ChatterBank60 mins ago
Can Someone Explain.
36 Answers
Me being a little dumb :0) I've never really understood how increasing the bank rate helps stop inflation.Make it simple if you can.
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Yes Hymie. Your anecdote - fascinating as it is - does not demonstrate deflation.
Just as a starter, your example involved new technology which was bound to get cheaper when volumes increased and development costs were recovered. Deflation influences discretionary spend, not essentials such as food (which have to be bought whatever).
Have a read up on what it really means. In particular, have a look at what twenty-odd years of deflation has done to the Japanese economy. When you've done that, report back.
Just as a starter, your example involved new technology which was bound to get cheaper when volumes increased and development costs were recovered. Deflation influences discretionary spend, not essentials such as food (which have to be bought whatever).
Have a read up on what it really means. In particular, have a look at what twenty-odd years of deflation has done to the Japanese economy. When you've done that, report back.
Since 2000 the average inflation rate in Japan (over the 22 years) is +0.13%; I don’t consider a positive inflation rate to be a deflationary figure.
And the highest annual (negative inflation) deflation rate was -1.3%.
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And the highest annual (negative inflation) deflation rate was -1.3%.
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// ... all nations must realise sooner or later that the economic model of the last quarter century was madness. Fortunately Ms Truss has realised this sooner than most because the longer the problem is left unaddressed the harder it will be to cure it. //
Well, possibly. But she seems to have done a poor job of selling it.
I wouldn't dream of commenting on the economic wisdom, or otherwise, of the present Government's approach. But politically it's been an absolute disaster. Not the most auspicious start.
I personally would have thought that Truss's approach would be justified politically with an established mandate from the country, rather than just the Tory Party rank-and-file. Or, at the very least, more honesty that these sweeping changes to taxation hardly deserve the "mini" in the so-called mini-budget; it would surely have been better to publish alongside an OBR analysis.
Well, possibly. But she seems to have done a poor job of selling it.
I wouldn't dream of commenting on the economic wisdom, or otherwise, of the present Government's approach. But politically it's been an absolute disaster. Not the most auspicious start.
I personally would have thought that Truss's approach would be justified politically with an established mandate from the country, rather than just the Tory Party rank-and-file. Or, at the very least, more honesty that these sweeping changes to taxation hardly deserve the "mini" in the so-called mini-budget; it would surely have been better to publish alongside an OBR analysis.
//the country’s national debt stands at somewhere around 260% of GDP – which make the UK’s (at around 100%) look good.//
The UK's is not "around 100%". It's around 85%, but I won't quibble. It does make the UK's look respectable.
One of the features of inflation is that it reduces government and personal debt. I have experience of it. When I first took a mortgage it was about three or four times my annual salary. When I'd finished paying it off, it was about a quarter of my annual salary. So it is (normally) with government debt.
The principal reason Japan's national debt is so high has little or nothing to do with its demographics. It's because it has been suffering deflation for thirty years and has only just resumed a decent inflation rate. There are similarities to what has happened in the UK: record-low interest rates fueled stock market and real estate speculation that sent valuations soaring throughout the 1980s. Upon realizing that the bubble was unsustainable, the Bank of Japan raised interest rates to try and stem the speculation. The move quickly led to a stock market crash and debt crisis, as borrowers failed to make payments on many debts that were backed by speculative assets.
Deflation leads to lack of demand and lack of growth and causes a multitude of economic problems. The accompanying low interest rates allows borrowers to overstretch themselves with the concomitant problems that arise when rates increase.
But back to the UK, where deflation is not an issue. The country has "enjoyed" ridiculously low interest rates for 14 years. Many young adults have known nothing but rates in the very low single figures. With inflation at 10% there is no way these low rates can be sustained. Inflation is global and has not been caused by the UK government's actions. It is actually higher in the EU (as a whole) than it is here. There is no way that interest rates can remain low and people will have to get used to higher rates, as they did in the 1980s and 90s.
The UK's is not "around 100%". It's around 85%, but I won't quibble. It does make the UK's look respectable.
One of the features of inflation is that it reduces government and personal debt. I have experience of it. When I first took a mortgage it was about three or four times my annual salary. When I'd finished paying it off, it was about a quarter of my annual salary. So it is (normally) with government debt.
The principal reason Japan's national debt is so high has little or nothing to do with its demographics. It's because it has been suffering deflation for thirty years and has only just resumed a decent inflation rate. There are similarities to what has happened in the UK: record-low interest rates fueled stock market and real estate speculation that sent valuations soaring throughout the 1980s. Upon realizing that the bubble was unsustainable, the Bank of Japan raised interest rates to try and stem the speculation. The move quickly led to a stock market crash and debt crisis, as borrowers failed to make payments on many debts that were backed by speculative assets.
Deflation leads to lack of demand and lack of growth and causes a multitude of economic problems. The accompanying low interest rates allows borrowers to overstretch themselves with the concomitant problems that arise when rates increase.
But back to the UK, where deflation is not an issue. The country has "enjoyed" ridiculously low interest rates for 14 years. Many young adults have known nothing but rates in the very low single figures. With inflation at 10% there is no way these low rates can be sustained. Inflation is global and has not been caused by the UK government's actions. It is actually higher in the EU (as a whole) than it is here. There is no way that interest rates can remain low and people will have to get used to higher rates, as they did in the 1980s and 90s.
