Who will lend us a few billions to tide us over this week?

Today’s borrowing figures are horrendous. July is usually a month when strong revenues exceed monthly spending. Instead the UK government borrowed another £8 billion in the month. In the April-July period last year the government borrowed an extra £16 billion. This year they have borrowed an extra £50 billion. It means we are on course to exceed the eye wateringly large sums they forecast for this year’s total borrowing.

Spending is up a massive £19 billion on last year in the first four months, and revenue is down a predictable £21 billlion thanks to the VAT cuts and the fall in activity. No wonder the Governor thinks we ought to print some more money – who is going to lend us all this? Interest rate increases to get people to buy more governent debt will be the inevitable result of this failure to hit very relaxed targets for spending and borrowing. This will be the mother and father of all crowding outs, as the cash has to go to the public sector to meet these huge bills. The private sector will continue to be squeezed.

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49 Comments

  1. Peter Mc
    Posted August 20, 2009 at 9:34 am | Permalink

    And why isn’t Parliament being recalled so that Alastair Darling can explain why the figures are so bad and just what he’s doing to fix it?

  2. Jonathan
    Posted August 20, 2009 at 9:56 am | Permalink

    John,

    Do the Public Sector Borrowing figures include the effect of QE or is that in addition to what the State borrows? i.e. if QE was not being carried out would we be having to borrow an extra 150bn or whatever the total QE is up to now.

    Thanks

    Reply: The borrowing excludes QE. That is buying government bonds which one day the Bank will have to sell back to the private sector.

  3. oldrightie
    Posted August 20, 2009 at 10:21 am | Permalink

    It’s only money, John. The grandkids can pay, surely, or their grandchildren or………….

  4. gyges
    Posted August 20, 2009 at 10:41 am | Permalink

    It’s obvious that UK plc is goind to default.

    • APL
      Posted August 21, 2009 at 8:28 am | Permalink

      Will that include the debt owed to the private pensions of United Kingdom citizens?

  5. gyges
    Posted August 20, 2009 at 10:42 am | Permalink

    that should read “going”

    as in “going to default”

  6. alan jutson
    Posted August 20, 2009 at 11:26 am | Permalink

    John why are you surprised.

    Wait until you get a chance to examine the unpublished (real) version of the accounts next year.

    As always the situation is always worse than is being published when a company goes into bankruptcy, or ceases trading, and in effect that is what is the case here.

    The Conservatives if they get into Government next year, (God help us all if they do not) need to publish the accounts of UK PLC fully, after a real and proper investigation of the books.

    The general public need to be informed of what has happened again under a Labour Government.

    To quote my mother of 95 years who never had a well paid job in her life, but was never ever in debt.

    “You have to have the Country run by businessmen, not by idealists, otherwise you end up in trouble”

    • Freddy
      Posted August 20, 2009 at 2:46 pm | Permalink

      “Wait until you get a chance to examine the unpublished (real) version of the accounts next year.”

      What information is there which does not get published already ?

      • alan jutson
        Posted August 20, 2009 at 7:56 pm | Permalink

        I have absolutely no idea, but I fear not all of the figures are out.

        That is the problem when you continue to spin, tell lie’s, hide the truth, and make announcements on bad news days for 12 years

        “Weapons of mass destruction spring to mind” as an example.

        When could you ever believe that this Government is telling the whole truth with its past record.

        I can only hope that the next Government will be more honest, but it is only a hope, I do not have a lot of faith in any of them to be honest.

        But almost anything must be better than what we have at the moment !!!!

  7. Nick
    Posted August 20, 2009 at 11:44 am | Permalink

    John… why are we not making more of this. This is a crisis and it gets a 30 second flash on BBC news. Should we, as HM Opposition and the likely government in 10 months calling an urgent debate, a no confidence motion, a recall of parliament to give this issue an injection in the public mind.

    I think we need some Regan style speaches (in the run up to the 80 election he made some excellent speaches on the defecit and put it in to plain language such as “We can, as individuals, all borrow and live beyond our means for a certain period of time but after a period it catches up with us, why then do we think collectively this is not the case when we are all living beyond our means”)

    Where is the opposition??

