Jonathan Bradley

THE GLOBAL ECONOMY IN 2003

A CHOICE OF TWO EVILS?

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Jonathan Bradley

INFLATION OR DEFLATION A SUSTAINED RISE OR FALL

IN THE OVERALL PRICE LEVEL

POTENTIALLY DEVASTATING CONSEQUENCES

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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!)

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THE ECONOMIC AIM: A SAFE MIDDLE COURSE

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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!!

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A COMPLICATION

ECONOMISTS TELL US THERE IS

– GOOD DEFLATION

– AND

– BAD DEFLATION

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WHAT ON EARTH IS “GOOD” DEFLATION??

WHEN PRICES FALL BECAUSE OF:– INCREASED EFFICIENCY– TECHNOLOGICAL PROGRESS– INCREASED SUPPLY

EXAMPLES: COMPUTERS, CD PLAYERS

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AND WHAT IS “BAD” DEFLATION??

GENERAL AND SUSTAINED FALL IN PRICES WITH:– INSUFFICIENT DEMAND– FALLING PROFITS AND RISING

UNEMPLOYMENT– POSSIBLE DEPRESSIONPOSSIBLE DEPRESSION

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WHAT HAPPENS? SHRINKING OUTPUT MASS UNEMPLOYMENT SOMETIMES, POLITICAL AND

SOCIAL UNREST

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HAVE WE GOT DEFLATION?

YES - IN SOME COUNTRIES BUTBUT, IS IT THE GOOD KIND OR THE

BAD KIND? ANSWER: A BIT OF BOTH HAS IT LED TO DEPRESSION? ANSWER: POSSIBLY, IN JAPAN

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STOCK MARKETS AND LAND PRICES WENT UP FAR TOO MUCH

BUBBLES!!BUBBLES!! WHEN THEY

BURST ECONOMIES SUFFERED

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0

500

1000

1500

2000

2500

3000

3500

1985 1990 1995 2000

DJII

Nasdaq

REBASED

Much worse in Japan!!

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PRODUCER PRICES 2003

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

UK GERMANY JAPAN USA

% YOY

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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………………………..BUT………………………..

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2003 WORLD GDP GROWTH

0

0.5

1

1.5

2

2.5

UK GERMANY JAPAN USA

% REAL

FEEBLE!

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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?

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CURING (BAD) DEFLATION

MONETARY POLICY - CUT INTEREST RATES, SO:– MORE BORROWING– MORE INVESTMENT– MORE SPENDING

SOMETIMES DOESN’T WORK - KEYNES’ “PUSHING ON A STRING”

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A KEYNESIAN BOOST

If people won’t spend then -

government must spend for them

this will make up deficient demand

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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

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EXTREME BUT EFFECTIVE PRINTING MONEY

ONLY JUSTIFIED IN EXTREME CASES

CAN BE EFFECTIVE

WILL JAPAN DO IT?

MIGHT NEED IT ELSEWHERE

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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

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