Deflation? Not in most of the world.

There is a new fear abroad. There is the fear of deflation gripping the world economy in its icy hands. So is deflation terrible? And is it likely? I suggest the fears are being overdone.

Deflation means a general fall in the price level of a country or currency zone, not a fall in some prices like energy whilst others may rise. Falling prices can then react to encdourage falling wages, which in turn can generate falling output. As prices fall so people hold off buying the inessentials, knowing they will be cheaper later. This in turn can induce further price falls as stocks hang heavy on producers which they need to discount to sell.

This is not currently happening in any major economy in the world. The world’s two largest economies, the USA and China, are both growing at satisfactory speeds, and both have low levels of inflation, not falling prices. The same is true of the UK. Latin America’s largest economy, Brazil, has the opposite problem. Inflation and currency weakness have been too pronounced, so Brazil has hiked interest rates and is forcing down the growth rate to try to get inflation down. India has quite high inflation and good growth. Russia has high inflation following a currency collapse. Even Japan, a country which had no inflation to speak of for over 20 years, now has some inflation mainly thanks to a tax hike, and a monetary policy designed to get price rises up to 2% per annum.

So the worry comes down to Euroland. There inflation is now very low, and may dip further into negative territory this year. Growth is very sluggish, and parts of the zone including Italy are back in recession. The fear of deflation is being used by the doves at the European Central Bank to encourage moves towards creating more money to ease the squeeze on the distressed parts of the zone.

Deflation is to be feared if a substantial fall in the price level is part of a general slump in incomes and output, as in the early 1930s. Even the Euro area is not on the threshold of such a development, barring a sudden whirlwind Euro crisis and collapse which is unlikely at the moment. Sharp falls in some prices like energy can provide a stimulus, especially for countries which import a lot of it. Price stability or even a small fall in the general price level need not mean recession or worse, as Japan, Switzerland and some others have demonstrated in recent decades. Deflation only gets serious when it is spurred by banking collapse or consolidation, leaving an economy short of credit for worthwhile new ventures.


  1. Lifelogic
    January 12, 2015


    The banks (certainly in the UK) are still hugely inefficient & lack real competition. Perhaps paying 0.2% or nothing when you deposit funds and often circa 10% + on overdrafts for many borrowers. They do indeed leave some sensible new ventures short of credit when they do not have access to alternative sources of funding and can thus cut the rip off banks out. The OTT new restriction on mortgages and the slotting rules are also a large problem.

    They should not be allowed to make up for past mistakes by ripping off current customers due to a lack of competition in the market.

    1. Lifelogic
      January 12, 2015

      So Camerons six key themes at the heart of his parties manifesto are to be:

      The deficit:
      Cameron has done so very little and continues to piss money down the drain onHS2, green crap expensive energy, damaging & pointless wars, yet more EU bills and soft loans and all manner of economic nonsense.

      We still have absurdly restrictive employment laws, very high NI, expensive energy by religion, restrictive planning, OTT health and safely ……….

      He introduced 299+ tax increases and ratted on his IHT promise.

      Home ownership:
      He introduced the absurdly high 12% stamp duty that stop people moving or buying homes.

      Most state schools are very poor, the exam syllabus is hugely dumbed down and is also partially green religion and lefty indoctrination. He is against grammar schools and has done little on the technical skills now needed. Just compare a maths or physics A level now to one of say 1970.

      He has suppressed interest rates for savers and continued Browns mugging of private pension with lower caps and lower contribution limits.

      Strangely his first priority “in three letters” last time was the N H S which is clearly now even worse but he has dropped that subject.

      He says: Look at the children you love and save them from a legacy of huge debts by voting Conservative, otherwise you will put the very stuff that makes life worth living at risk.

      It rather makes me feel I need to reach for a large sick bag. Miliband is clearly even worse but why on earth should we trust him this time?

      His priorities should be:

      Sensible but controlled & selective immigration or a non racist basis from anywhere in the World.
      Far less or no EU.
      Cheaper non religious nonsense energy.
      Far less tax borrow and piss down the drain.
      Far lower and much simpler taxes.
      Sound defence & not counter productive attacks.
      A better legal systems with a fair balance of risk reward for actions.
      An NHS and Education system that works and provided what is actually needed for gainful employment.
      Sound money.
      Re-establishment of some moral hazard and incentives for people to do the right things.
      Some real deterrents in the criminal justice system rather than police who cannot be bothered and this give a green light to shop lifting and other “minor” matters.
      Protection of civil liberties.

      1. Lifelogic
        January 12, 2015

        He also has uncontrolled/unselective EU immigration without sufficient provision of housing, health, education etc. This clearly helps stress all of these areas as we see every day.

        1. Bazman
          January 12, 2015

          Will that be the ones paying 12% stamp duty unable to move out of their £1.5 million homes. This oppressed minority facing stresses in their housing?
          More elitist nonsense with no relation to the real world lived in by the majority of this country.
          Maybe you should have the government subsidise helicopters, and bring Concord back as a private jet as many are facing extreme hardship on public transport such as planes and roads.]
          Besides who will do your dirty non jobs if immigration is restricted?

      2. APL
        January 12, 2015

        Lifelogic: “Retirement: He has suppressed interest rates for savers and continued Browns mugging of private pension with lower caps and lower contribution limits.”

        Zero or near zero percent interest rates and Quantitative Easing AKA inflationary printing, will destroy the duration matching on bond portfolios, this will eventually destroy the pension funds ability to pay their pensions.

        This is why QE has been suspended in the US, and will be why Cameron or whom-ever comes after will either stop QE or destroy the UK private pension industry.

