Transcript WILL THERE BE A DEPRESSION??

THE GLOBAL ECONOMY
IN 2003
A CHOICE OF TWO EVILS?
Jonathan Bradley
Jonathan Bradley
INFLATION
OR DEFLATION
A SUSTAINED RISE OR FALL
IN THE OVERALL PRICE
LEVEL
POTENTIALLY DEVASTATING
CONSEQUENCES
Jonathan Bradley
INFLATION: WHY IT IS BAD
 CAN
DESTROY SAVINGS
 DAMAGES CONFIDENCE
 HURTS THOSE ON FIXED INCOMES,
SUCH AS PENSIONERS
 DISTORTS THE ECONOMY
 LOTS IN THE 1970S AND 1980S
Jonathan Bradley
DEFLATION: WHY IT IS BAD
 IT
HARMS DEBTORS (PEOPLE WHO
OWE MONEY)
 DAMAGES CONFIDENCE
 REDUCES ECONOMIC ACTIVITY
 CAN BRING DEPRESSION
 1930s IN USA AND EUROPE (AND NOW
- LOCATION TO BE REVEALED!)
Jonathan Bradley
THE ECONOMIC AIM: A
SAFE MIDDLE COURSE
Jonathan Bradley
Which is the bigger danger?
 Just
now the main danger is from
deflation
BUT
 The
cure for it could lead to inflation
later on
 So, there is a dilemma!!
Jonathan Bradley
A COMPLICATION
ECONOMISTS
TELL US THERE
IS
– GOOD DEFLATION
– AND
– BAD DEFLATION
Jonathan Bradley
WHAT ON EARTH IS
“GOOD” DEFLATION??
 WHEN
PRICES FALL BECAUSE OF:
– INCREASED EFFICIENCY
– TECHNOLOGICAL PROGRESS
– INCREASED SUPPLY
 EXAMPLES:
PLAYERS
Jonathan Bradley
COMPUTERS, CD
AND WHAT IS “BAD”
DEFLATION??
 GENERAL AND
SUSTAINED FALL IN
PRICES WITH:
– INSUFFICIENT DEMAND
– FALLING PROFITS AND RISING
UNEMPLOYMENT
– POSSIBLE DEPRESSION
Jonathan Bradley
 WHAT
HAPPENS?
 SHRINKING OUTPUT
 MASS UNEMPLOYMENT
 SOMETIMES, POLITICAL AND
SOCIAL UNREST
Jonathan Bradley
HAVE WE GOT DEFLATION?
 YES
- IN SOME COUNTRIES
 BUT, IS IT THE GOOD KIND OR THE
BAD KIND?
 ANSWER: A BIT OF BOTH
 HAS IT LED TO DEPRESSION?
 ANSWER: POSSIBLY, IN JAPAN
Jonathan Bradley
 STOCK
MARKETS
AND LAND PRICES
WENT UP FAR TOO
MUCH
 BUBBLES!!
 WHEN THEY
BURST
ECONOMIES
SUFFERED
Jonathan Bradley
3500
3000
2500
REBASED
2000
DJII
Nasdaq
1500
1000
500
0
1985
1990
1995
2000
Much worse in Japan!!
Jonathan Bradley
PRODUCER PRICES 2003
0.5
0
-0.5
-1
% YOY
-1.5
-2
-2.5
-3
UK
Jonathan Bradley
GERMANY
JAPAN
USA
THE MAIN ECONOMIES
RIGHT NOW
 CONSUMER
PRICES (WHAT WE PAY)
GOING UP IN MOST PLACES
 GROWTH CONTINUING (JUST) IN
MOST COUNTRIES
 SO MAYBE EVERYTHING IS OK
AFTER ALL?
 BUT………………………..
Jonathan Bradley
2003 WORLD GDP GROWTH
2.5
2
1.5
% REAL
1
0.5
0
UK
Jonathan Bradley
GERMANY
JAPAN
USA
FEEBLE!
SICK JAPAN
 CONSUMER
PRICES HAVE BEEN
FALLING FOR SEVERAL YEARS
 REAL OUTPUT HAS BEEN
SHRINKING OR ONLY JUST
GROWING FOR OVER 10 YEARS
 IS THIS SLOW-MOTION
DEPRESSION?
Jonathan Bradley
CURING (BAD) DEFLATION
 MONETARY POLICY -
CUT
INTEREST RATES, SO:
– MORE BORROWING
– MORE INVESTMENT
– MORE SPENDING
 SOMETIMES
DOESN’T WORK KEYNES’ “PUSHING ON A STRING”
Jonathan Bradley
A KEYNESIAN BOOST
 If
people won’t spend
then  government must
spend for them
 this will make up
deficient demand
Jonathan Bradley
SORTING OUT JAPAN
 JAPANESE
INTEREST RATES ARE
CLOSE TO ZERO - SO CAN’T CUT
THEM
 PUBLIC DEBT ALREADY 140% OF
GDP, SO CANNOT BORROW MORE
 SO, BANK OF JAPAN MUST CREATE
MONEY FOR TAX CUTS OR STATE
SPENDING
Jonathan Bradley
EXTREME BUT EFFECTIVE
 PRINTING
MONEY
ONLY JUSTIFIED
IN EXTREME
CASES
 CAN BE
EFFECTIVE
 WILL JAPAN DO
IT?
 MIGHT NEED IT
ELSEWHERE
Jonathan Bradley
THE OTHER DANGER
 PRINTING
MONEY SHOULD HELP
DEFLATION/DEPRESSION NOW
 BUT, IN THE LONG RUN MASSIVE
MONEY CREATION MAY LEAD TO
INFLATION - BACK TO THE START!
 SHOWS THE IMPORTANCE OF
BALANCE IN ECONOMIC POLICY
Jonathan Bradley
? ?
?
Jonathan Bradley