I can’t sleep, and this annoyed me, so my turn to make a long comment! I write this as an ignoramus, as much to invite your critique as anything.
…On thinking about this further I think that Hendry was so flabbergasted by Liam Bighair, he didn’t articulate the counter argument.
(BTW isn’t WW2 in the US the snappy answer to the ” tell me one time QE worked” question?)
LBH seemed to be working from the starting point that things are slowly starting to look up in various markets, and that this would be choked off if we acted inappropriately.
Yet he then goes on to say that the problems ae so great in the financial sector that the only legitimate response is to purge the system – to close banks, reduce asset values drastically and generally let the devil take the hindmost.
Which sort of leaves you with the question of how on earth the economy would perform in that scenario. I mean, if that doesn’t sound like an recipe for plunging demand and deflation, I don’t know what does.
LBH leaves unexplained what he thinks this would mean for the real economy, except that it involves “hard choices” -which he lauds himself for being prepared to take but doesn’t spell out the consequences of.
He says we need to liquidate assets, purge the system and start all over again but at the same time suggests that the biggest threat to the economy is inflation.
With demand plummeting around the world and asset values at record lows, it’s interesting to ask where this inflation is going to come from.
Well, there he moves from the global to the particular and focuses on Britain alone. Is anyone arguing that _japan_ is facing an inflationary crisis?
To a certain extent Britain_ is_ exceptional – our currency devaluation means that if global prices drop we won’t feel the cut.
Yet currency protection from global economic demand crisis via currency devaluation can only ever be a tempoary deal, no? Either the downturn is transient, in which case *phew*, or it isn’t – in which case other currencies will begin to devalue too.
So perhaps Britain is more protected from the risk of global deflation than other countries – a good thing, but a temporary shield. (I’d like to see a more reasoned analyis on the UK’s current inflation exposures. I suspect that the massive drop in oil and a projected huge drop in imports will impact the next few months of data.)
But LBH isn’t arguing that we’re lucky – that we can afford less of a fiscal stimulus in the UK because our currency has given us a shield that allows us to free ride on others desperate efforts to reinvigorate their economies – he’s arguing that _no-one_ should try to re-invigorate their economies.
Which leads you back to the beginning – if the only option in the face of a huge drop in economic activity is to purge the system and reset – why should we be worried about inflationary pressures at all?
I broadly agree with everything that you say. So does that make an ignoramus too?
I think the problem Halligan has is he is totally unable to imagine an increase in the money supply that is not somehow (perhaps by magic?) inflationary.
What I found interesting is that they both agreed that QE won’t work.
Hendry is correct to say that increasingly this ‘return of inflation’ is being heard a lot. I suspect as so many look to the 1970s as their frame of reference.
On Britain and inflation – in dollar terms oil is at about one third of its June 2008 peak. In sterling terms about one half. In sterling terms the price of wheat, corn, oil, steel and copper have all fallen over the past year. The only things still rising (in wholesale not retail terms) are meat prices. So still very deflationary. A weak pound helps, but isn’t enough.
I’d argue that ‘flexible labour markets’ probably make us more likely to experience deflation than much of Europe too.