Economics Question

[ukcstokie]

Now this may be a dumb question, but here goes...

We now have negative inflation.

The last two Governments have followed a policy of austerity, reducing expenditure so that the debt can be reduced (parking here the point that they are actually increasing the overall debt).

Now I remember back in the 1970's - when the Labour Government took the approach of 'printing money'. We were told that the problem of this approach was that it was inflationary.

So, given the current inflationary position, couldn't the Bank of England effectively 'print' more money, and use it to buy Government debt (bonds)? This appears to be similar to what they did when they did quantative easing - but does help the overall economy?

Can someone with a better grasp of economics tell me where I'm wrong please?

[britsabroad]

They could do that if they hadnt already done so much of it with quantitative easing. If they want interest rates to rise in the slightest in the next 50 years they will try to avoid doing it again.

[harryburrows]

May 19, 2015 16:22:20 GMT ukcstokie said:

Now this may be a dumb question, but here goes...

We now have negative inflation.

The last two Governments have followed a policy of austerity, reducing expenditure so that the debt can be reduced (parking here the point that they are actually increasing the overall debt).

Now I remember back in the 1970's - when the Labour Government took the approach of 'printing money'. We were told that the problem of this approach was that it was inflationary.

So, given the current inflationary position, couldn't the Bank of England effectively 'print' more money, and use it to buy Government debt (bonds)? This appears to be similar to what they did when they did quantative easing - but does help the overall economy?

Can someone with a better grasp of economics tell me where I'm wrong please?

Zimbabwe tried it recently , their currency became worthless

[nicholasjalcock]

Fundamentally, this is not deflation as the negative inflation is temporary. It reflects the $45 barrel oil price which has risen to $65 barrel today. So petrol and fuel costs will rise. You're right that economists have warned too much printed money could be inflationary but much of this printed money has been used to rebuild balance sheets and today banks have to hold more reserves in case of another banking crisis. So, some of the more extreme worries of Weimar Germany 1930s style inflation are wide of the mark too.

[boothenboy75]

Japan recenty did this. Abenomics, named after ther premie,r doubled the money supply, but only after a decades long battle with deflation. It seems to have had some success with inflation now running at just under 2%. As nicholas says though our own deflation isn't structural but merely a short passing phase due mainly to the drop in oil. Don't worry prices will soon be rising again. :)

[nicholasjalcock]

May 19, 2015 19:12:07 GMT boothenboy75 said:

Japan recenty did this. Abenomics, named after ther premie,r doubled the money supply, but only after a decades long battle with deflation. It seems to have had some success with inflation now running at just under 2%. As nicholas says though our own deflation isn't structural but merely a short passing phase due mainly to the drop in oil. Don't worry prices will soon be rising again.

You're right. I used to do a lot of economics work for the MoD 15 years ago. I was amazed by the scale of Japan's deflation. Not only did the BoJ support the banks but the insurance companies were in an awful state too! Japan has no welfare state so the Japanese save money on a massive scale. Japan has the highest saving rate in the modern world.

[boothenboy75]

May 19, 2015 19:24:29 GMT nicholasjalcock said:

May 19, 2015 19:12:07 GMT boothenboy75 said:

Japan recenty did this. Abenomics, named after ther premie,r doubled the money supply, but only after a decades long battle with deflation. It seems to have had some success with inflation now running at just under 2%. As nicholas says though our own deflation isn't structural but merely a short passing phase due mainly to the drop in oil. Don't worry prices will soon be rising again. :)

You're right. I used to do a lot of economics work for the MoD 15 years ago. I was amazed by the scale of Japan's deflation. Not only did the BoJ support the banks but the insurance companies were in an awful state too! Japan has no welfare state so the Japanese save money on a massive scale. Japan has the highest saving rate in the modern world.

I could be wrong but don't they have one of the highest levels of government debt in the world, which they only sustain (as you say) due to their citizens being such high savers?

