Deflation averted...

Thomas Rai

Could somebody here please explain, in very simple terms, why deflation is a bad thing?

C Powell

We don't have deflation; we have a lower rate of inflation than previously but prices are still rising. And what do you think will happen to prices when the higher prices on our imports caused by the 30% drop in value of the pound come through?

I have the feeling that the threat of deflation is being used by the authorities to justify printing money in order to inflate away their debts. Fine for the imprudent; absolutely disastrous for the prudent.

Only to be expected, I suppose, from a government which has been anything but prudent.....

Rhoda Klapp

How many further rate cuts may we expect? The actual situation is that in many items we have deflating prices, in others the reverse. What we don't have is demand. But the lack of demand is stoked by fear, uncertainty and doubt. It isn't proce-related particularly. To look at this through economics 101 spectacles is to over-estimate the effects traditional remedies would have. We need our confidence back. We can't get it. Deflation is not much of a concern.

Pete Hoskin

Thomas Rai: the Times leader today is a great summary of the issues:

http://www.timesonline.co.uk/tol/comment/leading_article/article5748227.ece

idle

T Rai: The only thing that doesn't go down in a deflationary environment is debt, so it becomes a bigger burden. And we have LOTS of debt.

hysteria

What Rhoda said - this is driven by confidence more than anything else

BrianSJ

C Powell. Spot on. This is a story to frighten and distract the sheeple.
The things we need are going to get a lot dearer from now on, with devaluation and commodities hitting the bottom. We aren't going to have free oil for long, and foodstuffs are going to go up considerably. The things we don't need (flat screen TV etc) may continue to get cheaper depending on currency rates.

Stephen Rose

@C Powell
I agree. The current falls in price inflation are being used as a cover for the massive money printing, boondoggle-laden bailouts and power grabs by the political elite. Typical misdirection.

@Thomas
Deflation, i.e. a contraction in the money supply, need not be a bad thing. As the amount of money circulating decreases the purchasing power of that money increases. Which means falling prices and falling wages. Though deflation-adjusted wages need not be lower. Whilst those with savings are finally rewarded for their self-control and thrift, the profligate find that their debt becomes more expensive.

For socialist western Governments, such as the UK, US and Europe, with economies founded on excessive debt and pollyanna promises, even the remotest chance of actual deflation cannot be tolerated. If deflation did actually occur their welfare states would be revealed for what they are, a collection of pyramid schemes and shell games. To prevent that the politicians will lie, print and bribe to keep the populace from realising the truth. Because of that, hyperinflation is a growing risk for the next decade.

@Rhoda
Confidence is certainly a factor. The lack of confidence of Joe Ordinary in the future and, as a result, the expenditure he is willing to make. The lack of confidence of investors given the possibility of liabilities lurking in the shadows of a company's balance sheet. The lack of confidence of employers and entrepreneurs to create employment in a country which is effectively bankrupt and resembles nothing more than a rotting corpse with a cancer riddled head.

However, the denial over what needs to be done to make the economy healthier is a further problem. The fake demand created by the phony boom has gone. The reality is there is too much capacity, especially for a plethora of discretionary items. The excesses and over supply need to go so that real jobs can be created based on genuine and sustainable demand. Unfortunately, this is not being allowed to happen. Instead, those unwilling to adapt to the new environment have their hands out wanting bailouts, subsidies, protectionism or simply a wodge of cash discreetly slipped in to their back pocket.

Whilst talk of deflation may be nothing more than a smoke screen, a stagnating economy suffering serial recessions and shrinking surplus disposable income is a real possibility as the Government continues to pursue its inverse Darwinism style of economics.

PayDirt

The solution of printing money to pay off debt must eventually be an election issue. Who will the Govt of the day preferentially give the hand-outs to? Labour will pursue the moribund welfare state while Tories will probably gab on about what is “fair”. Meanwhile more and more money will need to be printed as the foreign exchange debts increase. If it’s really that bad, and how do I know how bad it is, it’ll end in default.

oldtimer

It is interesting to see that the inflation goalposts are being altered to suit the government`s agenda. Previously all the talk was about RPI (excluding housing costs) when that produced the lower inflation number - he "low inflation" much invoked by Mr Brown when it suited him. That all changed when commodity prices shot up. Now the talk is all about CPI (including housing costs) which is offered as the deflationary threat, with near zero interest rates, and is now the lower number. "They" seem to think that we do not notice these clumsy attempts at sleight of hand, smoke and mirrors, call it what you will. But we do.

bmc3186

Stephen Rose - don't be so sure that that deflation would expose socialist governments. It's much more likely to destroy private businesses which hold debts.

The classic example of deflation decimating the private sector in a (decidedly) un-socialist economy was - of course - the US during the great depression.

Hyperinflation is not a serious risk. Deflation is certainly more likely, and it would be very damaging.