Top economist issues deflation warning

[BirdGuano]

http://business.scotsman.com/economi...ing.4910721.jp



Top economist issues deflation warning

Published Date: 25 January 2009
By Nathalie Thomas

THE Government, businesses and households are not sufficiently prepared for the likelihood of deflation this year, warns leading City economist Roger Bootle in his latest report today.

The Capital Economics director predicts the UK economy will fall into deflation for the first time in almost 50 years in the autumn, sending further shock waves through companies and households with high levels of debt.

Although a short spell of deflation temporarily boosts spending power, as the cost of goods and services fall, in the long term it increases the real value of debt. This poses a particular problem for heavily geared companies and debt-laden households that struggle to repay their loans as income, wages and benefits also fall.

In his latest report, for Deloitte, Bootle warns that the UK risks becoming trapped in a dangerous debt-deflation cycle where businesses and consumers rein in spending to pay back debts, forcing struggling shops and suppliers to cut their prices further.

He says policymakers have not made sufficient allowances for the possibility that the Consumer Prices Index, the main benchmark of inflation, will fall to –1% by the autumn. And although the Government and Bank of England are likely to resort to further emergency measures to prevent a Japanese-style deflationary spiral, this will place an even greater burden on public finances, which are already bending under the strain of two banking bail-outs.

Bootle makes a depressing forecast for the next few years as he says the Government will have little choice but to hike taxes in the medium to long-term.

"What's more, the response of policymakers may not prevent consumer price deflation from becoming a more familiar feature of the economic landscape over the coming years," he says.

[sandyd]

Won't tax hikes also cause less spending and more deflation?

[BirdGuano]

Originally Posted by sandyd

Won't tax hikes also cause less spending and more deflation?

Yes, but the government's knee-jerk response to falling revenue is to raise taxes, not increase productivity and use what resources they have more efficiently.

Devoid of reality.

How successful would you be if you told your boss that you have to have a raise to maintain your lifestyle, even though the company's revenues were going through the floor due to deflation ?

Not likely.

[leistb]

Originally Posted by BirdGuano

Yes, but the government's knee-jerk response to falling revenue is to raise taxes, not increase productivity and use what resources they have more efficiently.

Devoid of reality.

How successful would you be if you told your boss that you have to have a raise to maintain your lifestyle, even though the company's revenues were going through the floor due to deflation ?

Not likely.

Couple this with an increase in government spending and you exacerbate the problem even further.

[sandyd]

The downward spiral will keep going till it finally breaks big time....that's why so many think civil unrest or even a WW is on the horizon. Amirite?

[3wood]

Yes I have to believe it's going to get alot worse before things start to get better, proabably years down the road. My biggest fear is I dont think anyone in Washington has a clue on what their doing.

[flourbug]

Welcome to CE, 3wood.

I think my biggest fear is, the people in DC DO know what they are doing - and do it anyway.

[leistb]

Originally Posted by 3wood

Yes I have to believe it's going to get alot worse before things start to get better, proabably years down the road. My biggest fear is I dont think anyone in Washington has a clue on what their doing.

Indeed, welcome. You folks in Michigan had it pretty tough before this conflagration. Thanks for the post.

[3wood]

yea I have to say there are pleanty of strip malls almost empty now and alot of homes for sale which arent moving. I think the government is spending all of this money just to buy time. (which isnt on their side in this credit bubble).