pasty Tax. That £30bn could put a lot of people back into productive work.

PS. BFYP accused me if being obsessed with Keynes. I said it was because Keynes had great insights that we have ignorantly forgotten.

Here's an analogy. 100 years ago, great engineers harnessed Newton's laws of mechanics to produce heavier than air aircraft. Imagine if today, we have a spate of air crashes, because modern engineers got the weight-to-lift calculations wrong and made inefficient wings. Then, to solve the problem, 21st Century engineers say "Well we'll ignore Newton's Laws because they were developed years ago and planes are much more complex than they used to be. So the solution must be somewhere else. Or maybe there ISN'T a solution, and planes just shouldn't fly."

That sounds stupid, but it is EXACTLY what economists and politicians have done in wilfully ignoring Keynes's analysis of how to get out if a Depression.

Future historians will excoriate the current leaders. They are failing us on an epic scale.

[1] that is because there is no danger whatsoever of us not being able to pay our debts back.  In the worst case, because we run our own Mint, we could just print more pounds to pay back our debt. The markets know this. Hence they give us low bond rates even when our debt has exploded. EXACTLY as Keynesian theory says.

The reason why the bond rates for Ireland, Greece, Spain etc went through the roof is because they DON'T control their monetary policy. If Germany decides to stop supporting them, they CANNOT pay back their debts. So creditors want a premium for the risk of lending to them.

The biggest ignorant f*** up of this whole Depression was Clegg flipping his economic policy to support Austerity, because he was spooked by Greek bond rates. Utter, imbecilic ignorance. The man wants buggering by the three-headed hound of hell for all eternity.

[mjdgreg]

Why not? You have. According to you we can have deflation and inflation at the same time. Unbelievable.

You really need to read my posts a lot more closely. We currently have inflation now. I have predicted deflation by 17th July 2014. Now and 17th July 2014 are not the same time.

[Glyn_Wigley]

Why not? You have. According to you we can have deflation and inflation at the same time. Unbelievable.

You really need to read my posts a lot more closely. We currently have inflation now. I have predicted deflation by 17th July 2014. Now and 17th July 2014 are not the same time.

I did read your posts closely.

The deflationary process has already started.

[mjdgreg]

Yes and I get quite well paid for it thank you very much.

We're all very happy for you. Just bear in mind that when you retire, that generous public sector pension is not going to turn out as you imagined. Due to the mess Labour have made of things it will be cut and cut as years go by because we can no longer afford such generous provision. Don't say I didn't warn you.

[mjdgreg]

Deflation occurs when the rate of inflation is zero or below. Therefore deflation is not yet with us. What is so hard for you to understand about that? I'm glad you're not teaching my children.

[Glyn_Wigley]

Deflation occurs when the rate of inflation is zero or below. Therefore deflation is not yet with us. What is so hard for you to understand about that? I'm glad you're not teaching my children.

I understand it perfectly well thank you, which is why it's hilarious reading your drivel.

[mjdgreg]

I understand it perfectly well thank you, which is why it's hilarious reading your drivel.

I'm afraid you don't. You're the one that everyone is laughing at. I'd leave things to Billy if I were you. He's much more of a challenge.

[wilts rover]

And where do you get you figures from? House prices are going up.

That's the biggest laugh I've had for ages. Just shows how little you know. Let's just conveniently ignore inflation. Let's also ignore the distortion to the average price by the London property bubble. Unbelievable.

The average price may have gone up by 2% but because inflation has been higher they have gone down in real terms. Interest rates being held lower than they should be is also distorting the market. The long-term trend in declining house prices is fact.

Do you realise that with everything you say you just make yourself look even more ignorant? You see them blue linkey things in my post - if you click on the first one:

Even when London's price increases are not taken into account, prices still rose 0.2pc year-on-year, according to property website Rightmove

Are your long term trens between now and July 2014? Or between now and this time last year? Between now and when the property market crashed because prices are highly overinflated? I bought my house in 2002 - its worth over double what I paid for it - that will do me for a long term trend.

[wilts rover]

Yes and I get quite well paid for it thank you very much.

We're all very happy for you. Just bear in mind that when you retire, that generous public sector pension is not going to turn out as you imagined. Due to the mess Labour have made of things it will be cut and cut as years go by because we can no longer afford such generous provision. Don't say I didn't warn you.

No problem - the profit I shall make from selling my house willsuit me quite nicely thank you very much - although as I can now work for as long as I wish and not be forced into compulsory retirement I intend to ease your pension burden for a while longer thank you.

[Glyn_Wigley]

I understand it perfectly well thank you, which is why it's hilarious reading your drivel.

I'm afraid you don't. You're the one that everyone is laughing at. I'd leave things to Billy if I were you. He's much more of a challenge.

I've got to hand it to you, you never let your comedy quotient flag.

[The L J Monk]

These falling house prices could spell trouble for your property development hobby Mick.

[mjdgreg]

If we are facing deflation, why should interest rates naturally be high?

Interest rates being kept artificially low is part of what is causing the problem. Low interest rates and QE have delayed the process of inefficient businesses going bust. These companies are now able to grimly cling onto existence and they are neither solvent or bust.

10% of companies are only paying the interest on their debt. Because they can't repay any of the actual loan, they continue to consume resources inefficiently and drag down the economy. This situation is increasing as the number of these types of company have grown by 10% in the last few months. These companies need to be put out of their misery, sooner rather than later. They wouldn't have got into this state if interest rates had not been lowered so recklessly. They'd have gone bust as they should have done.

The best laugh is that the BoE also thinks these companies are part of the reason why the economy is so weak. They caused the problem!

