Bank of England: Britain Heading Towards 1930s-Style Depression
March 16th, 2009WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
I’m not convinced that it’s going to be deflation. Not yet. Not with the printing presses preparing to go to afterburner.
Your thoughts?
Via: Telegraph:
The country is displaying early symptoms of being trapped in a so-called “debt deflation trap” where families find themselves pushed further and further into the red every month, according to a Bank report published today.
The stark warning will cause serious concerns, since it was this combination of falling prices and soaring debt burdens that plagued the US in the 1930s.
The Bank is using its Quarterly Bulletin to highlight the threat posed to the economy by deflation – where prices fall each year rather than rise.
Although inflation is currently in positive territory, it is expected to become negative in the coming months.
The Bank is worried that this may combine with high levels of indebtedness to squeeze families further.
It says that families with high debts could fall prey to the debt deflation trap. This means that the cost of their debts, which are fixed, would rise compared to average prices throughout the economy. While inflation erodes debts, deflation makes them relatively higher.
The Bank’s paper suggests that Britain is particularly at risk because there is a high proportion of families with significant levels of debt, and many of them are on fixed mortgage rate, which means they will not benefit from rate cuts.
Britons’ total personal debt – the amount owed on mortgages, loans and credit cards – is, at £1.46 trillion, more than the value of what the country produces in a year.
Total personal debt has risen by 165 per cent since 1997 and each household now owes an average of about £60,000.
The Conservatives claim this is the highest personal debt level in the world.
The Bank’s paper also says that consumers were suffering as banks keep the cost of borrowing high, despite Government attempts to get them lending again.
…
The bank slashed interest rates to just above zero and pledged to create £150 billion worth of cash with which to buy up government and corporate debt.
This so-called quantitative easing is regarded as a radical measure to help prevent a repeat of the conditions associated with the Great Depression.
Many experts believe that the US authorities’ initial reluctance in the 1930s even to cut interest rates was partly responsible for causing the worst economic slump in Western history.
I´ve poured over the economic data and weighed the scales, I have to lend more probability to the ka-poom theory, though such lending may leave me bankrupt.
Ultimately monetary theory is 10% math and 90% mass psychosis, so if people can get hopenotized and psyched into spending their SDR fun tokens, then we will have inflation in commodities at least. Can people be psyched into spending heavily again? If yes, then inflation.
I’m anything but an economics expert, but 1) we are seeing deflation (to some degree) now and 2) it would be interesting to see some kind of analysis on how long it takes how much additional money to cause how much inflation ( delta I = t * amount of money dumped into circulation * some factor (e.g., “Sparky’s constant”)).
“SDR fun tokens.”
That’s a good one.
I’m not an economics expert either, but even many of the so-called experts have opposing views. I did a study a few months ago to try and get a handle on who the inflationists and deflationists are. It’s available here: http://www.doomers.us/forum2/index.php?topic=35996.0 — I post under the name ninakat there. At any rate, the inflationists outnumber the deflationists in my sampling, hardly scientific, but still somewhat representative of the more outspoken analysts out there. I was biased towards an inflationary outcome before doing the study, and still am now for the reasons Kevin indicated in his opening commentary — the printing presses in afterburner. Keep in mind that the Fed makes money in an inflationary environment, but apparently doesn’t in a deflationary one. The real question is whether or not the Fed still can control this collapse to its advantage. Bernanke is certainly attempting it, which is why even hyperinflation is not out of the question in my view.
I am going to be a strong voice of dissent, on these simple grounds; The Federal Reserve and Treasury can only increase base-money. However, base money accounts for less than 5-10% of the total money supply in circulation. And that’s the only money that matters–the currency in circulation–when it comes to price inflation, which is the symptom that most of us are concerned about when we discuss monetary inflation.
Given the massive, widespread destruction of credit, and largely–credit worthiness of American consumers–the currency in circulation is being destroyed at phenomenal rates, and the increases in base money have no impact whatsoever. Of course, its possible that may change. But I believe that Mike Shedlock nails it when he suggest that we have seen a wholesale change in consumer attitudes toward debt, and as a result, there will not be any significant inflation on the horizon.
I read a ton of analysis, and Mike Shedlock is among my favorites. He is data intense, has an unusual grasp of logic, and he deploys both with aplomb. Let go of the inflation dogman–enjoy the article:
http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html
Caveat: I’m not an economist, but here’s how I see it:
My pick is that we’ll see a deflationary collapse before we see an inflationary one, however you may see localised “inflation” in prices of some things. (Scare quotes because inflation is about the money supply, not just prices. Prices are the symptom, not the disease)
Here’s my reasoning:
– Yes, there is a shitload of printing going on by central banks, but very little of this money is reaching people who might spend it. It’s being sucked into the black hole of banks’ balance sheets.
– The last few years (barring the last 2) have seen a credit boom and a massive increase in derivatives volume. This was inflationary and my guess as to what was fueling the spending of the ultra-rich. The downside of this was that the free money streams of derivatives in good times can turn into a liability many times greater when times go bad. This is how the investment arm of AIG got them hundreds of billions in the hole and had to be bailed out at taxpayer expense.
– Governments arent giving away free money to people hot off the printing presses. There have been some “tax rebates”, but they’ve borrowed money to generate them.
– The only way the governments and central bankers can ignite inflation again (and they’re trying) is to get people to borrow, but do you know anyone who’s thinking about getting a massive mortgage or buying a new car on credit?
– As usual, you and I see the downside of both inflation and deflation. On the inflation side we see our savings erode, purchasing power disappear and prices rise way faster than incomes. We of the sub-$100m investing class cannot participate in the markets where the ultra-rich play. On the deflation side we see the collapse of government services that we think we’ve paid for via taxes (instead the taxes go to bailouts), we end up holding the bag of government debt (used for bailouts, rebates and to pay for the services that tax no longer covers) and we see the collapse of jobs and the resulting downward pressure on wages.
Welcome to the new hell, same as the old hell.
i tend to agree with Seattle Shortbus’ comments. the destruction of fictional asset values is a very big black hole, with the final coup de grace being the credit default swaps–the ultimate antimatter?
btw, surely hyperinflation is the preferred weapon of the ultra-elite?
bloodnok: “My pick is that we’ll see a deflationary collapse before we see an inflationary one …”
We’ve been IN a deflationary collapse, my dear, for several years now. It’s just going to get more ugly and obvious. I’m curious as to when it turns inflationary, and I suspect it’ll take a LOT longer than I imagine. I thought the circus top was coming down over a decade ago with the LTCM implosion. I was waaaaaay early. Lawdy, but it’s eye-popping how things get propped up and buffed beyond surreality, dazzling the sheeple. So pookie’s shiraz-dipped finger in the wind indicates no hyperinflation until at least 2012.