    • April Ryan
      Posted August 20, 2009 at 3:18 pm | Permalink

      Where is the opposition??

      Nick that’s exactly the question I posted in the article “The way out of borrowing too much – borrow more”.

      Frankly if the Conservatives are not capable of rousting up enough information to expose this deliberate bancrupting of the country then I seriously question just how effective they will be in power when they are left to manage the devastation that Labour has caused.

      You are quite right we need an urgent debate, a no confidence motion and a recall of parliament right now before this madness continues.

      If we continue to fuel this insane level of borrowing through the ridiculous means of simply printing money there will be riots in the streets within 18 months when the reality of our position is finally exposed.

      I have every respect for John Redwood but it’s time for him to do more than just write about this catastrophe in his blog.

      reply: The Leader of the Opposition and the Shadow Chancellor have this week denounced the massive build up of debt. I regularly call for the government to recall parliament, but they have the majority so they can avoid doing it.

  8. Nick
    Posted August 20, 2009 at 12:03 pm | Permalink

    Just found this link – interesting that 6 years in Reagan was still driven to drive down costs…

    http://www.youtube.com/watch?v=3x8wF99ZGcc&feature=related

    • StevenL
      Posted August 21, 2009 at 12:37 am | Permalink

      He was talking out of his rear end then. Reagan, and moreso Bush 1 and Bush 2 are all responsible for running up these massive deficits. In fact they make Brown look prudent!

      Total US debt 30/09/1980 = $907,701,000,000.00
      Total US debt 30/09/1988 = $2,602,337,712,041.16
      Total US debt 30/09/1992 = $4,064,620,655,521.66
      Total US debt 30/09/2000 = $5,674,178,209,886.86
      Total US debt 30/09/2008 = $10,024,724,896,912.49

      Source: http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

      Obama seems intenet on carrying on where the Bush’s left off too.

      • Stuart Fairney
        Posted August 21, 2009 at 1:11 pm | Permalink

        Mr Obama will make even Mr Bush 2 seem frugal

  9. Mark M
    Posted August 20, 2009 at 12:35 pm | Permalink

    And yet David Cameron is STILL promising increases in NHS spending. We badly need to get people off the state payroll. For an example of just how bad things are, if we doubled income tax to 40%/80% even assuming no laffer curve effects we would be in deficit.

    We can’t afford to wait for a recovery, borrowing was forecast to be £172,000,000,000 next year on the back of a trampoline recovery. Spending has to be slashed. There is no other way. The only question is whether it will be us or the IMF that does it.

  10. Stuart Fairney
    Posted August 20, 2009 at 12:50 pm | Permalink

    Wow, £2 billion a week in the hole!! Depending on who calculates it (I used Wikipedia) this level of debt would bankrupt Richard Branson’s entire worth in just about five days!

    Perchance I might venture the opinion that we should make some spending cuts?

  11. Brian Tomkinson
    Posted August 20, 2009 at 1:07 pm | Permalink

    Another “good day for burying bad news”?

  12. Paleo
    Posted August 20, 2009 at 1:42 pm | Permalink

    John, why have you not condemned the Governor even more because he is funding this deficit through phantom money that he is printing money that doesn’t exist. this is ROBBING THE POOR BLIND because prices in the supermarket will go up and the people taxed via inflation. This is a CRIME, simple.

    As you pointed out the QE is the same as the deficit, they wouldnt be able to overspend without Mervyn and his gang of…. on the MPC voting for it. We need to toss out the traitors and get this under control now. Mervyn King is (making a wrong judgement-ed) and should be treated as such, he is allowing Brown to run up this deficit and he is going to monetize it through inflation.

  13. Ian Jones
    Posted August 20, 2009 at 2:04 pm | Permalink

    It would appear Brown, Darling and King are gambling with the countries economy. Currently its double or quits where if they win Labour may get some votes and Mr King his Lordship and if they lose they bankrupt the country and leave it in the hands of the Tories to clean up.

    Where is parliament in all this? 3 men are taking the mother of all risks and nobody is saying a thing! Frightening.

