Learning lessons from Japan

At last, they are beginning to appoint people like Adam Posen to the MPC with clear and independent thoughts.

It is a pity that we don't have people available in the UK up to the required standard, and have to import them from the USA.

Japan is a manufacturer, an exporter, and the second largest economy in the world. As such, it has a strong currency and a trade surplus. Also, its population saves rather than spends. Hence, deflation took hold because wages fell to make Japanese goods more competitive in the world market. Leaps in manufacturing technology also served to reduce prices. Japanese deflation happened while the rest of the world was experiencing an economic boom time......

None of this applies to Britain today.
Therefore, it is difficult to compare the UK with Japan's experience.

However, it is blindingly obvious that the British economy will not get back to anything approaching an even keel as long as the financial sector continues to suffer from an ongoing crisis of bad debts.

Japan never really recovered, and Britain has it harder than Japan........

That's right, recovery has to be fuelled by consumer confidence and demand, neither of which are evident in the UK so government spending will not cure the problem. As for the banks, the troubled ones still look troubled and I am glad that I am not running a small/medium sized business in the current malaise.

Saying that deflation is poorly understood because QE has unpredictable effects is putting the cart before the hourse don't you think?

https://www.debtdeflation.com/blogs/wp-content/uploads/2008/11/IMG0008_4969906.PNG

Japan didn't recover at all - see graph above. It has been in limbo since it's meltdown in the early 90's and is now in decline. The Asian crises were the writing on the wall for the West.

Again, endogenous credit creation is not something that can go on forever, as there must be a burden to debt (or the debt would be valueless, and thus the money it equates to). Eventually it gets to the point that the weight of debt is too high compared to the GDP available, and the mood turns to pessimism.

Great column Ms Flanders, and Posen indeed will be invaluable for ordinary people, not perhaps for those trying to save their political career.

Re Japan and US/UK, there are a few interesting comparisons which indicate that the US and UK really face an uphill struggle:
Japan entering its crisis had a high personal savings rate, a government budget surplus and a trade surplus.
US/UK entering their downturn (Mandy speak) had a low personal savings rate, a government budget deficit and a trade deficit.

Do sleep well tonight!

FrankSz

The debt must eventually be repaid, and the costly interest must also be "serviced" (ie paid).

All this will crowd out spending on new investment and new consumption.

There's a hole in our bucket dear liza, and the water is draining out faster than we can top it up.......

Good insights as always Stephanie - but I think you understate the importance of Posen's last comment. His point is that the stimulus is a bridge between decline and growth: that it provides space for the financial system and the economy to be restructured. Provided that takes place, the scene is set for a new period of economic growth. We all should hope the financial sector is rescued and does take up its proper role as the 'nervous system' of a restructuring economy:

https://www.knowingandmaking.com/2009/07/1-stimulus-2-restructuring-3-growth.html

#6

"The debt must eventually be repaid"....

...which leads me to an earlier question:

If, as in Japan, we see a conversion of private to public debt (bailouts, fiscal stimulus, etc) in the West, and that involves nationalisation of banks, or giving the government a high stake in private banks, then why does the government not invoke it's power are stakeholder in these banks to reduce the interest rate, while fixing monthly repayment rates (ie. reduce the debt burden by increasing the amount going to principal, instead of just contributing to bank profits)?

This comment was removed because the moderators found it broke the house rules. Explain.

No.7. inoncom wrote:
"stimulus is a bridge between decline and growth: that it provides space for the financial system and the economy to be restructured. Provided that takes place, the scene is set for a new period of economic growth."

Let's put it this way. In the summer my horses have plenty of grass to eat. I cut some grass and leave it to dry, and then store it away for the winter. When the winter comes, the horses live on this dried grass, as there is no fresh in the paddock. Eventually, spring comes, and the fresh grass grows. Despite the change in seasons, my horses remained fit and well, with plenty of food to eat.

Unfortunately, the British economy is experiencing an economic winter, but guess what, the UK government forgot to set aside any surplus to feed us during the winter. Hence, we seem to be missing the necessary bridge.

Never mind, we'll just borrow; and spend tomorrow's earnings today.
We'll eat the spring grass before it's even grown.
Of course, it's all based on the assumption that growth will return.....

We won't learn any lessons from Japan because so much responsibility is now attributed to the power of globalism beyond nation state governments' control. This is the ultimate tool of economic anarchism (libertarianism) and is why statist nations have in the past tried to isolate themselves. See Stalin and Bretton-Woods after WWII, China, N Korea, Burma, and Iran in the 1980s saying it didn't fear invasion by armies but by Western immorality. Look at how liberal-democratic governments justify abrogation of responsibility for domestic governance, for which they were primarily elected, because of alleged global economic forces.

In the July Green Paper the point is made that our Financial Service Sector contributed about 6% to GDP in 1980 whilst it accounts for just under 8% of GDP today, manufacturing it is pointed out contributes just under 13%. The rest being largely Service Sector. But looking at the graph on page 18 which shows Financial Services' contribution to the UK balance of payments, there was a trade surplus in Financial Services of £38bn in 2008 to about 1 billion in 1986, a 38x increase (no coverage of manufacturing of course).

Like everything else unpalatable in the UK (especially in these blogs it would seem), what substantially matters is given the silent treatment, i.e. is censored.

What is the UK going to export now? Look at its human capital. See Leitch (2006). ETS in the states (2007)

Perhaps Mr Posen will be the intellectual undertaker of the MPC. They should at least take a sabattical! Is it not clear from Stephanie's and other articles that fiddling with interest rates and juggling with some QE is not the way to recover a complex economy let alone maintain stability and sustainability. What is needed is a range of direct intervention (e.g. nationalised banks public works) and indirect measures of monetarism, fiscal policy (including tax and benefits)and dont forget the odd rabbit's foot.

