One day last week I sat down to watch a debate on the world financial crisis on BBC World News, featuring half a dozen world class economists on stage and a lot of other experts in the audience. About half way through, I realised that the only feature of the programme I was engaging with, was Christine Lagarde’s elegance, and in particular the mystery of how a woman over 50 endures 4 inch stilletoes, or why she wishes to do so.
It’s not that I don’t understand what is being said by economists, but I do have difficulty engaging critically with the debate and making up my mind who is right and who is wrong. Also the questions I really want answered are not the ones that ever get discussed. So, here they are, and maybe someone will provide me with the answers:
First – inflation. You keep telling me that the aging population is a problem. Us baby-boomers are going to be making increasing demands on the economy. But, us baby-boomers are currently looking aghast at our life-savings devaluing by the day, which means we are going to be even more of a drain on public resources in the future. So, how can QE, which is printing money, which creates inflation, be a good thing? When our government prints money they just give it to the banks who sit on it, or give it away in bonuses, anyway. I get the point that inflation will magic away a large chunk of the national debt, but it will also create a lot of state dependent people, who will make it more difficult to keep our deficit down in the future. So, what is actually achieved in the long run?
Second — deflation. Before I started getting fixated on Christine Lagarde’s shoes, I heard her say the real danger was deflation, and go into her “lost decade” routine. I understand this deflation prediction is based on the idea that history repeats itself, specifically the nineteen thirties, or Japan’s “lost decade”. I’m sceptical. The nineteen thirties did not have diminishing oil and other mineral reserves. It had a smaller world population, and not the same pressure on food prices. It did not have massive economic growth in China and India competing for resources. It did not have climate change creating costly weather catastrophes. All of those factors seem inflationary to me. So, please explain why you think we are about to revisit the nineteen thirties?
Third – deflation again. Why is deflation bad? People put off purchases because they think stuff will be cheaper if they wait. That acts as a drag on economic growth. Anything else? Because I can think of a few advantages. Such as, all those baby-boomers, me included, would recoup the savings they have lost and be able to support themselves in their old age. Housing would get cheaper and more affordable for first time buyers. A combination of lower prices and lower consumption should mean that the level of household debt, which has been at unsustainable levels, will fall, but by being paid off instead of magicked away. Of course, it also means us baby boomers losing out on the value of our homes, but that seems a reasonable quid pro quo to me.
Fourth — growth. The IMF’s global forecast of 6.4% in developing countries and 1.6% in advanced economies, doesn’t seem that terrible to me. It certainly doesn’t look like the crisis of capitalism, that Marxists seem to think it is. There is a strong argument on environmental grounds for reducing the pace of growth in the advanced economies (which only averages 2.5% in the UK anyway). What happened to the idea that we should stop measuring a country’s success by GDP? Apart from the economy, we have an environmental crisis caused by the failure of the advanced economies, notably the USA, to develop meaningful strategies for combating climate change. Surely a decade in which emissions are restrained by sluggish economies might be a good thing in the long run?
Geoffrey Payne said
The reason why low growth is bad is because we rely on growth to help us pay off our sovereign debt. The problem is more that we are standing on the edge of a cliff. If we do not get enough growth and therefore have to cut more, and that in turn takes demand out of the economy, and we get into a recessionary cycle. The only way out would be an economic stimulus and more debt. As for deflation, although you are right about commodity prices, a global recession will take away demand and commodity prices are more likely to come down again, like the oil spike in 2008. That said the underlying trend in commodities is up and there is a good change we will avoid deflation.
Mira said
OK. Not sure I follow your first point Geoffrey. My own understanding of Osborne’s strategy is that he is only trying to pay off the structural deficit, not the cyclical one. Surely, that means growth is irrelevant? He can borrow to cover low growth because that is cyclical. So in what way is growth important to paying off the deficit — which is what I understand you to mean by sovereign debt?