    2. Hope
      January 12, 2015

      I thought the EU places budgetary guidelines what countries can operate in? At the moment both France and Germany are outside the guidelines, should they not be fined or asked to make a larger contribution? Or is every country too scared to say anything to Germany?

  2. bluedog
    January 12, 2015

    ‘Even the Euro area is not on the threshold of such a development, barring a sudden whirlwind Euro crisis and collapse which is unlikely at the moment. ‘

    A courageous statement with just a fortnight to go before the result of the Greek GE is known.

    Of course, it’s always possible that EU ‘observers’ will successfully rig the result and Syriza will not form a government. But if Syriza does and then acts as it will have been mandated to act, expect a Eurozone crisis. Now the ECB has had months to prepare for this possibility, so it should be manageable. But want can’t be accurately predicted or managed is a political chain reaction amongst other highly indebted and recessionary Eurozone states. In that event, confidence in the ECB (and that’s about all there is) may evaporate, over-night.

    1. lojolondon
      January 12, 2015

      I was about to make a comment and realised Bluedog said exactly what I was thinking – I have been anticipating an imminent Euro collapse for the last two years, the apparatchiks have fended it off by pouring taxpayer money into their banks hand over fist, but surely it can;t withstand a Greek vote for the Socialists who have vowed to leave the Euro, and the subsequent destabilisation? I certainly hope not!
      The EU is desperately afraid, not that the Greeks will leave and fail, but the horror when the Greeks leave the Euro and turn the economy around.
      Every three months it becomes harder and harder to bail Greece out, but we Eurosceptics (Enemies of (a german led EU ed)) take confidence from the consistent failure to achieve any progress at all regarding economic stability of the Mediterranean countries.

      1. Bazman
        January 12, 2015

        Wishful thinking. Greece is not going to bring down the Euro and without it they are not going to turn their economy round.

    2. Hope
      January 12, 2015

      Off topic, is it correct that Cameron is not taking action against the Spanish over Gibraltar in the hope he might be able to get some minuscule reform on the EU? Ironic he is prepared to go to war with Syria without any British interest and the same with Libya, yet he appears not to be standing up for British citizens in Gibraltar! Is this political cowardice or EU fanaticism at the expense of British citizens?

  3. Lifelogic
    January 12, 2015

    So six years after Osborne’s £1M IHT threshold promise (that made Brown foolishly bottle his early election) I hear that the discredited man is muttering about IHT and VAT again. Nothing specific of course, as it is not close enough to the election yet. But having increased VAT from 17.5% to 20% (we have no plans to increase VAT) and having done nothing on his IHT promise (in fact having increase it in real terms each year) why on earth should anyone trust him this time? He has also further mugged pensions in the Gordon Brown manner and we know have an absurd rate of SDLT on property at 12% to prevent people moving and discouraging buyers.

    I think it is very clear that Cameron and Osborne are anything but the “low tax at heart” Conservatives they claim. You can only be a “low tax Conservative” if you choose to stop pissing money down the drain and they have not done. Start with HS2 and all the greencrap and the many civil servants and many QUANGOs that do nothing of much use.

    1. Hope
      January 12, 2015

      VAT is also included in the formula what we pay the EU. JR., does the government need EU approval what rate it charges VAT?

      Reply, No but there are bands for full Vat rate

      1. miami.mode
        January 12, 2015

        Reply to reply

        Try reducing it without EU approval.

      2. Denis Cooper
        January 12, 2015

        But once VAT has been applied to something it can never be removed, and it can only be reduced to an EU-approved minimum rate. That is why we still have 5% VAT on domestic fuel, once Kenneth Clarke had put it on it could not later be taken off or reduced to a zero rate.

  4. Gary
    January 12, 2015

    The cause of benign inflation or deflation in the general economy, despite absolutely massive money printing, is the bubble in the bond markets.

    The money is being vacuumed up by the bond markets. That is the real danger. When, not if, that unwinds, the risk is generalized hyperinflation. That means the currency dies.

    1. Roy Grainger
      January 12, 2015

      One assumes that for that reason QE will stop but will never be unwound, the BoE will never sell all those bonds they purchased with the QE money. As apparently the government also doesn’t pay interest on the bonds purchased by the BoE the present government has operated in a time when debt has been extremely cheap. The shock to all when rates normalise will be large.

      As an aside, Ed Milliband’s promise to freeze energy prices looks more than absurd now that prices are falling, those of us (like me) who chose to enter long-term fixed price contracts are losing out.

      1. miami.mode
        January 12, 2015


        You’re right about the energy prices. Quite a few seem cheaper this year than a year or so ago.

        You may also recollect that in late 2013 the government forgave the energy companies the necessity of spending approximately £50 per customer on energy saving measures which was supposed to be passed on to their customers. I’ve no doubt that you have had a reduction of £12 on your electricity account but the other £38 will probably have gone straight to the energy company.

        Your current contract may not have an exit fee or possibly it would be worth paying an exit fee to move to a cheaper deal.

      2. Denis Cooper
        January 12, 2015

        I guess that the Bank’s subsidiary will continue to hold the gilts for maybe ten years, and when any of them mature the proceeds will be used to buy replacement gilts to maintain the stock at the present level; and then there will be another phase of ten years when redemption proceeds will not be used to buy replacements but instead to pay off the loan from the Bank, so the stock is gradually run down; and then when the remaining stock has got low enough it will be dribbled back into the market over some more years, and perhaps around 2040 the Treasury will make a payment to balance its books and it will be wound up. It could possibly happen more quickly than that, or it could happen even more slowly, especially if in the meantime there is another recession and there has to be more QE.