One of the main causes in the drop in inflation to 1.8 percent is the (daft and unwise) reduction in interest rates! (I don't think there is any evidence that QE has had any effect on the real economy.)

Solution to deflation put interest rates up and then inflation will go up. (At these absurdly low levels of interest rates I suspect that the normal effects of interest rates rises are in fact reversed.)

Mervyn King will of course, it is almost guaranteed, do the wrong thing now, as he, and his team of wimp,s have been doing for years. He will do nothing and the result will be that he is personally turning a disastrous credit bubble burst into a prolonged slump.

We are all Japanese NOW!

Not letting the banks go bankrupt, but bailing them out is, and will be, detrimental to any recovery.

The patient (the economy) is in a persistent vegetative state. We need the assets held by the banks to be released into the economy at their (lower) market price so that commerce may re-commence. The longer they are held in an economic limbo the longer and deeper will be the slump.

(As an aside I read in today's Guardian a piece by Larry Elliot that mixed up value and price yet again. Price is the cash equivalent of an asset - its value is what it is worth. Houses are places to live and that is their value. Their 'price' is what they will fetch in cash terms and not much to do with their value as a home. This mixing up of price and value perpetuates the myth that rising house prices equates to rising house values, which of course its does not - it equates to devaluation in the monetary equivalent of the house. Basic Economics 101.)

No.8. FrankSz

The financial sector accounts for, or underpins, directly and indirectly, around 40% of all Britain's economic activity.

Our financial services are one of the few exports Britain has. Therefore, the government does not want to run the banks directly, as it does not want to risk "disruption" to the current model. The government hopes to sell its stake in the banks for a profit at some point in the future. It does not trust itself to run the banks efficiently, is too scared of the responsibility, and doesn't want to fall out with its best friend the USA (nationalisation is such a dirty word).

We need to reduce our current over-dependence on financial services and debt slowly, and in a manageable way. Therefore we employ QE, and hope for a bit of a bounce in asset prices to instill some confidence, while we restructure the economy properly over the coming 10 years.

Personally, I think the problem is so great that we will not have the time and money to pull it off. Hence, Britain will be stuck with a permanent fall in its world economic standing.

#14

I see. That makes some kind of sense. In that case, it needs to put different incentives on the banks. For example, it could heavily tax bank profits, or savings.

It is a world banking system and the individual countries have various resources to resturcture and finance. First, the banks brought this on themselves but because of their relationship with legislative bodies were free to produce a scheme that impacted the world economy. Only theft at this level allows the criminals to not only walk away without punishment but also allows them to remain in control. The obvious need to separate the influence of banking from political processes may be the most imposing problem because now the government owns the banks. With interest rates low this is a benefit to the governments who are the primary share holders and with lower debt service the costs to governments are reduced. In the business community everyone is attempting to keep the prices at the level before the crisis and this simply will not work. Instead of a concentration of business closures there is simply a steady stream as shoppers are looking for deals. The forecasts by economist are often wrong, but that does not seem to deter governments from following their advice. With high unemployment the costs of labor reduces and thus so should the costs of goods and services. The idea that downward adjustments are bad and upward adjustments are good is based more on an unstainable "growth" model and does not incorporate the concept of sustainable economies. Like individual investing, only a portion of any investment portfolio should include high risk and the rest should be sustainable, reliable returns. Governments are mainly concerned with social unrest and high rates of unemployment combined with high prices for goods and services stratifies the society in ways that create competition amoung the lowest wage earners to their disadvantage. As far as can be determined, no major restructing of the financial system is on the table, no change in the structures, no change in the international agreements and no governmental organization to protect the private investor from further financial industry wholesale schemes to steal from the middle class and give to the rich. Until the public is convinced that something will be different do not expect things to get better. The steady stream of "what if" economic projections never include "and if not." It is somewhat disingenuous on the part of economist and politicans to continue the mantra that it is the public who is at fault for not saving enough (please refer to cost of living increases for decade in relation to wages). It is like saying that if you were in better shape it wouldn't hurt so much when I punch you in the stomach.

From a personal perspective, I would welcome a period of deflation.....a little controversial perhaps but then I haven't got any debts and my needs are modest. Most of my spending is on food and household bills eg energy etc.

I have downsized my house to reduce my outgoings and run a small car. Even if I won the lottery I would not move to a bigger house or buy anything flash. I don't see the point; I would help my adult children with their mortgages and student debt. By downsizing my house I have a modest amount of savings and as interest rates are low my earnings from this are low but if prices go down then effectively my money buys me more so interest rates are not so important.

Having worked in the pensions industry and seeing how money purchase pensions "work", I cashed this in some time ago as soon as I reached the age at which this became possible.

I think there may be quite a few people now who are thinking along these lines and are at the very least looking to pay off as much debt as they can.

The problem with deflation only exists if your debts are large especially if your earnings go down which seems to be happening in this recession and this is different from previous recessions. The debt is an ever-increasing burden in this case.

So form a UK perspective I can see why everyone seems to be gloomy about deflation as the UK is in it up to it's neck but within the UK there are many with no debt who will be thinking the same way as I am.

From the individual's point of view to be a saver rather than a borrower has to be better otherwise you are forever at the mercy of the person/organisation you owe money to. This is the only sustainable option for the long term. As for individuals so for the country as a whole.

So as several others on here have pointed out the position of the UK isn't anywhere near the position Japan was in. We are indeed in "uncharted waters" and the outcome is anybody's guess.

Deflation may not be such a bad thing, goods and services in this country have been overpriced ( or rather , too much profit has been applied ) for a very long time. Perhaps if companies cut their salaries , costs and profit expectations to reasonable levels then Britain might one day become a net exporter again. At the moment the object seems to be to soak the home consumer and forget about exporting product. Nobody has a god given right to high wages and huge profits, these must be worked for and if this recession does anything, hopefully it will get rid of those companies who think otherwise.

