A long, slow slump will Britain go the way of Japan – MoneyWeek

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Justonemonthlater,inOctober,pensionerswouldhavebeenlookingatariseofjust4。

2%,asRPIinflationfellsharply。

Andwithfurtherfallsahead,that5%risewilllookprettytasty。

Ofcourse,itsnotallgoodnews。

Becauseasinterestratesfall,sowillsavingsrates。

Thestategiveswithonehand,andtakesawaywiththeother…

Inflationwillkeepfalling

Britishpriceslastmonthfellattheirfastestratesincecomparablerecordsbegan20yearsago。

Theannualrateofconsumerpriceindexinflation(CPI–thebankstargetmeasure)fellto4。

5%,from5。

2%inSeptember。

Itsstillwellaheadofthe2%target,andfarabovethe3%level,abovewhichtheBankofEnglandhastowritealettertotheTreasury。

Butitwontbethereforlong。

Theplungewasdrivenmainlybysteepfallsinfoodandpetrolprices。

Thatswhatyoudexpect,giventhecollapseinoilpricesandtumblingagriculturalcommoditypricestoo。

Withoilpricesshowinglittlesignofrecovering–andeverysignthattheycouldfallfurthertheslideislikelytocontinueinthecomingmonths。

Infact,JonathanLoynesatCapitalEconomicsreckonsthatnotonlyisinflationintheUKstilldead,butdeflationisabouttobereborn。

LoynesreckonsthatCPIwillturnbrieflynegativeinaboutayearstime。

RPIinflationcouldevengoaslowas-2%(pensionersneednotworryunduly–thegovernmentguaranteesaminimum2。

5%annualuplift,thoughwellseehowkeentheyaretodothatinayearstime)。

Loynespointsoutthatthiscouldhavepositiveeffectsontheeconomybyboostingspendingpower。

Butofcourse,inayearstimepeoplewillalmostcertainlystillbeincut-backmode。

Joblosseswillbehighandrising,housepriceswillstillbefalling,GDPwillbefalling–soanymoneysavedthroughfallingpricesislikelytobespentonpayingdowndebtratherthanbuyingmoregoods。

Deflationisnowthebigworry

Andofcourse,becauseitsbeendrivenlargelybycommodityprices,inflationisntjustfallingintheUK。

ItsdivingintheUSaswell。

Producerpriceinflation–pricesatthefactorygate,basically–fellatarecordrate,down2。

8%inOctober。

TheannualPPIinflationratecameinat5。

2%。

Sodeflationisnowthebigworry。

InvestorsunsurprisinglyexpectfurtherinterestratecutsintheUK–two-yeargiltyieldshitarecordlowyesterday,fallingbelow2%forthefirsttimesincerecordsbegan30yearsago。

AndintheUS,marketsmovedtopriceinafurther0。

5percentagepointcutintheFedfundsrateinDecember。

ThatwouldleaveUSinterestratesatjust0。

5%。

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ThebigquestioniswhethertheWestcanseeoffabigJapan-styledeflationaryslump,orwhetherwellbestuckwithwhattheJapanesehavebeensufferingfornigh-ontwodecades,fortheforeseeablefuture。

NomuraeconomistRichardKoohaswrittenacoupleofbooksonJapansproblems。

Histake,inTheHolyGrailofMacroeconomicsisthatcompaniesreachedapointwheretheysimplydidntwanttoborrowmoney。

Theirkeygoalbecametopaydowndebt–hecallsthisabalancesheetrecession。

Ifcompaniesandconsumersarefocusingonpayingdowndebt,heargues,thenthestatehastostepinandspendforthem。

AndthatswhatJapandid。

Infact,Kooarguesthattheeconomytherewouldhavebeeninanevenworsestateifthegovernmenthadntsteppedupspendingasitdid。

Thatsaworryingthought。

ThegoodnewsisthathedoesntthinkthattheUSwillsufferthesamesortof15-yearstagnationasJapanhas,simplybecauseitsgotJapantolearnfrom。

Nowthatwehavemuchbetterknowledgeofthewaythebalancesheetrecessionoperates,theUShasnoreasontomakethesamemistakemadeinJapan。

WevemoreonKoosthesisinthenextissueofMoneyWeek(outonFridaysubscribetoMoneyWeekmagazine),butcertainly,thepsychologyringstrue。

However,theideathatthegovernmenthastokeeppumpingmoneyintotheeconomyuntilitrecoversisaworryingone。

TheFedistryingtopreventarepeatofJapan

AstheteamatSocieteGeneralepointoutinoneoftheirmostrecentresearchnotes,theFediscertainlydoingitsbesttopreventarepeatofJapan。

Itisexpandingitsbalancesheetandlendingdirectlytobusinesses。

Indeed,SocGenreckonsthatsustaineddeflationisunlikelywithsuchmassiveincreasesinthemonetarybase。

Infact,ifthemassivecashinjectionsarenotreversedquicklyoncecreditmarketsrecover,theFeds[actions]couldsetoffanotherwaveofseriousinflationarypressuresin2010-2011。

WellhavemoreonthisinfutureMoneyMornings。

Fornowcertainly,deflationliesintheimmediatefuture。

Butbeyondthattheoutlookismuchlessclear。

Thatsonereasonwhywedbeholdingontogoldfornow–withconcernsoverthestabilityofthefinancialsystemstillhigh,andrampantinflationstilladefinitefuturepossibility,itsoneofthebestinsurancepoliciestohold。

MycolleagueDominicFrisbyhasmoreonthecurrentstateofthephysicalgoldmarket–lookforhisstoryonthissitelatertoday。

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