      3. Lifelogic
        January 13, 2015

        Can you not get out of your fixed price energy contract just by moving the account into someone else’s name?

    2. Denis Cooper
      January 12, 2015

      Insofar as there is a “bubble” in the bond markets that is because central banks have been rigging some of them with vast sums of newly created money. And when a central bank steps into the market and buys up a large fraction of the bonds which have been issued by a government, and stores them away out of circulation, I’m not sure that “bubble” is the correct description for what has really become a false market, even when all the participants in the market are well aware of what has been done. I can’t say off hand what fractions of US government bonds, or Italian government bonds, have been taken out of their respective secondary markets in that way, but the Bank of England – or more exactly a wholly owned subsidiary of the Bank – now owns about a quarter of all the gilts in issue, while only about 15% of Greek government bonds are in private hands with the rest owned by EU institutions and the IMF. It is similar to the EEC buying up surplus butter and putting it into cold storage, keeping it out of the market to prop up the prices, except of course that when the EEC built up its butter mountain it used existing money provided by the governments of the EEC member states to pay for its purchases of butter rather than getting a central bank to create new money for that purpose.

      1. Gary
        January 12, 2015

        yes Denis, almost all the bonds end up with the central bank. But, the most insidious aspect of this is as soon as the central bank signals that it stands ready to buy bonds, all speculators cling into the trade for a risk free ride. Money that should be invested into private enterprise gets sucked into the bond trade and the private economy gasps for investment. That is the deflation that we see.

  5. Ian wragg
    January 12, 2015

    We already have wage deflation due to the stupidity of importing half a million immigrants every year.
    I see Dave doesn’t want to discuss Immigration or the NHS during the next 3 months. He seems to be deliberately trying to throw the election. Maybe that was Angelas idea.
    It looks very much that Greece is heading for the door. Maybe we won’t be far behind

    1. libertarian
      January 12, 2015

      Ian Wragg

      Oh how do you account for this headline from ONS report Nov 14 ?

      Pay growth beats inflation as jobless total falls, ONS says wages rise 1.3% while inflation falls below that figure.

      1. ian wragg
        January 13, 2015

        Very gullible, wage rise of 1.3% minus tax and N.I is a rise of 1.05%. in the pocket.
        take out the part time, self employed with little work and zero hours contracts and you will find some real wage deflation.

        1. libertarian
          January 13, 2015

          Ian Wragg

          If you take out the part time, self employed and zero hours workers then average wage numbers would GO UP significantly !!

  6. petermartin2001
    January 12, 2015

    Deflation is generally a sign that everything which is for sale in the economy cannot be sold. If we have a closed and isolated economy we can imagine that everything that is produced in that economy is put up for sale in a single department store. The customers of that department store are everyone who has worked in that economy and earned any wages or made any profits. Those wages and profits are their spending money. So, for everything to clear in the economy everyone who has earned anything or made any profits has to spend it.
    If they don’t spend all of it, and choose instead to save some money, governments will normally borrow that saved money by issuing bonds and then spend it on their behalf to ensure everything clears.
    If that doesn’t happen, if governments won’t take up the slack, the existing stock has to be sold at a lower price than the cost of its production. That means companies will not want to repeat the exercise. They will stop making things. Farmers will stop growing crops or, maybe, instead of harvesting them will plough them back into the soil. It’s not that the crops aren’t needed , its more that the potential customers don’t have enough money to buy them. They may have lost their jobs or be working in very poorly paying jobs.
    It’s a very dangerous and pointless situation. The problem isn’t a lack of credit. It’s a lack of demand. In recent times, economic theorists have over-concentrated on the supply side of the equation without paying enough attention to the demand side. There has to be that demand. ie customers with money to spend. The very simple equation INCOME = SPENDING has been forgotten.
    There’s only one entity which can fix the problem of lack of demand and that is the currency issuer or Government. Except in the Eurozone where governments have given up that ability. We should not be surprised to see they have the problems they have.

  7. David Hope
    January 12, 2015

    I keep hearing this theory of how deflation is bad because people delay purchases, which in turn causes more deflation. But I don’t buy it

    Let’s face it, phones, cars, TVs etc all get cheaper all the time due to technological progress and people buy them. Obviously an item now is more useful to one in a year!

    At the same time, other things such as bread, petrol, rents are essential and so you are hardly going to not buy them in a deflationary environment.

    The only reason deflation is dangerous is because governments (and many individuals and companies) are heavily in debt, and rely on inflation lessening that debt burden. They’ll get in trouble without it.

    Without this deflation could be a useful tool in a downturn to normalise prices to levels they’d be at without heavy credit

  8. Leslie Singleton
    January 12, 2015

    Deflation? What deflation?? If it were (negative) say 20% rather than 0.2% that might be something to talk about; but as things stand, especially with definitions and accuracy being as hopeless as they are, the whole palaver is just a way for economists to cost us a lot of useless overhead. Inflation relates to the value of money: if oil (or whatever) drops by 10% (or whatever) how has the value of money changed? And as for the business about the horrors of people waiting a year to buy more cheaply, again I am unimpressed. The average chap if he goes out one day and notices stuff is cheaper, perhaps because of a supermarket price drop, is much more likely to buy immediately at the lower price than “wait a year” (why not a decade?). Even if they did wait, is that not what they call Savings and isn’t that good rather than bad, with more people standing on their own feet? And No I don’t see any difference if it’s Investment rather than Baked Beans. What we are in is no more nor less than a period of sound money. Apart from all else what is the justification for the entirely artificial (plus) 2% as a goal?

