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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