  14. Alfred T Mahan
    Posted August 20, 2009 at 2:08 pm | Permalink

    These are truly horrific figures. The government is paralysed, and even if it thought it should act (which is doubtful – remember the scorched earth policy suggestion that was laughed off?) it doesn’t appear able to. Were it not for QE, we would already have had failed gilt auctions and they can only be a matter of time now – I suspect Mervyn King knows this, which is the sole reason why he’s keen to increase QE; turning the tap off will create mayhem – and when that happens we are really into Mugabenomics.

    I think the next couple of months will be crucial as it becomes ever more evident that the so-called recovery is petering out in the UK and the USA. The gilts price bubble will burst as government figures continue to deteriorate – and yet The Guardian forecast yesterday that “low interest rates are here to stay”. Who on earth will buy British government stock except the BoE?

    At least it’ll come to a head before the election next year, so we won’t have to listen to rubbish along the lines of “the moment the Tories come to power, the successful economy they inherited was ruined”.

    • Stuart Fairney
      Posted August 20, 2009 at 7:34 pm | Permalink

      Guilt auctions have already failed though not yet substantially

      • Alfred T Mahan
        Posted August 21, 2009 at 6:54 am | Permalink

        Stuart – thanks.

  15. Mark M
    Posted August 20, 2009 at 2:19 pm | Permalink

    If I could add another comment.

    Interesting to think back to when John mentioned the coincidence between the £175bn QE program and the £175bn of government borrowing.

    Remember those stories the other day about Merv wanting to raise QE to £200bn? Now we know why. Someone had a word in his ear.

  16. Robert
    Posted August 20, 2009 at 3:42 pm | Permalink

    We are in a mess – simple – it will require both some tax rises (which I am personally dead against) to assuage the fact that we will need to cut government expenditure by a substantial margin. We have and will continue to see the biggest asset swap in history as the privatet sector dumps poor quality assets into the hands of the public sector. Effectively the credit cycle has and will continue to be nationalised! The problem is that this ignores the necessary deleveraging and simply delays the day of reckoning. Global credit growth will remain anaemic and Governments and central banks will be forced into a 2nd round of monetary and fiscal stimulus later this year or early next year. This will be poorly received by the bond markets and the final leg down in the credit cycle will begin when the government bond markets choke on the huge issuance which will push interest rates higher!The strains are likely to appear later in 2010, combined with the looming prospect of competitive devaluation as governments turn to their currencies to take some of the strain. A few observations on the still parlous state the UK is in. In the UK, The unprecedented cash injection has not translated into improved credit growth(not surprising really), in fact loan growth increased only 1.3% for May, the slowest growth on record. The money multiplier(M4/M0)has collapsed from a more normal 20-25% level to 12.9% in the same month. The UK’s government to debt to GDP is forecast to exceed 100% by 2013, and this does not take into account the colossal contigent liabilities of the bankrupt banking system. The ratio of UK banking assets to budgeted revenue is 5.3x while banking assets to foreign reserves are at 117x (as at the end of 2008), a sense of perspective is provided by Norway, where banking assets to budgeted revenue and foreign reserves are 2.3x and 12x respectively! Simply put, Government debt and fiscal problems not only in the UK, but also elsewhere in the developed world will point to the cost of money and credit becoming more expensive. Looking into 2010 there is a real prospect of increasing strains within the government debt market, forcing both real and nominal interest rates higher. This together with significant currency instability, with Sterling looking the most at risk amongst the major currencies, does not bode well. All in all this will provide the opportunity/compulsion for a major reform of government expenditure, if we can ride out the wave of social unrest which could well result.This is the challenge that faces the next Tory Government, I am not sure that it has th eintelectual rigour or backbone to do what will be necessary – underlying Government deficits have expanded over the last 40 year so to support welfare/health etc it cannot continue.

    • Doug
      Posted August 20, 2009 at 10:59 pm | Permalink

      The UK’s finances are so perilous, the debt so high, that it simply can’t afford interest rates to rise by much.

      As others have noted, the BOE has moved the money it really cares about – the pension funds of its employees – into index-linked gilts. This is consistent with the expectation of an inflationary environment.

      I believe low interest rates and high inflation lie ahead – inflate the debt away – and keep the (regrettably) all important property market moving upwards.