    1. ian wragg
      January 12, 2015

      As a pensioner with significant savings I look forward to some deflation. This will restore some value to my money.
      Of course the government doesn’t like it being the debt junkies they are as it increases their (our) debt. It also reduces the tax take and the pressure on wage rises. All things the bozos don’t want.

    2. Narrow Shoulders
      January 13, 2015

      An interesting article in the Evening Standard tonight (Tuesday) where Anthony Hilton extols the possibility of deflation using Japan as an example of how per capita production has gone up despite the economy apparently not growing for 20 years. The average Japanese citizen is better off, has not had thier identity stolen and has no more of a housing crisis thatn they had before. Education levels remain high.

      Japan is held as an example of a basket case economy and shows the dangers of deflation, it sounds fairly agreeable to me unless you are in government and want to spend more and more money

  9. Bert Young
    January 12, 2015

    Pinning a common label across the EZ is unrealistic . Some bits of it are strong some bits weak . In the past , without the Euro , the variances were often adjusted by the manipulation of currency levels thereby overcoming the differences . Going to Italy in the 60’s and 70’s always required a knowledge of the changes in the lira making purchases there often very attractive . Under the EU approach of “one size fits all” these adjustments are no longer possible and disempower national efforts to react effectively . Germany has a lot to answer for the current situation and , as I have said so many times , should “put up or get out”.

  10. Iain Gill
    January 12, 2015

    In countries like the UK where they are basically printing money deflation is all but impossible. Destruction of savings however is real and routine here. Theft of money from the prudent by the state to fund its excess and cliques in the same social circles.

    Reply Savers who have bought bonds or shares since 2009 have done well.

    1. Iain Gill
      January 12, 2015

      Not really, not in real terms, and not against house prices where those saving to buy have been hit by ever more manipulated house prices rising faster than their savings.

  11. alan jutson
    January 12, 2015

    Perhaps the time has come where people working in the so called inessential services and industries, which has grown hugely over the past few decades, should start to worry a little.

    Perhaps the people who have worked in the traditional and sometimes so called boring essential services and industries will be rather more happy that, for once it may retain them in work for longer.

    The simple fact is if wages, pensions, and disposable income fall, relative to the price of goods and services, then most people will make the obvious choice and will keep spending on the essentials to live and survive

    The government should worry, because it is the inessential services and industries which have had much of the growth during the last few decades, which has given them the increasing tax income to fund their forever over spending programme ideas.

    Why spend £2.50 on a coffee out, when you can make it for 10pence at home.
    Why spend £3.50 on sandwiches out, when you can make them for 40 pence at home.
    Why spend money on clothes when the wardrobe is already stacked out.

    The list is almost endless.

    Thus the deficit may soon be growing again if we do either stand still or worse, get some deflation.

    1. alan jutson
      January 12, 2015

      There is a huge difference between I want, I would like, and I need.

  12. William Long
    January 12, 2015

    You say that even the Euro area is not on the threshold of a slump such as took place in the early 30s, but I wonder? The cause for that slump was lack of liquidity in a gold standard environment, due to hoarding of gold by the USA and France. For the latter two I would read Germany and if she does not budge from her (perfectly understandable given history) position, then a slump becomes almost inevitable. I say ‘almost’ because unlike the 30s, the rest of the world is not in the same economic straight jacket as the Eurozone, whereas in the 30s the gold standard was pretty well worldwide.
    Southern Europe might say the slump had been there for some time already. Sooner or later the light must dawn on these countries that their only solution is to leave the Euro and then for a time hell will break loose.

  13. rick hamilton
    January 12, 2015

    The Japanese did not complain when the price of everyday items was stable for 20 years. It is only now with tax increases that prices are going up and consumers are cutting spending accordingly.

    In my schooldays I used to wonder what those cartoons of government ministers floating around like balloons with ‘INFLATION’ written on their jackets actually meant. Clearly inflation was a very bad thing. Now we are told we should TARGET inflation as a good thing. Why? Could it be because politicians can only think of one way out of huge national debt: to inflate it away by debauching the currency?

    The value of the US Dollar has fallen 98% since the Federal Reserve was set up 100 years ago. The days when sixpence made a nice present for a child are long gone too. Better buy gold bars now and put them in your mattress.

  14. bigneil
    January 12, 2015

    Whatever happens financially to the Eurozone, by the time the GE arrives, one thing will be a certainty. We will have about an extra 200,000 foreigners wanting “their” NHS treatment, “their” benefits, all their children needing their free schooling, etc, none of it contributed to in any way. . . . With a reported £100m spent on interpreters alone we have enough ( growing every day ) financial problems of our own.

  15. Denis Cooper
    January 12, 2015

    As I have pointed out repeatedly, ad nauseam, in early 2009 the threat of deflation was used as a justification for “Quantitative Easing”, QE, in the UK, when in truth the threat being addressed was that of the Labour government running out of money to pay all its bills in full and on time unless it made drastic cuts to its spending, which it did not want to do and especially so in the year leading up to a general election.

    Rather than have the Bank of England use newly created money to buy up gilts that the government had previously sold to investors, while in parallel the government sold new gilts to much the same set of investors at much the same rate, as was done, it would have been much simpler and more transparent if the Bank had bought new gilts direct from the government, or the Bank had extended an overdraft to the government.

    However not only were both those options prohibited under the EU treaties, it would have been a political disadvantage if the electorate could more easily understand what was being done and why. And that obfuscation was hugely successful, insofar as even now, nearly six years later, clearly most of the electorate still don’t understand what was being done with QE as practised in the UK, both with the original £200 billion under the Labour government and the later £175 billion under the coalition government.