Keep up NJ – we’ve crashed through 100% already.
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A balanced explanation of the current "financial crisis" from renowned economist Ewen Stewart. If New Judge looks back in it is something that may interest him.
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interesting article Togs, especially this paragraph:
"The truth is that an unprecedented decade of free money came to an abrupt halt. As can be seen by the chart below, all countries faced a similar conundrum. The UK is not in splendid isolation here, though you would think it was by the political and media response" - If you listen to our resident 5C you'd think it was just the UK!
"The truth is that an unprecedented decade of free money came to an abrupt halt. As can be seen by the chart below, all countries faced a similar conundrum. The UK is not in splendid isolation here, though you would think it was by the political and media response" - If you listen to our resident 5C you'd think it was just the UK!
"Poor Kwarteng delivered a Budget that lacked political nous, for sure, and was insensitive in terms of the balance of tax cuts, but it was absolutely required if the UK economy was to have any chance of breaking the death spiral of tax and spend." - So he did the right thing in spite of the political fall out. 5C take note.
"Recession in my estimation is inevitable throughout the West: in the UK, US and EU. The US will likely fare better than the UK, but I would wager the UK should do better than most in the eurozone where imbalances remain great and monetary normalisation is very far from complete." - oh dear remoaners!
//If New Judge looks back in it is something that may interest him.//
Yes it does interest me, Togo and thanks for finding it. The article largely explains (far better than I can) the points I have been trying to get across. Since 2008 (and possibly before) economies (as well as businesses and individuals) worldwide have relied on cheap or almost free money to sustain what they consider to be "growth". Governments have been keen to encourage that by printing what amounts to worthless money. If there are any "outliers" to conventional wisdom, it is not theh Truss:Kwateng partnership; it is everybody else who believes such a model can be sustained. The article explains the folly of this and reiterates my point that sooner or later all major economies will have to face the same conclusion.
Yes, the UK's announcement last week amounted to a major shock and it could have been better timed and accompanied by some realistic spending plans. But the underlying message is sound even if the delivery was a bit short on detail. But the message is clear: the printing press has been turned off; businesses and individuals will have to get used to paying the going rate to borrow money; the "wealth" that people believe they have accumulated over the past decade and a half will be watered down.
The reaction to the "mini-budget" was predictable. The howls of anguish came from all the quarters that supported and encouraged this ridiculous fiscal strategy. Markets don't like sudden announcements that they were not expecting. But even the pension fund "scare" was predicable if those running them had not assumed that a life of zero interest rates would not endure forever. They invested heavily on the basis of "Liability Driven Investment" where they used their gilt assets as collateral to raise more money. The value of those guilts collapsed upon the Chancellor's announcement (largely as a result of the pension fund managers themselves selling them off) and they had to post more collateral to maintain their positions. But the main gripe of many people, including some Tory back - the abolition of the 45% tax rate - is simply unjustified. For starters, that tax take resulting from that rate is around just £2bn of the £45bn cuts announced. But the 40% rate was deemed perfectly adequate for the entire duration of the Blair/Brown administration until a couple of years before its end. Gordon Brown introduced it, secure in the knowledge that any (presumably Tory) government that seeks to abolish it would be shown as "feeding the rich."
Yes it does interest me, Togo and thanks for finding it. The article largely explains (far better than I can) the points I have been trying to get across. Since 2008 (and possibly before) economies (as well as businesses and individuals) worldwide have relied on cheap or almost free money to sustain what they consider to be "growth". Governments have been keen to encourage that by printing what amounts to worthless money. If there are any "outliers" to conventional wisdom, it is not theh Truss:Kwateng partnership; it is everybody else who believes such a model can be sustained. The article explains the folly of this and reiterates my point that sooner or later all major economies will have to face the same conclusion.
Yes, the UK's announcement last week amounted to a major shock and it could have been better timed and accompanied by some realistic spending plans. But the underlying message is sound even if the delivery was a bit short on detail. But the message is clear: the printing press has been turned off; businesses and individuals will have to get used to paying the going rate to borrow money; the "wealth" that people believe they have accumulated over the past decade and a half will be watered down.
The reaction to the "mini-budget" was predictable. The howls of anguish came from all the quarters that supported and encouraged this ridiculous fiscal strategy. Markets don't like sudden announcements that they were not expecting. But even the pension fund "scare" was predicable if those running them had not assumed that a life of zero interest rates would not endure forever. They invested heavily on the basis of "Liability Driven Investment" where they used their gilt assets as collateral to raise more money. The value of those guilts collapsed upon the Chancellor's announcement (largely as a result of the pension fund managers themselves selling them off) and they had to post more collateral to maintain their positions. But the main gripe of many people, including some Tory back - the abolition of the 45% tax rate - is simply unjustified. For starters, that tax take resulting from that rate is around just £2bn of the £45bn cuts announced. But the 40% rate was deemed perfectly adequate for the entire duration of the Blair/Brown administration until a couple of years before its end. Gordon Brown introduced it, secure in the knowledge that any (presumably Tory) government that seeks to abolish it would be shown as "feeding the rich."
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