This guy is lying

https://news.yahoo.com/s/nm/20090714/bs_nm/us_gulf_usa_geithner_6

NOT A FAR FAR BETTER THING..

Addendum (#11) Played for fools.

Of course, there's always a good story to be spun - hence the Taleban and Alky Ada, mind you, I bet it can't be too long before we're told that the CIA created these evil-dooers so that Western liberals would become incensed about their illiberal treatment of women etc, thus justifying the stationing of their 'Satanical' troops on Iran's Eastern border to complement those to her West.

A tale ......... indeed.

Deflation is not really a problem in the UK, Most of the price fall we have seen in the last year or so will soon fall off the end of the scale, and when things start to pick up rising oil and other prices will see a fast return to inflation.

There's an important point everyone is forgetting regarding the "deflation" we are in. Namely that its purely a technical glitch arising when quoting annual rate of inflation as the increase in RPI (or CPI) values over the preceding twelve months (as the media always do). This comparison can be grossly misleading and miss underlying shorter and longer term trends. Consider that the June 2009 RPI index is now 1.6% higher than it was in January 2009 whilst the June CPI value is 2.1% up on its January level. This suggests over the course of 2009 price inflation will be comfortably in positive territory ie the trend of prices is currently upwards and may be further boosted due to extra fuel duty, VAT going back to 17.5%, etc. Also taking a longer term view, if you look at RPI (or CPI) over, say, the last 5 or 10 years then you find the annual compounded rate of inflation is around 2.6%. The negative inflation glitch obtained by calculating with just two numbers (eg comparing June 2009 with June 2008) will disappear by the end of the year. If you are going to put money into a fixed rate account today you want to estimate how much inflation there will be over next 12 months, not what there has been over the last 12 months so look at the trends and that says up.

Ah yes Japan. Was there not a song "I think I´m turning Japanese"? or something like that.

Why not take a look at the performance of the NIKKEI 1989-date? Would this really indicate a story of growth and revovery? No? Perhaps that is why it is not worthy of analysis.

Why not look at the price of oil that prevailed throughout the 1990´s and compare that to the price of oil today?

How many countries "collapsed" contemporaneously with the collapse of Japan? How many countries are in negative growth today? Was and is Japan a highly export focussed county? Does the answer to these questions tell us anything about likely differential export performaces?

What was and is the domestic savings rate in Japan compared to the domestic savings rate in the US/UK?

Is the Yen a reserve currency?

Does Japan habitually invade other countries or otherwise devote a material portion of its GDP to "defence"?

Did Japan seek to raise cash by selling off its key infrastructure to foreign owners?

Is Japan an island nation? Yes!!!! At last we have found something that the UK has in common with Japan. Presumably Mr. Posen is a keen sailor, that would explain everything.

#22

Deflation is rife. Whichever way you look at it. Prices are falling through the floor and money supply is drying up like a Somali flower exhibition....


...the only problem is that the GBP has lost about 25-30% of it's value too, you see, so to the average beer drinking UK curry monkey, prices are suddenly quite baffling.

#20

Doesn't it just make you sick?

These 'business men' - these 'reputable companies' - they are nothing but a group of well dressed parasites, self-deluded and blinded in their own game, a lab-rat maze of numbers and arbitrary regulations, which produces nothing of any value.

Destroy it all.

FrankSz,

Feeling somewhat nihilistic today or what!

Well, I don't see the true relevance of the Japanese experience as far as the UK is concerned so to that degree I agree with what MrTweedy has posted.

I was more concerned today with the results that Goldman Sachs posted. Given the reported state of the US economy, the declines in the global economy then how can a bank that was in so much trouble less than 6 months ago now be so profitable? Or are we still on the merrygoround of smoke and mirrors?

Come to think of it, I'll join you:

Destroy it all.

It is the mountain of debt and our ability to resolve it which is the issue. Deflation may just be a symptom of this deeper problem.

The consuming public is paying down debt which is preventing retailers from increasing their prices. In order to maintain market-share and perceptions of foot-fall retailers are having to promote by cutting prices. However, prices are not cut across the board but maintained/increased where fashion and other special demand factors permit.

The government is not paying down debt. It has taken on the role of benefactor principally to the finance services industry when it should be building helicopters. Therefore the banks are blossoming whilst our soldiers die needlessly. Consequently mortgages are now available to 125% of the property price and the house-builders are polishing up many half-finished sites with a view to sale.

There is no plan as there can't be a plan as nobody agrees what has to be done. What a wonderful scenario for our political class: we would like to do something but we can't, so there! Do you like my moat/second-home/trouser-press: please delete that which is not applicable.

What we need to do is make more things that other people want to buy only they won't want to buy it as they are doing the same thing in their country. So why not just go protectionist? That way we can at least control our own destiny? You know it makes sense. We can think globally later.

#20 Jadedjean. It seems that you are a stranger to the truth. The link in your post states the Taleban came to power in 1994 and quickly came into conflict with the international community due to their treatment of women.

This is evidentially untrue. The Taleban were wooed by western energy companies and were afforded corporate hospitality in Texas by UNOCAL in 1997. At the time the governor of Texas was George W Bush.

The Taleban were not so different to the ideas of the House of Saud. No-one is suggesting that Saudi Arabia is an international outcast, and no-one is suggesting that we should overthrow the House of Saud.

Stephanie,
What relief there must be that at last the rate of increase of consumer prices is falling below the MPC target....the unconventional unconventional QE policy now fully justified by slowing food and furniture prices awaiting the QE boost. Is that it, then?