    As for the supposed threat of deflation used as a pretext for getting the Bank of England to create vast sums of new money and indirectly lend it to the government to ensure that it could cover its yawning budget deficit when normal gilts investors were starting to get worried about lending it any more money, as it turned out QE actually resulted in excess inflation, with something like 8% added to CPI over and above the 2% a year target set by Gordon Brown and retained by his successors as Chancellor, a large contribution to the so-called “cost of living crisis” about which Labour like to complain.

    So what is now happening in the eurozone, again, has a familiar ring, with expressions of exaggerated concern about the threat of deflation but that just being used as an excuse for the central bank, the ECB, to create new money and indirectly feed it through to the governments of distressed eurozone states to make sure that they can pay all their bills without having to make further cuts to their public spending, and it could easily have the effect of creating excess inflation across the eurozone just as it did in the UK.

    1. petermartin2001
      January 12, 2015

      it (QE) could easily have the effect of creating excess inflation across the eurozone just as it did in the UK.


      As a scientist I must admit to having a liking for graphs. If we measure any parameter as a function of time, say, there will be a mixture of random variation and signal. It’soften not easy to tell which is which from just a few measurements but it becomes much easier if we plot out the data on a graph.

      So, if we look at inflation, measured as a function of time we should see some signs of a signal in the level of the inflation rate if what many say about the inflationary effects of QE are true. But, from the graphs I’ve looked at I can’t see any indication that QE has had much effect at all. In fact, the inflation rate since the introduction of QE has been lower than before, both in the the USA and the UK.

      Have I missed something? Can you show me a graph showing an uptick in the inflation rate which corresponds to the introduction of QE?

      1. Denis Cooper
        January 13, 2015

        If you would like to see some graphs I imagine you could find plenty in the Bank of England study reported here last April:

        Extrapolating the Bank’s estimate for the inflationary impact of the first £200 billion of QE to the full £375 billion gives 4.2% divided by 200 and multiplied by 375 = 7.9%.

        However the empirical fact illustrated in this graph:

        is that for four whole years the annual CPI rate of inflation came in above the Chancellor’s 2% pa target, month after month from December 2009 to December 2013, and cumulatively that excess inflation added about 6.2% to CPI over and above the 2% pa target.

        1. petermartin2001
          January 13, 2015


          Have you allowed for the effect of rising VAT, firstly from 15% to 17.5% , then later from 15% to 20% in your calculations? This was all happening at approximately the same time as the QE program could possibly have had some effect on inflation figures.

          VAT is included in the RPI and CPI, which is fair enough, but from an economics perspective we should look at the core inflation (ie inflation less or more than any tax changes) and only raise taxes if core inflation is rising above target levels.

          Fortunately such figures are published by ONS. RPIY and CPIY From the graphs shown in the link below it can be seen that both the RPI and CPI are higher than the level of underlying inflation by at least 1% (I’d say about 1.3%).

          I’m not disputing that QE would have had some effect on inflation – but I’d say that your 6.2% figure needs some correction for tax rises. If the “independent* BoE and the government hadn’t collaborated we could probably have had the deflation seen in Europe and the economy wouldn’t have seen much, if any, growth at all.

          1. Denis Cooper
            January 14, 2015

            When I looked at the cumulative change in CPI over that period I found that it had exceeded the 2% pa target by a total of 6.2%, that was an empirical fact. The theoretical study by the Bank concluded that the first £200 billion of QE had caused excess inflation, and extrapolating their estimate of the effect to the full £375 billion I found that it would be an addition of 7.9% to CPI. 6.2% empirically or 7.9% theoretically are really much the same thing, and either way there is no doubt that at the levels adopted QE did more than just counter the supposed threat of deflation as originally advertised, there was overkill and it actually caused excess inflation. Not a huge amount, by no means the hyperinflation that some originally feared would ensue, but enough to hurt when incomes were not keeping up.

    2. waramess
      January 12, 2015

      Coin clipping was so much easier to understand.

  16. acorn
    January 12, 2015

    1 So the central bank goes QE which means it swaps “Bonds” from private sector bondholders for electronic cash “reserves”.
    2 This pushes up the price of bonds and more importantly reduces the interest yield.
    3 This makes corporate dividend yields high and hence share prices go up to bring down the dividend yield ratios.
    4 This makes corporates look a much better risk to lend to at lower rates now prevailing in the economy.
    5 This new borrowing, the corporates will use to buy new machines to make more goods and boost the supply side capacity of the economy and raise potential GDP.


    6 The demand side (households particularly) of the economy, is still mired in debt, hasn’t had a real pay rise for six years and ain’t going on a spending spree anytime soon.
    7 Cross out step 5 above and replace with step 8.
    8 Corporates take advantage of low interest rates to refinance their old debts and sit tight waiting for severe case of Austeritatis Osbornosis to clear in the public and, subsequently, private sector customers.

    Meanwhile at the central bank, the governor wants to know why he can’t dump £375 billion of Gilts in the bin as he has swapped them all for the original government money that was spent into the private sector and used by the private sector to buy them in the first place.

    1. petermartin2001
      January 12, 2015


      I know what you are getting at but if we go along with the idea that the BoE is somehow independent of government then the Governor needs those Gilts to keep his balance sheet right.

      If I set up the Bank of PM and the Treasury of PM as separate organisations, and spend from my treasury account only, I could move say £10k worth of bonds from my Treasury to my bank and move £10k worth of liabilities (cash) from my bank to my Treasury, which I could then spend on a new bathroom. My house then increases in value by £10k , but I’ve spent £10k in cash. I’ve also got an asset of £10k worth of bonds in my bank and a liability of £10k in my treasury to my bank.
      So I’m all square on the deal!