[geoff321]

There are several factors that can cause inflation but the main one is continual expansion of bank lending and consumer borrowing. There are two simple reasons bank lending is not expanding enough, the first is the reluctance of banks to lend and second the already indebted consumer is unwilling to borrow, deflation is the inevitable result.

[boothenboy75]

May 19, 2015 19:33:07 GMT geoff321 said:

There are several factors that can cause inflation but the main one is continual expansion of bank lending and consumer borrowing. There are two simple reasons bank lending is not expanding enough, the first is the reluctance of banks to lend and second the already indebted consumer is unwilling to borrow, deflation is the inevitable result.

Well that certainly doesn't square with Japan over the past 2 decades!

As you say borrowing levels is one of them but is not even one of the biggest factors let alone the main one. There are many more important issues affecting both the supply and demand side such as interest rates, exchange rates, balance of payments, commodity prices, employment levels, etc.

[geoff321]

Interest rates have been low for six years, commodity prices have been collapsing over the last couple of years, employment levels are high, the problem now is to much debt both public and private.
QE has amongst other things been an attempt to create inflation but it has not reached the real economy enough, the money has had to go somewhere and it has gone into the stock market which is now at record highs.

I have been having this debate about inflation on a financial website where virtually everyone was talking about money printing causing inflation, even hyperinflation some said, yet deflation has been slowly spreading across the Globe and will continue to do so, it is almost impossible to have inflation without continued expansion of bank lending.

[nicholasjalcock]

May 19, 2015 19:32:37 GMT boothenboy75 said:

May 19, 2015 19:24:29 GMT nicholasjalcock said:

You're right. I used to do a lot of economics work for the MoD 15 years ago. I was amazed by the scale of Japan's deflation. Not only did the BoJ support the banks but the insurance companies were in an awful state too! Japan has no welfare state so the Japanese save money on a massive scale. Japan has the highest saving rate in the modern world.

I could be wrong but don't they have one of the highest levels of government debt in the world, which they only sustain (as you say) due to their citizens being such high savers?

A lot of Japanese savings ends up funding the U.S.A.'s debt too. While the Americans spend like mad it's Japanese(and Chinese) savings that are covering it! I wish they could do the same for me!

[boothenboy75]

May 19, 2015 19:54:13 GMT geoff321 said:

Interest rates have been low for six years, commodity prices have been collapsing over the last couple of years, employment levels are high, the problem now is to much debt both public sand private.
QE has amongst other things been an attempt to create inflation but it has not reached the real economy enough, the money has had to go somewhere and it has gone into the stock market which is now at record highs.

I have been having this debate about inflation on a financial website where virtually everyone was talking about money printing causing inflation, even hyperinflation some said, yet deflation has been slowly spreading across the Globe and will continue to do so, it is almost impossible to have inflation without continued expansion of bank lending.

I'm struggling to understand how you can say there is too much public and private debt and then say that there should be more bank lending to increase inflation?

Inflation will soon return towards it's traget level and if history is anything to go by creep above it. It wasn't long ago that arguments were made that interest rates would have to go up to counter high inflation, now a few are troubled by a momentary dip into deflation.

QE achieved it's main aim in dragging us clear of depression, I've not come across anyone who thought it was a way of causing infation. Historians will I'm sure find ways in which the money could of been fed into the economy better, i.e more investment in the countries infrastructure, but will I'm sure consider it a relative success.

[geoff321]

I'm not saying there should be more lending, I'm simply stating the reason why bank lending and consumer borrowing are not expanding enough, that is because banks are more cautious and borrowers already have to much debt.

[boothenboy75]

May 19, 2015 20:14:09 GMT geoff321 said:

I'm not saying there should be more lending, I'm simply stating the reason why bank lending and consumer borrowing are not expanding enough, that is because banks are more cautious and borrowers already have to much debt.

T

Thats it though, sometimes you just have to nail your colours to the mast. You can't say that theres too much debt and that banks should lend more. Similarly you can't say theres too much government debt and that they should spend more.

I believe that the recent restrictions on bank lending are quite small and that there overall effects on inflation are that small as to be irrelevant to the current dip into deflation.