Lets get to the real reason why the Bank of England started QE ( and lets not fog it with side issues ) :-

Ref MPC minutes February 2009 paragraph 36

1. Raise private sector spending by purchase of government securities thereby -
2. Directly increasing money holdings of private asset sellers, and
3. Indirectly Expanding the supply of credit by banks

112 billion sterling afterwards...............post us please on how its going. Who are the asset sellers? What are they doing with their new money holdings? Where is the expansion of the supply of credit by banks? Mr Posen told the committee that banks are still short of capital - the IMF have said similar things as has Mervyn King. What do you say, Stephanie? What's your view, as opposed to others? Is it working? Or is it the BoE line : um, urgh, ah, ahem, yeahh ' dont know, not sure, ask us in 12 months'......

STOP PRESS : Government tells Treasury Committee ' Demand for gilts, particularly from pension funds and insurance companies, is strong and sustained.' Great relief all round in Westminster that at least in all the gloom something is working. Hang on, are these purchases being funded by QE? Anyone know? Sir Humphrey commented ' um, ugh, ahem, yeahh, dont know, not sure, ask me in twelve months'

armagediontimes (#28) "#20 Jadedjean. It seems that you are a stranger to the truth. The link in your post states the Taleban came to power in 1994 and quickly came into conflict with the international community due to their treatment of women."

You know...I sometimes get the impression that you might not be getting the gist of some of my posts...

#31 Jadedjean. The truth of my words are in this

https://news.bbc.co.uk/2/hi/middle_east/1874471.stm

Followed by this:

https://news.bbc.co.uk/2/hi/uk_news/7068616.stm

The fundimental is the banks are still not working and it is blindingly obvious to all. The banks are still calling the shots. The banks oversupplied easy cheap credit which created the mess. HMG could not, would not control ie regulate.

A bailout then occurred with HMG using taxpayer money. The banks, well most of them, grabbed the money. HMG then has to intervene with QE to try and plug the hole due to non functioning banks. Now the banks are intent on grabbing as much income as possible with double digit interest charges when base rates are 0.5 percent. This is not a functioning banking sector and everybody is being screwed to provide the money to plug the bank losses due to risk taking at the banks. This is going to continue for some time.

When the banks start to function sensibly then there may be some improvement. Local bank managers have no capability to set policy, policy is set at HQ. HMG appears to be happy to let the banks do what they want, presumably to avoid the nationalisation issue. Meanwhile whilst the bank feed decline continues and the computer says no. The idea there is going to be some remarkable uplift under these circumstances is laughable. The banks priority is the banks bottom line and all else can go hang.

HMGs desire to see the continued position of the financial sector as dominant means that what the banks want will happen irrespective of the impact elsewhere. There remains no control. The banks are not lending recklessly because they have decided not to, nothing to do with HMG.

When there is the best part of 1 million job losses in process uplift is not going to come. The follow-through is likely to be more dysfunction. Consumers still do not seem to have twigged that there will be shortages of some goods in the future, stocks will be run down, reluctance to forward order will occur, waiting time will be introduced and extend, the whole feedback loop will slow. There will be twitchiness on investing to expand or fund new starts. Its pretty simple really. And political policy is being focused on a GE.

There will be different socio economic groups with different wealth and disposable income. The impact of economic policy will therefore be different in effect on those groups. A policy intended to be beneficial overall will be subverted by the differential impact in the different socio economic groups. Youth unemployment will be rife. Now HMG is back peddling on the retirement age driven by pension cost worries. So dead mans shoes will be reduced further blocking youth employment. A soured society will result because the wealth in society will not be spread throughout society. Just what is so difficult to understand about these mechanisms.

Other than faffing around with loving the banks with money HMG has done virtually nothing that has any depth to it to address the problems. Many HMG decisions unravel as soon as made and there is no appetite for a fight on any issue. There is no strategy or direction. If you dont know weher your going any road will take you there.

#26

Absolutely.

These bankers, Goldman Sachs included, need to step aside. Their attempts at preserving the status quo are dangerous. The more likely any kind of recovery, the more likely in the near future an even greater collapse. They need to recognise that the dead horse is no longer the subject in dire need of flogging...

I wonder...how many countries in the EU, or states in the US, have statistical offices that have properly secured IT infrastructures, multiple datacenters and the like? Of all the institutions that a hostile force could target using IT techniques, damage to the stats offices would be the most likely to cause currency turmoil and national damage I think.... You know, it might not have been the case a year or two ago, but perhaps today it is. Take out the stats data, and undermine government bonds....

#35

Actually it might not be healthy to think aloud like that come to think of it....please could someone kindly delete post #35 before the secret police contact me?

FURTHER STOPP PRESS : In a significant development in the recession Whitehall have discovered the term 'counterfactual'. Counterfactually you cant prove the counterfactual apparently. QE's a big success because who can prove the counterfactual? Counterfactually, who knows how bad it could have been without QE in a counterfactual sense. 'As such QE is already a success in the sense of the counterfactual' commented a spokesperson.

armagediontimes (#32) Yes, we live in rather referentially opaque times, don't we? :-(

26 fdd

The japanese experience followed the substantial crash of an overinflated housing sector and had debt consequences. One of the hallmarks of the period that followed was that economic policy appeared to not work as expected, in particular policy appeared to work in one area and not another. Similar problems are likley here is my guess, but I'm no expert. You can already see some, a minority, in the population are both secure in their jobs and benefiting from low interest rates and have more to spend. Alongside that low interest rates are not being forwarded to businesses and short term credit applicants, they are seeing no benefit at all. Elsewhere jobs can be insecure. There is little commonality so broad brush policy can only suffer varibility in impact. The japanese experience was that they bumped along the bottom, the bathtub shaped recovery.

In the last recession we knew a financal services. He said at that time that throughout the population group he had as customers only a few where affected, a minority, most where okay. I don't have contact with him now but I would expect a different response now, just a guess. My proposition is that if the majority are not affected then a sharp rebound can occur following a recession, but if the majority are affected than you do not see an uplift and things are muted. Not only are the majority probably affected in the UK, the majority in the world appear to be affected. It is not hard to see the impact lasting a decade.

