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Deflation could give UK Japan-style ‘lost decade’
Bank of England economist says it’s deflation – not inflation – that is the big worry
Recent worries about inflation are overblown, according to a member of the Bank of England’s Monetary Policy Committee, who says we should be more worried about deflation and the possibility that the UK is at risk of producing a ‘remake’ of Japan’s so-called ‘lost decade’.
Adam Posen, an American economist and expert on the Japanese economy, said: "The UK worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had."
In late 1980s Japan, low interest rates and high land values led to massive borrowing, much of the proceeds of which were invested in the shares. When the Ministry of Finance suddenly raised interest rates to bring the situation under control, the stock market crashed and there were mass debt defaults. For the whole of the 1990s, interest rates were reduced to nearly 0 per cent.
Unfortunately this made no difference because deflation meant that, in reality, interest rates were much higher.
The parallels with the UK today – with its high property prices and low interest rates - are worrying.
But Posen fears Britain cannot export its way out of the recession, as Japan did in the 1990s. Not only is the UK’s manufacturing sector significantly smaller, but Japan was able to sell its goods to booming foreign markets – a luxury we do not have today. Particularly worrying for the UK is the weak growth and sovereign debt crisis infecting the eurozone, its biggest trading partner.
The euro fell a cent yesterday against the pound to €1.167, which will not help British exporters. Posen’s own assessment of the outlook for the eurozone is not good: "Let us just say that the prospects for strong growth in most of the euro area are rather dim for the next several years," he said.
One obvious difference between the UK today and 1990s Japan is our current high rate of inflation, which in April hit 3.7 per cent – almost twice the target figure of 2 per cent. This, the ongoing euro crisis and a stock market fall in China has led some economists to fear we could be heading into another period of recession.
Posen acknowledges inflation is high, but sees it as a temporary problem: "We may not have [set interest rates] perfectly right - we are overshooting our target a bit - but I'd rather temporarily be missing the target by 1 per cent on the upside than be facing deflation.
"More active investors and greater openness in the UK than in Japan may be able to turn this around." ·
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That such a moron is an MPC member should worry us greatly. As if our situation is remotely comparable to the Japanese, who's economy, like he says, was export based, and whos people were savers rather than borrowers. Its obvious to anyone above moron level that we face stagflation rather than inflation. The Bank of England has been way off base in its predictions of inflation for over a year now, yet it still keeps yelling from the same discredited hymn sheet and absurdly the media takes them seriously. Worse, the new government appears to do so also. Osborne's reply to the Governor's letter shows a new Chancellor as caught up in the Bank's fantasty economics of reality denial as the MPC.
God help us with dolts like these running the economy (further into the ground).
For some years we have overspent our national income. We have lived beyond our productive means. So now we must be worse off than we have been; that means reduced incomes in real terms, either higher prices or lower money incomes. The former distributes the burden of adjustment more evenly and needn't create unemployment and so is to be preferred. If the unions could behave sensibly and accept wage rises below inflation it might be a fairly painless adjustment. I may be overly optimistic to hope for sensible behaviour from the unions.
So they Bank of England are complacent about inflation - rising prices that erode the real value of the pound in your pocket - and are worried about the deflation that decreases prices and increases the real value of the pound in your pocket? Why? Because inflation is caused by the Government - who instruct the not-independent Bank Of England to do what they are told, it is after all the Bank of England - to print money (aka quantitative easing) in excess of the demand for money in the economy. They then spend this free money on things they want but have not had to work for like the workers of the country - after all, all they have to do is print the money. This dilution of the value of the pound in your pocket is inflation, the rising prices are the symptom, not the inflation itself. So the government is really worried about not having inflation as a form of taxation at its command. Deflation is a loss of stealth taxation revenue to the government, that is why the bought-and-paid-for Bank of England are 'worried' about it.