      If this sounds unnecessarily complicated that’s because it is. But that’s just the way it is in government. A sensible person would just think: OK I’ve spent £10k on a new bathroom but it’s worth doing that because I’ll get my money back when I sell the house!

      1. acorn
        January 13, 2015

        The Governors balance sheet was never not right. When the Treasury spends its fiat money into existence it appears as a “reserve” at the central bank. The exact same amount would be duplicated into my current account at my high street bank, if it were my pension payment say. My High Street bank has its own current account at the central bank. My bank now has a liability to me, my pension deposit and no asset to balance it.

        The central bank moves a “reserve” equal to my deposit into my banks current account. It now has an asset to balance my liability. The Treasury does not have or need a balance sheet, it creates the currency by spending it into existence as a number in a spreadsheet or a piece of paper with a picture of the Queen on it. Both cost it next to nothing.

        The Treasury and the central bank are one and the same, now recognised by accounting rules that stop the Treasury paying interest to itself, by “round tripping” the payments through holdings of Treasury debt by its own central bank.

        If JR allows, the Mosler business card money story works well on sixth formers. Notice there is no central bank required yet.

        “The concept of fiat money can be illuminated by a simple model: Assume a world of a parent and several children. One day the parent announces that the children may earn business cards by completing various household chores. At this point the children won’t care a bit about accumulating their parent’s business cards because the cards are virtually worthless. But when the parent also announces that any child who wants to eat and live in the house must pay the parent, say, 200 business cards each month, the cards are instantly given value and chores begin to get done. Value has been given to the business cards by requiring them to be used to fulfill a tax obligation. Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. In fact, a tax will create a demand for at LEAST that amount of federal spending. A balanced budget is, from inception, the MINIMUM that can be spent, without a continuous deflation. The children will likely desire to earn a few more cards than they need for the immediate tax bill, so the parent can expect to run a deficit as a matter of course.

        To illustrate the nature of federal debt under a fiat monetary system, the model of family currency can be taken a step further. Suppose the parent offers to pay overnight interest on the outstanding business cards (payable in more business cards). The children might want to hold on to some cards to use among themselves for convenience. Extra cards not needed overnight for inter-sibling transactions would probably be deposited with the parent. That is, the parent would have borrowed back some of the business cards from the children. The business card deposits are the national debt that the parent owes.

        The reason for the borrowing is to support a minimum overnight lending rate by giving the holders of the business cards a place to earn interest. The parent might decide to pay (support) a high rate of interest to encourage saving. Conversely, a low rate may discourage saving. In any case, the amount of cards lent to the parent each night will generally equal the number of cards the parent has spent, but not taxed – the parent’s deficit. Notice that the parent is not borrowing to fund expenditures, and that offering to pay interest (funding the deficit) does not reduce the wealth (measured by the number of cards) of each child. “

      2. A different Simon
        January 13, 2015

        “which I could then spend on a new bathroom. My house then increases in value by £10k , but I’ve spent £10k in cash. ”

        That is not the way it works in the rentier U.K. economy .

        Houses go up without you having to spend a cent on improve them .

        This trend relies on buyers taking on more debt in real terms than the seller originally did .

        The belief is that this can go on indefinitely .

    2. acorn
      January 12, 2015

      JR, I am at a loss as to why my post of the 8th, failed moderation. I have given it the customary four days wait to be fair. OK, I understand that it is a bit complicated for the likes of Cameron and Osborne but, you have been there and got the T shirt.

      A UK programme of import substitution would be a good idea, alas, we do not have an economic management system in Westminster / Whitehall that has the competence to manage that. Punch & Judy we are stuck with.

      Having a large net import bill means other countries, end up with a lot of our Pounds Sterling. You can see it happening in the ONS Trade data. “3spoken” does a good graphic of it as well. You really want those Pounds recycled into the UK rather than the rest of the world “saving” them. So why does the UK government pay such people NOT to spend those Pounds, by issuing interest paying bonds (Gilts)? And, the higher the interest rate, the more you are encouraging them not to spend.

      The WTO reckons that 92 – 94 % of currency trades (FX market) are purely speculation leaving circa 6 – 8 % for transactions for paying invoices. That means that the value of the Pound for instance is not set by fundamental balance of trade requirements. Specialists tell me, in their opinion, the Pound is currently overvalued by around 10 – 12 %. This appears to be supported by the REER being at an index value of circa 110 %. A stronger Pound, caused by the prospect of rising interest rates means, we will be tempted to importing more of them 60 inch plasma TVs.

      As Neil Wilson says, “Stronger currencies can buy more goods and service from overseas, and so tying the two ends together you end up with the government paying foreigners more currency so that the country can import more goods and services. With current budget balancing policies it seems to me that means taxing the citizens of your country so that you can subsidise imports and close down substitute domestic production. That’s crazy isn’t it?”

      There is a case for shutting down the process of controlling inflation by a central bank controlling an economy wide sledgehammer interest rate. That tool could be taken back into the Treasury and used as a substitute for taxation if / when needed.

      Remember, the country (its central bank to be specific), that is trying to force your currency up in value, is the country that sells you their exports.

    3. Denis Cooper
      January 12, 2015

      I’ve never heard either the last or the present Governor wanting to know that. I did hear the last governor saying that Osborne could have the cash balances for the moment but the Bank would need them back eventually.