The protectionism you lean towards and the training investment you wish to see are both not likely to happen. There is likely to be a form of protectionism result by any other name due to FX problems and lack of disposable wealth both of which will inhibit imports. The big problem is the UK is not big enough to carry the development of the new high tech products you also wish to see and that area will be affected negatively.

This is not going to be easily sorted. All policies are experiments because this situation has not occurred before. The Gt Depression was different and there was still the need for labour then. If something is an experiment then decisive action will be unlikely to occur, the minimum of a year from major policy implemetation means

#33 Glanafon. All that you describe IS the strategy. It is purposeless looking for answers from the government - the state and its agencies have been captured by the financial oligarchs.

26 fdd

The japanese experience followed the substantial crash of an overinflated housing sector and had debt consequences. One of the hallmarks of the period that followed was that economic policy appeared to not work as expected, in particular policy appeared to work in one area and not another. Similar problems are likley here is my guess, but I'm no expert. You can already see some, a minority, in the population are both secure in their jobs and benefiting from low interest rates and have more to spend. Alongside that low interest rates are not being forwarded to businesses and short term credit applicants, they are seeing no benefit at all. Elsewhere jobs can be insecure. There is little commonality so broad brush policy can only suffer varibility in impact. The japanese experience was that they bumped along the bottom, the bathtub shaped recovery.

In the last recession we knew a financal services. He said at that time that throughout the population group he had as customers only a few where affected, a minority, most where okay. I don't have contact with him now but I would expect a different response now, just a guess. My proposition is that if the majority are not affected then a sharp rebound can occur following a recession, but if the majority are affected than you do not see an uplift and things are muted. Not only are the majority probably affected in the UK, the majority in the world appear to be affected. It is not hard to see the impact lasting a decade.

The protectionism you lean towards and the training investment you wish to see are both not likely to happen. There is likely to be a form of protectionism by anty other name result due to FX problems and lack of disposable wealth, increased transport cost, all of which will inhibit imports. The big problem is the UK is not big enough on its own to carry the development of the new high tech products you also wish to see and that area will be affected negatively. I'm afraid I dont hold out a lot of hope for your strategy.

This is not going to be easily sorted. All policies are experiments because this situation has not occurred before. The Gt Depression was different and there was still the need for labour then, inefficency is a good thing in this sort of situation.

If something is an experiment then decisive action will be unlikely to occur, the minimum of a year from major policy implemetation to any measureable impact means a ghastly steering problem. It can only be do something, wait a year, do something, wait a year. And along the way try and work out if what is happening is because of what you think is having an impact or if the driving mechanism is totally different and the correlation is casual. There are no stats, this is one off.

It comes back to 'I can spend my money or your money, you can spend your money or my money' which either Greenspan or Friedman said, can't remember which, somebody will correct. Problem comes if either party or both parties don't have much or any money, in that case spending drops.

# stanillic,

Just to take up on your final point. I have been advocating protectioist policies for over a year - firstly on Peston's blog. Mostly the feedback has been negative but I sense that there is a change in the air.

Protectionism for its own sake just would not work. I believe that it would have to be an EU policy in the first place. Secondly, for the UK, it must be supported by an Industrial Policy (the identifiction and support of selected areas of economic activity).

#41 glanafon,

At least I can rely on some constructive criticism in your posts and I appreciate that.

The differences between Japan's lost decade and the UK situation are huge:

Japanese consumers have culturally been savers
Japan had/has a huge maunufacturing base
Japan still maintains huge overseas subsidiaries
Their 'lost decade' occurred during a time of rapid global expansion in spending and not during a lobal depression.

These differences are so large that their QE/stimulous experiences are bound to be different from the effects that we would experience.

Now, as for protectioism. It will happen, it's only a question of when. As time goes by, and across Europe more and more millions become unemployed, the protestations of national governments that maintaining an open global economy is the solution will sound more and more hollow. Even the US will have to face the facts that it has to protect its own eg Michigan today recorded an unemployment rate of 14%.

Now, I would like to be ahead of the game and make protectionism a positive strategy. I accept that as armagediontimes has said "you'll have to fight the globalisation adherents" but shortly the mass of the unemployed across Europe will drown out the "we are still making money" brigade. As you say it can't happen overnight so he sooner we start to plan and tell the World what we are going to do the better - to my mind we have already lost a year!

I am almost sick and tired of tring to point out that money is NOT he controlling factor in the economy.

#43 foredeckdave. You have to move with the times. Not only is money the controlling factor in the economy, it is the ONLY factor.

Follow the money find the lie. You can even see it on this blog. Young kids are sent to die in Afghanistan because the Taleban are nasty people who beat women. UNOCAL have been cosying up to the same people. The Queen is dragged out to welcome the Saudi King, and the BBC report that the Religious Police in Saudi are busy throwing women into a burning building because they are immodestly dressed.

There is only money. Was it not A J Cook (Union leader in the Great Depression) that said "You have been frighting the very legions of hell"? Only this time around there is no A J Cook and no-one is fighting.

#44 armagediontimes,

Now that is where you are wrong. Money as an asset value in its own right (along with its partner debt) is the very thing that is under attack in this depression.

The 'clever' boys and girls of the international finance industry who believed they could create wealth out of nothing have broken the machine. They have no way to fix it or there would already have been a fix in place. They are now moving their unsubstantiated money around at a faster and faster rate in a desperate attempt to stem the losses. Guess what? They can't find a secure home in or from which to do it. A classic example is today's results from GS. The money bubble has already burst and is now making lou farting noises as it blows off ino the far yonder. Wealth as identified by tangible assets will now emerge as the true engine of the future economies.

