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No Nasty Words from Mark Carney

Temporarily negative inflation. What on earth's that!?

Well it's what the Governor of the Bank of England calls deflation; he obviously thinks it's a nasty word, so he'd rather not use it. He had to talk about deflation, sorry temporarily negative inflation, last week.

The Bank of England expects inflation to be zero, or very close to zero, for most of this year, starting in March. And it says there is a greater than evens chance that it will turn negative, that prices will fall, for much of this period.
So why not even use the word deflation? Deflation Image

Well deflation and depression are linked in the mind for good reason. In the 1930s Depression, prices in 1934 were 12% lower than in 1928. What's so bad about things getting cheaper? Well if something may be cheaper tomorrow, you won't buy it today. The economy slows down. There is an even greater pressure on companies to cut their costs, to allow them to track prices lower. Wages stagnate. The real value of debt goes up rather than down.

Inflation reduces the value of money borrowed yesterday but owed today. But in a deflationary world you don't invest, you don't buy; you try and pay off debt and save - because things will be cheaper tomorrow.

One of the worrying things is that what has happened in the UK since the financial crisis of 2007, may be an echo of what has happened in Japan since 1989. Japan has suffered for years now with debt, deflation and an aging population. The same issues that we face.

When the Bank of England reduced the UK base interest rate to 0.5% on 5th March 2009, the talk over the following months and years was of rates going up in "18 months". Savers are still waiting. Japanese interest rates have been around 0.1% or less for most of the last 20 years.

There have been other nasty economic words over the last few years:

Negative growth - there was much talk about this at the time of the financial crisis in 2007 and after.  Of course, what it meant was that the economy was shrinking. People would be less well off. But nobody actually wanted to say that.

Austerity - really this just means living within your means.
If you don't live within your means, the only way to do this as an individual, a company or a country is to borrow money. Of course, it can be perfectly sensible to borrow some money, sometimes. But it is not a long term strategy. It has its boundaries. If you borrow money as a country, you or your children have to pay it back. For example, the government, we, will finally repay the outstanding £1.9bn of debt from the 3.5% War Loan on 9 March, 2015. Issued by the then Chancellor, Neville Chamberlain, in 1932, the War Loan was used to refinance government debt accumulated during World War One. But if ever people don't think you'll pay back your debt, they will stop lending it to you. Then, as the Greeks and the Irish found, others impose austerity on you very quickly and very brutally.

This is tough stuff, but it would be good if politicians treated us as grown ups.

 By Mark Bogard

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