      But I could be wrong ;).

      • Doug
        Posted August 21, 2009 at 7:22 am | Permalink

        I should add:

        1. My appreciation for John’s and your post Robert.

        2. My agreement that there *should* be upward pressure on real world interest rates.

        3. That I believe the BOE will maintain its base rate at 0.5% and continue to print money, which it will lend to the government via gilt purchases at an interest well below the rate “real world” economics would suggest.

        4. The preferred mechanism for the inevitable inflation will, once again, be house prices. (Banks are currently offering so-called tracker mortgages at BOE base rate + 3%. Provided the base rate is maintained at 0.5%, these mortgages will remain cheap and a mechanism will be found to feed cheap money from the BOE to the high street banks. Japan has done it for years. In recent years the UK has been known to erode the value of its currency by 20% annually vs houses with little effect on the CPI.

        5. The economy is an absolute shambles and something has to give. An incoming Conservative government will opt for inflation rather than the social disorder you referred to Robert.

        Feel free to rubbish my thoughts. I have a real world decision coming up whose outcome depends in part on my interpretation of the current situation.

        • Stuart Fairney
          Posted August 21, 2009 at 1:14 pm | Permalink

          I’m not at all sure an incoming tory government will have much choice, the inflationary pressures are here today and will in 12-18 months really get a grip.

        • Doug
          Posted August 21, 2009 at 2:41 pm | Permalink

          I agree about inflationary pressures Stuart – when VAT is restored to 17.5% (20% anyone?) inflation will get a boost too.

          I think the incoming government will have to choose between, as you say, allowing inflation to get a grip OR taking measures to reduce the country’s indebtedness through deep cuts in public spending.

          With an economy overwhelmed with (public sector + bank bailout) debt, inflation is by far the most painless way to reduce the real value of the debt. The other way involves large scale job losses in the public sector, leading, short-term, to deepening recession. For the long term good of the economy, this is what should happen. I don’t think politicians have the nerve for it though.

          The fact that inflation will hurt pensioners and people who have been responsible enough to save money won’t cut any mustard with governments. Pensioners and responsible savers don’t riot in the streets. Governments (with the exception of Mrs Thatcher’s) generally take the path of least resistance. In this case, I think they’ll choose inflation.

      • StevenL
        Posted August 21, 2009 at 2:16 pm | Permalink

        I think that a lot of people are expecting an inflationary outcome, but I’m sceptical over whether we will see a return to traditional price/wage inflation, for the following reasons:

        1) There is a lot of spare capacity in the global economy and most goods are imported.
        2) Many big employers have weak balance sheets and will struggle with working capital.
        3) Trade unions are very weak.
        4) Commodities are all priced in $ not £.

        I think it is more likely that we will see inflation in asset prices (including commdities which are nearly all packaged as financial assets these days) but also a fall in the general standard of living as wages fail to keep up.

  17. DiscoveredJoys
    Posted August 20, 2009 at 3:46 pm | Permalink

    The huge numbers worry me greatly. But what really concerns me is the (in)action of the current Governement. Why have they not started to control expenditure?

    Even if they believed in a half Keynesian approach (spend in busts, spend in booms too) you would have thought there would have been some recruitment bans as a minimum.

    I can only conclude that Brown and Co just don’t care. The problems will be someone elses. *If* this is the case (i.e. more than mere incompetence) then I would support any legal remedy to make them share the pain, if only to set an example for future governments. Impeachment, censure by a Commons committee, prosecution for malfeasance in public office, whatever.

    • April Ryan
      Posted August 20, 2009 at 4:38 pm | Permalink

      I personally would pitch for Treason.

    • Freddy
      Posted August 20, 2009 at 5:34 pm | Permalink

      There are lots of people in this country, many of them old enough to remember the 70s, who think all the economic problems of the early 80s were Thatcher’s fault.
      Labour are looking to do the same again. So long as all the real pain hits during the next Parliament, they will be able to tell their faithful, and the dimwit future voters who are still in school now, that it was nice under Labour and only those horrid nasty Tories made life horrid and nasty. ‘Cos they’re the horrid and nasty party, you see.
      So, twenty years from now, when we’re back on our feet again, and a Tory Cabinet member has been caught blowing his nose in public, then NewNewLabour will be able to get elected again.