Deflation is a symptom, not a cause. It means that a surplus goods and available services are competing for currency. Inflation mean that a surplus of currency is competing for goods. In a deflationary economy, there is insufficient credit, money supply, money velocity, incentive for investment, are low and there is a grim outlook for profits. In a worldwide depression or recession, a strong currency is a liability because given what little market is out there for your products, your price will be uncompetitively high compared to countries with weaker currencies. The cure is pump priming on a massive scale, the printing of money by the government and issuing contracts to private companies to put that money into circulation. It does matter if the money is invested wisely. Good investments stimulate further business activity. A road or bridge connecting a supplier with markets more efficiently brings shoppers. A bridge to nowhere is no better than just giving money away, it has its least impact on the overall economy.

Monetizing debt, that is printing money to pay for expensive debt with new cheaply minted currency is the only way to pay it down in a reasonable time. Central bankers hate this fact because they worry about the credibility of their currency on the market. This is why the strongest economy must take the lead. Until the US Treasury starts printing dollars, nobody else can print currency either. The damage has already been done. It took over a decade to get the world into the mess it's in. The more slowly new currency is created and old debt paid off, the longer recovery to normal levels of business activity will take. The central banks are doing nobody a favor by holding back. So the choice is clear, continued depression or significant inflation. Of the two, inflation will be the far better course. There is no middle ground to fall on. The longer they wait and the more businesses, individuals, and even governments go broke, the more they will have to print in the long run for the bailout. So far no matter what they have promised, the money is not getting into circulation. Geitner is still protecting his banker friends and is still worried about future bond sales to cover deficit financing. From where I sit, the US economy looks just about dead right now and consumer confidence is very low. The two trillion dollar stimulus package is either not nearly fully in play yet or it is insufficient. Much more is needed fast. China will have to accept this truth or its export driven economy will die and there will be social upheaval that is far worse than the loss of the full value of the trillion dollar debt they've loaned the US government.

armagediontimes,

I haven't heared that A J Cook quote before. The 2 I know are:

"Not a penny off the pay, not a second on the day".

and

"Say what you will about the tenets of socialism, at least it is an ethos."

#46 MarcusAureliusII

Well you can cling on to those notions if you wish. From the commentry I've seen over the last few months from US tv stations it would appear that the reality is slowly starting to sink in that this time the US is in a bind that it can't inflate its way out of. Purely because nobodyelse is going to pick up the bill!

What you say would be a strategy if, and only if, you had the manufactures that other nations craved to sell on the back of a weakened dollar. However, the US corporate model is busted. A large slice of the manufacturing that you have left is either foreign owned or controled. The quality of what is manufactured is debateable. To put it simply, you are an importing nation because you can't produce it at home.

Now, you always put down Europe as being soft, flabby and socialistic. You may be right. However, Europe is less and less dependant upon trade with the USA eg over 50% of all UK export trade is with the EU and growing: whereas the volume of trade with the USA has been in long term decline. You may still be the biggest market in volume terms in the world but that does not make you the most powerful. GM stands as an indicator of the US paupacy. There's a new economic world growing out there and it no longer relies upon the whim of the USA.

So you think China will just have to accept the USA inflating away their investment? I somehow don't think that they are going to do that. They have you by a very delicate part of the male anatomy - they just haven't squeezed yet.

Now I'm not talking from a position of UK or European economic strength - far from it. However, I'd rather be poor or ill in Europe than one of the growing millions in the US who are without healthcare cover or adequate social security provision (BTW when will the Seante pass even Obamas limited reforms?).

The American dream is over and the sooner you come to terms with that as a nation the sooner an acceptable way can be found out of this mess.

UK deflation is worrying, as the best way for the UK government to ease its debt problem is to inflate the debts away..... But more worrying is the fact that a single company, Goldmann Sachs can make so much money in only three months....given that GS do not make anything but make money by gambling then for every dollar they make someone must lose a dollar.... or maybe i am missing something?

meantime in the real world, I keep reading of falling prices and deflation, my weekly shop is increasing, we tend to buy the same things on a weekly basis and have seen some items increase by as much as 50% whereas we used to spend about £90 per week on shopping its now £130, so my meat, milk and veg is not cheaper its dearer.


I dont have debt so low interest rates dont help me, my pensions has been robbed by everyone who could get their hand in the jar, the new vehicle I just bought for cash went up £500 between when I placed the order and when I picked it up, fuel prices are up, see a pattern here.

All the suppliers I deal with have ramped their prices up, Ive just had a quote to refurb my bathroom since a leak occurred £5.5k no one gives a monkeys its almost like everyone is out to get what they can when they can.

I am seeing evidence of house prices in my area dropping, in fact I was agog to see a 3 bed detached house on a decent estate going for £133,000k it was up for 3 days and it was gone, did it go to a family in need of a house, probably not, I expect some cash rich individual bought it, other house prices are staying stubbornly high, due in part to the mortgage on the house I guess or they bought into the great housing con and thought they had thousands in the house that they can no longer grab.

My brother saw his advisor at the bank on monday, he has a pay our from when some thug decided it would be funny to play football with his head. Despite dying 3 times after a number of years he made a semi recovery, just able to walk, but wont ever work again. His compensation payment was placed in the bank last year. Its now worth 11 thousand less than a year ago, its been robbed. He can never make that back again by working and despite the optimism of the advisor it will have to go some just to get back to the starting point, never mind allow for inflation.
The advisor thinks we will get back to normal next year and that the stock market is at the bottom( they invested a lot of his money in stock market related investments) but they had no guilt or sorrow in announcing the loss, its just a numbers game to them. The advisor works for a Spanish owned high street bank and proceeded to tell us how they were best placed to ride out the storm, whoopeee.

Lots of people have lost big time and a few have made it big time, is this really the system we want to encourage and inflate again ?

No.50. romeplebian

Regarding the stock market investments made by your brother's bank.
I bet he's paying a mangement fee, but the bank doesn't manage the funds at all. In a falling stock market, the fund manager should sell the shares and then buy then back again at a cheaper price. That way he limits his client's losses. However, the bank does not follow this strategy, as its investment trading arm makes big profits from short selling and needs your brother to take the losses to balance the investment bank's profits.