This problem also extends to mortgage borrowers. By allowing many of them to only pay the interest on their loans they could well be leaving them in a worse position in the future. They may never be able to repay the loan. It would be far better to repossess now and let them start anew. This is what will eventually happen anyway as soon as bank balance sheets have improved enough. Lenders will be getting one hell of a surprise once QE has sorted the banks balance sheets. It’s only a matter of time.

Adopting a low interest rate/QE policy has left us in a terrible position. We now rely on low interest rates/QE to get by. Unfortunately this so-called cure is actually slowly killing the patient.

[mjdgreg]

These falling house prices could spell trouble for your property development business

It could if I weren't a strategic thinker. I have factored falling house prices into my business strategy. At the moment the rent I receive is still generating me a profit even allowing for the depreciation in my assets, some of which I bought at the bottom of the market years ago.

Also I am not a greedy man. As things stand I don't ever need to lift a finger ever again, even if my assets lost all their value. I'm more interested in keeping a roof over the head of my Polish workers to try and do my bit to combat the deflation problem.

[mjdgreg]

I've got to hand it to you, you never let your comedy quotient flag.

I couldn't do it without you. Thank you for being such an understanding stooge.

[Glyn_Wigley]

I've got to hand it to you, you never let your comedy quotient flag.

I couldn't do it without you. Thank you for being such an understanding stooge.

You're too modest, you're hilarious in your own right.

[mjdgreg]

Even when London's price increases are not taken into account, prices still rose 0.2pc year-on-year, according to property website Rightmove

What is it that you don't understand about inflation? If prices rose by 0.2% year-on-year then house prices have actually fallen in real terms. The link further goes on to say:

Prices fell on a month-on-month basis across all regions in England and Wales, except London where prices rose 1.2pc. The capital is benefiting from strong overseas buyer interest, with the most expensive boroughs seeing the largest price rises.
The North West saw the steepest decline, down 5.7pc to £156,431, followed by the South East with a 4.5pc fall to £297,564. Asking prices fell 4.2pc across the North to £142,200, by 3.8pc in the South West to £254,021 and 3.7pc in the West Midlands to £183,010.
The East Midlands and Wales both saw prices drop by 3.1pc – to £157,249 and £162,912 respectively – while prices declined by 2.8pc across Yorkshire and Humberside to £149,226. The smallest decline was recorded in East Anglia, down 2pc to £225,533.

Your own link proves house prices are falling. This is even without taking inflation into account. Got it? Stop digging the hole now and maybe people will stop laughing at you.

[mjdgreg]

No problem - the profit I shall make from selling my house will suit me quite nicely thank you very much - although as I can now work for as long as I wish and not be forced into compulsory retirement I intend to ease your pension burden for a while longer thank you.

I'd sell it now if you want to maximise your profit. The longer you leave it, the less you are going to make. Me, I prefer to live in a big house so I won't be down-sizing. My house is a home not a cash-cow.

I'm pleased you've decided to carry on working. I bet all those unemployed graduates will also be very happy for you.

[mjdgreg]

 

I bought my house in 2002 - its worth over double what I paid for it - that will do me for a long term trend.

Give it time and the effects of inflation/deflation and I reckon it will eventually be worth less in real terms. I won't tell you what my property portfolio is worth as modesty prevents me, and I don't want to piss on your parade.

[BillyStubbsTears]

Your own link proves house prices are falling. This is even without taking inflation into account.

In which case, and taking into account the fragility of the wider economy, only a madman would suggest raising interest rates...

[wilts rover]

Even when London's price increases are not taken into account, prices still rose 0.2pc year-on-year, according to property website Rightmove

What is it that you don't understand about inflation? If prices rose by 0.2% year-on-year then house prices have actually fallen in real terms. The link further goes on to say:

Prices fell on a month-on-month basis across all regions in England and Wales, except London where prices rose 1.2pc. The capital is benefiting from strong overseas buyer interest, with the most expensive boroughs seeing the largest price rises.
The North West saw the steepest decline, down 5.7pc to £156,431, followed by the South East with a 4.5pc fall to £297,564. Asking prices fell 4.2pc across the North to £142,200, by 3.8pc in the South West to £254,021 and 3.7pc in the West Midlands to £183,010.
The East Midlands and Wales both saw prices drop by 3.1pc – to £157,249 and £162,912 respectively – while prices declined by 2.8pc across Yorkshire and Humberside to £149,226. The smallest decline was recorded in East Anglia, down 2pc to £225,533.

Your own link proves house prices are falling. This is even without taking inflation into account. Got it? Stop digging the hole now and maybe people will stop laughing at you.

Despite it saying the opposite - if you dont believe the Daily Telegraph who do you believe!

My house is my home too, hence me not wishing to 'cash in' on it until I retire. When I have the fullest intention of moving. I dont believe in people using property purely to make money, it overinflates the economy to an unsustainable level, forces young people out of the home market - and was the primary cause of the economic diaster we are in now, but I am sure your Polish tenants are happy you are scamming them.

Yes the unemployed graduates are doing fine round here. I have had several working for me and managed to build up their skills for them to move into paid positions. In fact we have been quite lucky in that we have been so successful in growing in the past couple of years we created a new post for one of them - and will be creating another in March.

[mjdgreg]

In which case, and taking into account the fragility of the wider economy, only a madman would suggest raising interest rates...

No, I am perfectly sane. I bet your mate is glad you've backed him up. Read my previous post. We need to raise interest rates to kill off all those half-dead companies and put overstretched home-owners out of their misery now and not in the future. Also it's not fair that savers should carry on getting piss poor rates just to bail out others that think no further than tomorrow and borrow and spend every penny they can.