  17. oldtimer
    January 12, 2015

    It sounds to me as though someone is cranking up the spin machine to do something they want to do (such as QE in the EZ) that is not justified by the facts.

    January 12, 2015

    Back in the days of the late PM Rt Hon Harold Macmillan, when lights switched on to full brightness immediately and TVs no longer required “warming-up” or “…awaiting signal ” the BBC News hardly mentioned inflation and certainly not deflation. A monochrome photo appeared on the screen showing a docked ship with a bullet point for IMPORTS and another for EXPORTS with a percentage figure against each. 9 out of 10 times the imports exceeded exports. A smiling voice-over added “BUT our invisible earnings are satisfactory ” A figure was quoted which far outweighed any Balance of Trade consideration. Few people had the slightest inkling what these “invisible” earnings actually were about but imagined they were something to do with the jiggery-pokery of banks and insurance companies which, in my opinion, wasn’t an invisible number of miles from the truth.

    Hard to comprehend or indeed see our nation’s performance in the full landscape of world economics even if we focus on trade figures or notions of inflation and deflation.

    john Citizen, as he used to be known, but now further dehumanized by being termed “The Public” like a Coronation Street smoke filled snug or roadside midden, sees little change in his bank account “trade” figures except they are slowly edging into the red. His ship has come home but he guesses he will find it empty and will see, after General Election triumphalist trumpetting that he will again be called as duty to man the bilge pumps, and pay even more tax to whichever band of pirates has seized the helm..

  19. Stephen Berry
    January 12, 2015

    “As prices fall so people hold off buying the inessentials, knowing they will be cheaper later. This in turn can induce further price falls as stocks hang heavy on producers which they need to discount to sell.” (JR)

    But we should not look at the price of goods without reference to the price of labour. In an era of deflation the price of labour too will be falling, so not only will goods be cheaper in nominal terms, so too will labour. Waiting for the goods to fall in price would be like waiting for a competitor running on a treadmill to get tired, not realizing that you too are running on a treadmill at the same speed.

    What we really need to ascertain is the purchasing power of labour and this can improve in both a deflationary and an inflationary environment. Under the gold standard in the 19th century wages fell, but they fell slower than the price of goods and this brought about a rise in living standards. In the inflationary era since WW2, wages have risen but it is only the fact that have risen faster than the price of goods which has ensured our rise in living standards.

    A further problem with the people-holding-off-their-purchases idea is the fact that if I want a pint of beer, I tend to want it now and not next week. For instance, like most people, I have never held off purchasing a personal computer even though I know that it is likely to be better and cheaper in two years time.

    1. waramess
      January 12, 2015

      I agree with this totally however politicians these days have some wierd ideas.

      They don’t like an orderly liquidation of poor investments following a bubble because it causes temporary unemployment. They far prefer to exist in a zombie economy which is not quite as apparent to the electorate.

      Additionally they have put in place the minimum wage and this in itself should alert any thinking politician to the risk of deflation where prices fall but wages cannot.

      They know it is popular with the electorate but they know, or should know full well, that this of itself would cause deflation to escalate into a depression .

      So, all in all they need to sing in unison from a flawed hymn sheet.

      1. Stephen Berry
        January 13, 2015

        Yes, ‘waramess’ this is an interesting point.

        If we lived in an era of stable prices or gently falling prices then minimum wage laws would have to go if we wanted to avoid making the whole population unemployed.

        Perhaps the politicians would compensate for this disappointment by bringing in a maximum wage law?

  20. Bob
    January 12, 2015

    I see that Mr Cameron’s sanctions on Russia are beginning to bite – with the British dairy farmers!

  21. Margaret Brandreth-J
    January 12, 2015

    Thank goodness for something to read which is mildly positive.

  22. Dennis
    January 12, 2015

    “As prices fall so people hold off buying the inessentials, knowing they will be cheaper later.”

    That would be silly – if the goods become more cheap over a period then some people will buy, decreasing stocks, and as profits fail the company may well go out of business and those waiting for cheaper prices won’t get the products at all – so better to buy very soon.

  23. ian
    January 12, 2015

    Deflation all about how much debt you have, as you look at the elite, banks, governments and companies of the world, they have taken on lots of debt to fight deflation and buy more assets because they think the central banks have got there backs. As you can see with the oil wet&mad will waste billions on that and he will get nowhere. The best think to do is shut most of it down. They will not do that they will fight it. If i have a house that is worth 1 million pounds and go down to 100,000 pounds i have lost 90% which a bad thing if had 800,000 pound debt on it but i had no debt on it or not a lot of debt then it does not matter because all prices are relative i have lost nothing and all other prices, cars, food and so on would come down as well, it call relativity, now albert einstein was no fool. What it means is a change at the top they come down as opportunity open up for the poor which is everything the elite, banks and governments want to avoid at all costs.

    That”s why the rich invented central banks so assets would always go up with inflation and keep them at the top because before with deflation the leadership could change so quick if they made a mistake or they not that smart and lose the banks money, this way they could keep people with little intelligence at the top by birth right or favour, that”s why they done way with bank managers in the ninetys because they were giving money to people they did not want to give money to.

    That”s why they tell you that deflation must be defeated at all costs because it bad for the people of this country but only less than 50% of people have debt on there homes and as you are seeing deflation is very hard to beat. When the ECB go all in and another round by us and the rest of QE which will fail, you think they are winning, if they were winning what”s all the fuss about. They will take the shirt off your back and still loses. I say long live deflation. before when we had deflation we would have massive growth with new people coming up the ladder, that ladder has been taken away. it only for people they like entertainers family menbers and people who them a good turn.