#17 Janchild - You sound like an eminently sensible person who has a fair bit of knowledge about pensions and the pros and cons of interest vs borrowings !!

I did the same 5 years ago and shifted much of my "savings" Eastwards !! Therefore the falling quid had only increased the amount I get from my invested savings abroad mainly because of the difference in exchange rates !! My house is lien-free and my car is a long lasting medium sized Japanese model (size needed for carting grandkiddies around aka monkeys-wagon) !! :-)

#19 "This guy is lying" - Well, he *IS* a politician, isn't he ?? Therefore, by definition.....

This is a really good article. A taste of the future:

https://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/07/how_long_will_china_finance_am.html

#23 "Does Japan habitually invade other countries or otherwise devote a material portion of its GDP to "defence"?"

Well, they've tried rather unsuccessfully to conquer the whole of China for the last 2,000 years !! They keep forgetting that there's 10 Chinamen for every Jap !! When they finally realised their mistake, they turned to conquest in a different manner - Commercial - and they seem to be rather more successful in that area !! The top selling cars and medium to high tech goods in China, these days, are mainly of Japanese origin !!

To the Chinese, as well as the Japanese, business is war by other means !! :-)

"Presumably Mr. Posen is a keen sailor, that would explain everything. "

Let's hope he doesn't also fancy sushi !! The price of fish over here is ridiculous and they are not very fresh either !! :-)

#35 "I wonder...how many countries in the EU, or states in the US, have statistical offices that have properly secured IT infrastructures, multiple datacenters and the like? Of all the institutions that a hostile force could target using IT techniques, damage to the stats offices would be the most likely to cause currency turmoil and national damage I think.... You know, it might not have been the case a year or two ago, but perhaps today it is. Take out the stats data, and undermine government bonds...."

Are you crazy ?? The Al-Qaeda will defend these stats offices to the death !! Even they, could not have done a better job of destroying the Western economies !! Remember "lies, damn lies and statistics" !! :-)

Is the car scrappage scheme intended to help Dealers of Manufacturers? If the latter then, play the game I do and see how many cars you pass are manufactured in the UK.... you'll be lucky if you get 5 to 1 against.

I understand we are trying to boost consumer spending... have a look at the last 5 non-food items you bought.... where were they made?

Keynesianism is a One Trick Pony, it works in closed economies.. For every Billion we pump in Id be shocked to find more than a half of it still in the UK after the 2nd round

If we are going to throw money at the Economy it needs to be at Industry, Manufacturing, Infrastructure, etc...... the services industries piggy-back the Economy, they cant drive it indefinitely.

Generating Tax Revenue is not an indicator of how valuable something is to the Nation..... or do Civil Servants contribute more than they cost?

Three farmers are the sole inhabitants of an Island One Dairy, One Sheep and One Crops.... they trade happily one exchanges milk for potatoes, one mutton for beef, etc, etc... works very well, they can even support a chap that repairs machinery and does odd jobs..

A Hairdresser, a Shiatsu Masseur and a Banker are the sole inhabitants of an Island.... work it out....

#45 foredeckdave - Read romeplebian at #50, that explains exactly what is going on. However that is at an individual level. What is planned and is underway is at a global level. Massive transfer of wealth from poor to rich, and any recalcitrance on the part of the poor is to be met with overwhelming force.(See the different approaches to Afghan wife beaters and Saudi wife beaters)

Asset price deflation and commodity price inflation is the name of the game. The process is underway. There are reports in the US of small farmers giving away their cows because they can no longer afford to feed them. Free Cows Great!! The cow is the asset the food is the commodity. Does this translate to free milk and free meat? No, not a chance, just the opposite in fact.

#57

Well at least the hairdresser could shear a sheep. The banker could be used as a source of fuel, for a while, and the Shiatsu Masseur could dress up as a girl?

#57 "A Hairdresser, a Shiatsu Masseur and a Banker are the sole inhabitants of an Island.... work it out...."

The hairdresser "does" the Shiatsu Masseur and the banker "does" them both, royally !!

QED

#35 & #56
Why would hostile states or individuals bother targeting national statistical offices or other infrastructure to damage the economy/currency. All they need to do is take out some mortgages they can't afford...

#30 shireblogger.

Your comment(last night) re the purchase of gilts being strong with the notional cash deriving from QE strikes me as quite correct.

We heard recently about Goldman Sachs (miraculous death bed recovery) making big enough profits to pay out some rather swish bonuses. We hear that the bonus culture is back in the City. I don't think that is coincidental.

Both Governments have poured QE billions into the liquidity pot which is purchasing the Gilt Issues. The Goldman Sachs of this world are making a nice profit on commissions from these purchases. Our money. Galling. QE to drag the economy out of the tail-spin created by the very 'houses' that are now turning the mechanism to their advantage and making private profit out of debt raised against our future taxes.

To restructure...means, to change the way things are.... But we aren't changing the ways things are; and are showing no real signs of changing either ...In fact every attempt to return to way things were is greeted as a green shoot (Goldman's profits, 125% mortgages, house prices rising) of the money tree returning --rather than another failure from within the system to adreess the issue: and 're-structure'.

Re-structuring isn't synonymous with 'pain' of course and it would be really nice if we could find ways to restructure painlessly.....but the elevation of simple 'painlessness' in all responses by the govt, to being the premier objective of policiy, means effective restructing is simply being ruled out.

The nub of the argument has been that 'You don't cut in a recession, you invest in a recession' which is fine, understood and accepted by everyone, as long as you have the money to do that... once you haven't and you are 'inventing' money (stealing it from the future having become impossible) then there must come a point at which reality simply has to be faced up to and 'painful' restructuring addressed properly.