      It’s the Labour version of taking a long-term view.

      • Paul
        Posted August 22, 2009 at 5:48 pm | Permalink

        Leftie blindness. It’s quite funny.

        There’s always some comment about inflation, unemployment or interest rates ; usually mixed with quite visceral hatred of Margaret Thatcher (to a degree that I consider potential mental illness – it’s far worse than the comments here about Brown).

        Then you start talking about Healey, Callaghan, the IMF, the Winter of Discontent and it either (i) goes very quiet or (ii) gets the response ‘that’s ages ago’. Yeah, like the year before Mrs T took office.

        I rather liked the ‘Domesday book’ idea. Publish the accounts, with all the hidden debts, on day one of a Conservative Administration – using some of these analogies here to get across to the stupid innumerate Labour voters quite how bad things are.

        I think they think it’s some kind of “minor blip” and when the recession eases everything will be hunky dory again.

    • Stuart Fairney
      Posted August 20, 2009 at 7:36 pm | Permalink

      Retrospective legislation depriving anyone who voted for the debt of their pensions until we are again in surplus as the pensions are unaffordable ~ Hey if they can defer Northern Rock debts…

  18. UKIP member
    Posted August 20, 2009 at 3:50 pm | Permalink

    The answer, of course, is galloping inflation. A couple or three years at 30% and the public debt will look a whole lot smaller. This has been the traditional Labour answer to a balance of payments deficit in times past.
    However this will wipe out savings too; and the already glaring difference between taxpayer-funded public sector index linked pensions and the defined contribution jobbies that the other 3/4 trs of the workforce have is going to glare a hell of a lot more. And as for anyone currently living off a fixed income – penury awaits.
    As Guido notes, the Bank of England pension fund has been moved into Index-Linked Gilts, which are an instrument designed to hedge against inflation; the stated position that DE-flation is the threat must be regarded as purest hyperbole.

  19. Mike Stallard
    Posted August 20, 2009 at 4:16 pm | Permalink

    The first thing Brown did in 1997 was to nick the pensions which were there for the taking. Then he nicked a lot more in stealth taxes. Then more taxes were imposed – remember “schools’n”ospitals”? Then came the inevitable crunch which had been foretold for several years in the Telegraph. Now this.
    I now realise that, through deliberate inflation, he is going to nick our family savings to add to the pile.
    And, do you know what?
    There is nothing at all I can do about it.
    Nothing.
    Nic.
    Niente.
    Rien du tout.
    See you in Poundaround or Oxfam.

    • Freddy
      Posted August 20, 2009 at 5:42 pm | Permalink

      “The first thing Brown did in 1997 was to nick the pensions which were there for the taking.”

      Ah, yes, I distinctly remember him announcing the cancellation of the ACT Tax Credit system as “striking back at the pension fat cats”, surrounded by a crowd of idiot party loyalists, who were all going “Yay, fat cats, things can only get better, yay, etc., etc.”.
      I wish YouTube had existed back then. That would be a really useful clip to disseminate broadly now.

  20. Martin
    Posted August 20, 2009 at 5:39 pm | Permalink

    I hate to say this but I think we have been through the false dawn of a Sterling recovery from last January’s low points.

    Simple supply and demand economics implies a further Sterling slide and or a rise in interest rates.

    My solution is to have differential tax rates for Public vs Private sector workers. It should be made clear that in return for generous pensions and safe jobs that the tax take has to be higher.

    • APL
      Posted August 21, 2009 at 2:14 pm | Permalink

      Martin: “My solution is to have differential tax rates for Public vs Private sector workers.”

      Public sector employees don’t pay tax. The government pretends to give pse employees money over and above take home, then pretends to take it back again. That book keeping entry is called tax and national insurance.

      Martin: “in return for generous pensions and safe jobs that the tax take has to be higher.”

      Too late. No generous pensions and especially no safe jobs.

  21. Emil
    Posted August 20, 2009 at 6:57 pm | Permalink

    All tumbleweed rolling across the BBC prairie, meanwhile whenever a Tory MP opens his mouth…………..

