Running scared of deflation

Feb 26 2009 by Peter Jackson The Journal

I HAVE never tried turning round a supertanker, but I gather it’s a long, slow process. The world’s governments and central bankers must feel like supertanker captains at the moment, frantically spinning the wheel, yet still the damned thing won’t answer the helm.

The danger is that a combination of impatience, inexperience, sheer blind panic and a need to be seen by the crew to be doing something, can lead to oversteering. So, when the vessel does eventually start to turn, she doesn’t stop, but continues until she faces the opposite way. This is a danger facing the world economy.

Those with their hands on the economic levers are terrified of deflation, the spectre of falling prices which would mire us in recession for many years. With some justification, they point to the example of Japan, which went through deflation in the 1990s, a harrowing experience from which it has yet to recover.

But history can point to many more examples of inflation than deflation and, at the moment, governments and central banks are doing all in their power to stoke it.

It is worth remembering that, last December in the UK we were seeing an annual rate of inflation of 3.1%, comfortably above the 2% target. Despite that, interest rates are at a 300-year low, Government borrowing is approaching levels not seen since Captain Mainwaring was a bank manager and the pound has lost one third of its value in under 12 months.

The situation is no better in the US. Ben Bernanke, chairman of the Federal Reserve, is an expert on the Great Depression, even perhaps an obsessive on the subject, and he is determined that it should not be repeated. He points out governments can avoid deflation by printing money, and, boy, has he been printing money. The Fed’s lending programme has doubled its balance sheet to an eye-watering $2 trillion. If that’s not inflationary, nothing is.

Supertanker captains like Mr Bernanke may well miss the coast of Japan, but let’s hope that in their efforts to do so, they don’t go bump into the coast of Zimbabwe.

Peter Jackson is a writer and ex-business editor of The Journal – p.jackson77@btinternet.com