It's unfortunate that painful does mean 'pain'(!) and restructuring will mean 'cuts'---- in jobs, wages, income etc---that's a fact and we are at the point where we simply can't wait, as a country, for an election agenda to play out---- the latest jobless figures show reality emerging and breaking through despite the stasis, ...Cuts and Pain arriving in the real world despite the posturing and rhetoric in the Political world.

It's a classic management issue in a way .

In a situation where these things are happening, and will happen, the one thing we can do is manage them effectively to mitigate that pain, WHILE seeking to create conditions to exploit and enjoy success.

But the refusal to face facts (because the situation is one of denial (a State of denial for Political reasons, we know; remains denial nevertheless) means the effects could be amplified now, not mitigated---doing nothing isn't the safe option, 'not cutting' isn't the safe option.

By 2011 it may be clear that the stance, and the efforts being made right now, were not simply 'well intentioned efforts to avoid real pain, that didn't work'...but hopelessly ineffective and woolly thinking that actually made things much worse.

@ 51 thanks for the input, it reinforces in my mind that for the (most) part the city is just a big casino. Why it needs all these firms and manpower to facilitate the trade of firms shares boggles the mind. Each hand in the jar takes a piece of the value of the share. Why not have one independent share and business facility. That way the influence on the markets for the gain of unscrupulous firms would be taken out of the equation.

So Mr New Shop wants to go public with his chain of shops, he goes to the independent facility , gets a valuation, releases shares on the the facilities system for sale to whoever want to buy. Then the performance of the firm dictates the future value of the share( we would need to ban short selling). That way we get a trued indication based on dividend paid to the shareholder as to its value, seems simple to me, and no amount of jiggery pokery can alter the price, so the argument that short selling not only is a tool for the trader, but regulates the share price in case it is overvalued is negated.

The facility would be run by and independent body , the people who work there would be fully audited and not be allowed to buy shares (their wage and pension would reflect this.)
Much like the official secret act, anyone found to be leaking info would be subject to treason charges to put any thought of that nature not worthwhile.

Firms could still get their shares bought and sold but we would do away with all the parasites who add no value to this transaction. Our pension companies would have a safe place to trade and sell their products as so.

Im sure if you asked everyone, they would prefer a smaller increase year on year with their pension or savings with the knowledge that you were not paying the house, holiday, plastic surgery bill( for the hard necks) flashy cars, suits, meals etc of the greasy suited parasites who strut around proclaiming to be the talent that lives in the city.

But to give everyone the choice, if you want to chase those high gains and big gambles, go ahead trade outside of this with the rest. Just keep our hard earned out of it

"This isn't deflation in the sense that economists worry about."

Where are all these economists who worry about deflation? It's hyper-inflation that normally worries economists.

What evidence do we have, theoretical or empirical, that low inflation is better than low deflation? How often do deflationary spirals actually appear and what evidence do we have of their destructive impact? Did past societies crumble just because they followed the gold standard? Does anyone worry that the price of computers, computer memory and digital cameras is constantly falling?

"The Bank of England is right to be engaged in quantitative easing to address our current problem... it is clear that Japan's quantitative easing measures had the right effect, in the sense of being stimulative"

What evidence do we have of the net positive effect of QE in Japan? If QE is so good, why don't we just award each and everyone of us a million pounds? Does any serious economist believe that monetary policy is an engine of economic growth?

Why do people like Adam Posen feel the need to constantly intervene in the economy, influence prices and manipulate demand? Why do they base their policies on blind faith rather than rationality? Who pays their salary?

"The key point, though, is that little if any fiscal spending or tax cuts generate sustainable growth without continued expenditure."

Tax cuts can generate sustainable growth provided that they are permanent and come together with other measures that make the country more appealing to investors and entrepreneurs.

#64 In theory, it all sounds very nice but in practice it is not so viable. If you are in Birmingham and wishes to buy some shares, will you travel down to London each time and go through all the rigmarole and paper work or will you want a local broker to assist you in purchasing those shares ??

Furthermore, how will you know which share(s) are worth buying, which are worth keeping and which needs selling ASAP ?? Who keeps a daily eye out for the financial information that will affect you portfolio ?? Have you the time (say 3-5 hours each day) to scour through the news worldwide to obtain that information ?? And have you the knowledge and ability to then make meaningful judgments based on that information ??

A local broker can help you in those ways and is the very "parasite" you rail about !! Perhaps you have a case of mistaken identity between stockbrokers on the one hand and casino operations like merchant bankers, investment bankers and hedge funds on the other ??

"Our pension companies would have a safe place to trade and sell their products as so."

Unfortunately, it is those very same pension companies that keep these casino operations in business in their pursuit of ever greater returns !! Or did you think pension companies simply store all your cash under their mattresses ??

ishkandar (#66) "A local broker can help you in those ways and is the very "parasite" you rail about !! Perhaps you have a case of mistaken identity between stockbrokers on the one hand and casino operations like merchant bankers, investment bankers and hedge funds on the other ??"

Perhaps not...

Some of the points raised by Adam Posen (AP) on the way that deflation/inflation manifested itself in the Japanese economy raise some concerns about the UK government's policies for getting the UK economy out of recession.

Although AP was honest enough to say that he doesn't know why deflation in Japan's case was less harmful than he and most economists had predicted that raises some concerns that his opinions will add to the BOE and Treasury's confusion as whether or not their policies are working.

In the case of Japan perhaps the reason why deflation was less harmful was down to the fact that Japan had enjoys a much better balanced economy and a very healthy balance of payment surplus, than the say the UK. So perhaps the Japanese economy was/is less susceptible to monetary policy changes and the behaviour of the finacial markets.

If so then perhaps the Governor of BOE was right when he said, on a number of occassions, that although the financial institutions in the city do make a significan contribution to the UK economy it is not as great as the city traders and banker frequently suggest. Perhaps over the coming months his words might ring true.

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#34

the floggings will continue until morale improves