  22. Robert George
    Posted August 20, 2009 at 10:35 pm | Permalink

    You may have noticed that over the last six weeks the value of the Zimbabwan currency has improved against the Pound by an annual rate in excess of 200%.

    Says it all really!

  23. Javelin
    Posted August 21, 2009 at 7:36 am | Permalink

    Interest rates going up coming out of a down turn causes more damage for the UK than going into a down turn.

    To be fair it’s pretty easy on the eye going into a down turn – you just let gravity do its job. Its coming out of down turn, when interest rates go up, when the real damage is done.

    The problem is that the UK consumer hocks themselves up to their eye balls. They then go into a down turn and hold on tight, but when they come out of the down turn their income hasn’t gone up but their mortgage goes through the roof.

    Look at the UK when we came of a down turn last time, high interest rates and the ERM debacle. Interest rates are at 0.5% what will happen when they go back up to the history average of 5-6%??

  24. Mark Parker
    Posted August 21, 2009 at 8:08 am | Permalink

    This “interest rates must rise” refrain is a bit of a falacy. The base rate (currently 0.5%) has no bearing on what yield gilt bond buyers get – currently more like 3% for a ten-year bond – because gilts are auctioned and simply go the person prepared to accept the lowest yield – ie offer the most cash.

    The base rate has very little bearing on the cost of borrowing anymore. As a “lever of power” it’s broken: reducing it doesn’t reduce mortgage rates and (I suspect) increasing it wouldn’t increase mortgage rates.

    • Robert
      Posted August 21, 2009 at 10:10 am | Permalink

      Sadly, you may well be right with regard to inflation. I have never believed in the deflation story propogated by those who need to justify being bailed out of their profligacy! I was pointing out that interenational investors will demand higher rates come what may!

      • APL
        Posted August 21, 2009 at 2:29 pm | Permalink

        Deflation is not simply, indeed not even, falling prices. Inflation is always caused by the increase in the money supply and is always a product of government action. Deflation in a fiat economy is the contraction of money AND credit.

        What we are seeing is a contraction in credit on an extraordinary scale. It is outside the ability of the government to control, we may well get inflation in the future, how far into the future is difficult to say because we do not really know how much deflation there is yet to go.

        • Doug
          Posted August 21, 2009 at 6:12 pm | Permalink

          “It is outside the ability of the government to control”

          Certainly this is consistent with the Japanese experience, but Japan’s population growth rate is very low. This, I believe, has exacerbated their domestic deflation and won’t be the case in the UK.

          Don’t you think APL, that throwing money from helicopters (i.e. a *prolonged* period of quantitative easing), with provision to feed money to the commercial banks, can solve a contraction in credit?

        • APL
          Posted August 22, 2009 at 11:33 am | Permalink

          Doug: “Don’t you think APL, that throwing money from helicopters (i.e. a *prolonged* period of quantitative easing), with provision to feed money to the commercial banks, can solve a contraction in credit?”

          You would think so, wouldn’t you. BUT ask yourself, where is the money is going? If as you suggest the government were showering cash into the broad economy, for example handing it out in the market square or the town center then yes, you might expect to see inflation. Because as the quantity of money in circulation increased dramatically the value would fall in proportion.

          Well, that is not what is happening, at least not yet. The government has used the gatekeepers of the economy – the banks – to distribute its largess, but they are in no fit state to distribute the cash, they are hording it or parking it at the Bank of England. The banks know two things.

          1. Many if not all other banks are in a similar condition. There is much still on their books that if marked to the market price would instantly destroy the banks. By the way, this does not just apply to UK banks, but European banks too.

          2. The consumer has already maximum credit and while he/she might like more credit, in the face of falling demand and increasing joblessness is starting to take another look at his/her credit situation. The banks are trying to use the consumer to restore their finances.

          So, while there may be an appetite for credit, there isn’t the capacity for credit.

          If point one is correct, potentially we have the prospect of another round of de-leveraging (credit contraction) ahead of us.

