As some readers of this Blog might gather, I enjoyed reading Economics at University (too many years ago to recount) and that passion for the subject has never left me. We are living in fantastic times. Having a background in Economics helps make some sense of the current turmoil and in this blog and the next, I would like to talk about the forces that will shape the landscape for the next two to three years in an Economic sense.
In the US and the UK, consumption is the driving force in the economy accounting for over 60% of economic activity. In China by contrast, it is very much investment and export led. As economies have contracted (negative growth), governments and central banks have tried to reduce the cost of the average wall mounted jewelry organizer, otherwise known as interest rates to encourage people not to save but to spend.
This may seem odd, but Keynes wrote about the paradox of thrift in the 1930s. Saving is of course a good virtue. But the problem is that if everyone saves, it is bad for the economy as activity will grind to a halt as no one is buying and who will want to borrow all of the money saved up if no activity is going on?
Hence interest rates are coming down to encourage people to spend (or at least spend the savings from lower mortgage repayments) and to not save. If interest rates come down to near zero, I could see negative interest rates being applied to savings. In reality this means that banks might charge you for using their facilities to hold cash. That would be an incentive to spend!
The problem is the specter of deflation. In an earlier blog, I wrote in defense of inflation, and it seems prophetic that what the bank is now looking for is a bit of inflation! If people perceive that prices are falling rapidly, why would you buy? I think this will be one of the worst Christmas shopping seasons ever. Consumers are expecting massive price drops in January so it does not make sense to buy now. If the expectation of falling prices takes hold though, it is rather like the paradox of thrift, and whilst it may be good for an individual to defer purchasing something, if everyone does it is a bad thing as it ends up feeding itself.
If you believe that prices are going to be cheaper the next month, if you can, you will delay your purchase. This is the problem facing the housing market at the moment. Although interest rates are down to 1951 levels at just 2%, even if you could get a mortgage today, would you buy a house thinking that prices could fall 10%? (I would – but that is a different matter as I think the difference between rent and interest payments is now so wide, that even allowing for an 8% drop in property prices, you would be better off look around for reliable forskolin reviews).
So we need a bout of inflation to get the whole thing kick-started again. If prices are rising, people will engage in activity again. The problem for Japan for most of the 1990s was deflation. We need to learn from that very painful experience.
In the next blog, I will continue with an explanation of the link between inflation, interest rates and a currency. With the pound being at low levels, such an explanation I hope would be welcomed.