  24. Edward2
    January 12, 2015

    In the old days Governments used to reduce taxes at times of lack of consumer demand.
    And encourage Hire Purchase by reducing the minimum deposit required.

    I know its an unusual step in Europe and in the UK, but if deflation is looming them perhaps a little tax cut for wage earners might be nice.
    Give us back a little bit more of our gross pay in our “pay packets” to spend and enjoy.

  25. miami.mode
    January 12, 2015

    I thoroughly agree that current deflation fears are overdone.

    Much of current UK deflation must be due to falling energy prices and other imported products. As for the argument that it places an unbearable burden on those with debts, then surely these lower prices give them more cash in their pockets to enable them to more easily pay off their debts.

    Of course, those with stupendously high debts e.g. UK government may be in some difficulty, so they would probably welcome some inflation.

  26. ian
    January 12, 2015

    I am loving every moment of it watching your lot smash there selfs up on the rocks.

    When looking at the manifesto yesterday, labour blank page troys blank page libs blank page ukip manifesto look like somethink from the eighty that the government lead by a real person would of put forward to win election today also the greens. Your lot have got nothing to offer, only more of the same as dictated by the elite and central bankers. it a poorman who does not no when he lost, not the election but the war on deflation also still trying to build empires out of debt.

  27. Brian Tomkinson
    January 12, 2015

    JR: “There is a new fear abroad.”
    Isn’t that just how the ruling classes like it? We, the proletariat, must be kept in a constant state of fear and anxiety whilst they manipulate circumstances for their own advantage.

  28. Denis Cooper
    January 12, 2015

    “ECB divided on government bond-buying plan”

    “European Stability Mechanism head says ECB can’t be lender of last resort for Eurozone govts”

    So it may not happen.

  29. APL
    January 12, 2015

    JR: “Deflation means a general fall in the price level of a country or currency zone, ”

    You continue to misrepresent what deflation is. As with inflation, there are two types of deflation; deflation that comes with increasing productivity and technological innovation – leading to an increase in the value of the currency, that is a unit of currency will buy more of an item.

    This is why we have seen computers increasing in processing power, memory and functionallity, all the while the price paid for a PC ( to take an example ) has been falling.

    The other type of deflation, that which comes after excessive credit expansion is what you rightly fear. Because whenever it hits, its impact can be so severe and wide reaching that governments are often toppled and revolutions occur.

    This type of deflation occurs because, governments – who else is in charge of the economy – encourage reckless credit expansion to goose the economic figures, symptoms of credit expansion, bubbles in the economy, in the UK currently, the bubble the government is desperate to maintain is the property bubble – at least until the next election is over. But also we have a inflationary bubble in the stock market. The deflation that follows an inflationary credit expansion – that we have been seeing over the last thirty years, occurs because like every ponzi scheme, you eventually run out of ‘greater fools’ to keep the momentum going.

    Here we are. Congratulations to the political class of the United Kingdom who’d prefer to win an election rather than govern the country properly.

  30. ian
    January 12, 2015

    Could you imagine going back to mark to market, you soon see were the deflation then

  31. REPay
    January 12, 2015

    Yes, your analysis is shared by friends in the markets. This manufactured scare is an opportunity to press for more QE that will injure savers, businesses but not the index-linked policy makers and politicians…or those with financial assets where the QE money will end up unless it is well directed into better infrastructure or training to raise Europe’s skill sets.

    I think the Bundesbank will see through it…though their political masters might like some stimulus at the expense of the value of the euro. There is little real sign of deflation to date!

  32. Jon
    January 12, 2015

    The global economy with it’s not now so new entrants meant the West would devalue, in order to compete.

    Where would say 10, 20 or so years from now, with more severe demand on resources leave a highly regulated empire? When food is at a premium what will be the pontification of EU regulators on the size, colour and geometric shape of a banana be? I think it may well be the same but the rest of the world will have moved on.

    I am impressed with how the young today look far less to the State, assuming much of it won’t be there for them, reject the unions and are looking to progress to better their lot themselves, not relying on the state. How will a heavily regulated Empire fair in 10, 20 or so years?

    Trade needs an underwriter to back up to every contract that is made, in Europe the regulators manage that to an extent. Will the young and technology move it into a direction that overtakes the cumbersome unresponsive State regulation? In that 10 or so timescale we are in for a shock, a step change. I wasn’t totally adverse to the EU but don’t think it is nimble enough going forward.

  33. Bazman
    January 12, 2015

    We still have house price inflation and that is good as all Daily Mail readers know. I am currently earning well over a grand a month for doing absolutely nothing! When wages rise a little those same Daily Mail readers will be shouting wage inflation and calling for pay cuts to all workers in particular those in low paid jobs in the public sector in the north as everything is cheaper there like in the third world and even if you do not have a job you can gather firewood churn butter and choose from all the cheap goods in your leisure time which is now paid for by the state.

    1. Edward2
      January 14, 2015

      You are not actually “earning” £1000 per month though are you?
      Unless you sell up and buy a tent to live in or go and live in somewhere like Cambodia you will never realise these paper profits.
      It the same when people say Bill Gates is worth some huge number of billions.
      Its an illusion.

      1. Bazman
        January 16, 2015

        Its true, if I were to move to cheaper area in the UK or a tent in Cambodia the profits from all my hard work could be realised as you say. This is another drag the housing shortage has on the UK. Preventing free and easy movement of people and business in both directions. I could rent and keep the property but I would then give my profits to a landlord and have to be a landlord so there would be no point.
        I always told you were a Bill gates apologist, but you are actually real a Bill Gates apologist! LOL!

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