    • Robert
      Posted August 21, 2009 at 10:17 am | Permalink

      Yes – hence the wide spread on the real cost of money in the real world! The base rate is a politicised lever of government – the true cost of money will be set at the level which reflects the markets view of risk/reward in cojunction with the availablilty of supply and demand. i.e. teh cost of capital should be higher as deleveraging has to take place. Where you are wrong is that spread is likely to be maintained, so if the base rates went up the mortgage rates would still follow.

  25. Robert
    Posted August 21, 2009 at 10:28 am | Permalink

    Some further thoughts on the deflation bogeyman used by the establishment. For much of the last year or so , central bankers including MK, industrial leaders and politicians have been warning us about deflation. Falling prices, they tell us, will create another 1930s-style depression. The only answer is to print money furiously.
    Now it turns out the theory is a lemon. Deflation is no threat at all.
    It doesn’t prevent an economy from functioning, and it doesn’t stop it from recovering either. The evidence suggests a period of sustained deflation might be what indebted economies need to get them back on the right track. The U.K. Chancellor of the Exchequer Alistair Darling said in a speech earlier this year that the Bank of England must be “prepared to act” to prevent price deflation. “We are very keen on avoiding deflationary risk,” said European Central Bank President Jean-Claude Trichet in an interview this month. Much the same message has been pumped out around the world by economic leaders.Nor have they been slow to put their freshly minted money where their mouth is. The Bank of England has embarked on a programme of “quantitative easing,” or creating new money, to stave off the threat.The trouble is, the theory doesn’t stack up. Deflation, after all, has supposedly already arrived. In the euro region, prices fell a record 0.7 percent in July from a year earlier, after declining 0.1 percent in June, according to the European Union’s statistics office. In Germany, Europe’s largest economy, consumer prices posted their first annual drop in more than 22 years in July. Wholesale prices plunged almost 11 percent.
    So the “deflating” euro area is disappearing over an economic precipice, right? Not quite. It is leading the world out of recession. Figures released last week showed Germany and France were hauling the region out of the global decline — both expanded 0.3 percent in the three months through June after four consecutive quarters of contraction. Not much sign of the dangers of deflation there. In reality, anyone with a sense of economic history would have been aware that the whole deflation story was well oversold. In the U.K., the House of Commons Library publishes data on prices going back to 1750. From 1814 to 1914, prices rose a bit in some years, and dropped a bit in others, so there was no real change in the price level over the century.In other words, there were plenty of deflationary years. Yet over that period, the U.K. became the greatest economic power in the world: Its relative decline only started once inflation took hold. Deflation didn’t stop the Industrial Revolution, one of the most sustained times of economic creativity ever seen. Likewise, a 2004 study by the Federal Reserve Bank of Minneapolis looked at the data on deflation across 17 countries over 100 years. It found that although the Great Depression of the 1930s was linked with falling prices, that wasn’t true of any other historical period. There was, it said, “virtually no evidence” that deflation caused a depression. Why should it? We are constantly told that deflation is bad because it makes consumers hold off from buying things, thinking they will be cheaper tomorrow. But that is just silly.veryone knows that a computer or an iPod will be both better and cheaper in six months. And people really want one right now. Torn between those two impulses, plenty of shoppers go out and buy computers and music players. It is true in the electronics industry, and, once they get used to falling prices, it will be true for other industries as well. Deflation may be bad for particular interest groups, which happen to be very powerful. It is bad for chief executives. It is easier to keep your profits rising in a mildly inflationary environment. You can just jack up your prices a bit, and you can often cut workers’ wages by stealth by holding wages steady. The banking industry, which has come to rely on inflation to make highly leveraged loans sustainable, also dislikes deflation. Likewise, it is bad for governments, which use inflation to reduce the value of their debts. On the other hand, deflation is good news for savers, who get richer just by hanging on to their cash. And it is beneficial for consumers, who get cheaper prices. It is usually good for workers as well, as they can generally hold the value of their wages, even while prices fall. There are winners and losers, just as there are from most economic developments. The important point is that the people who lose are more powerful than the people who gain. That might explain why we hear about the dangers of deflation, and not about its advantages. It still doesn’t make them right.
    Conclusion – There is no threat from deflation. It may even be desirable if it encourages a balance between saving and consumption, and discourages governments and banks from taking on debt.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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