The dreaded “D Word” has been popping up more frequently of late, having briefly hitting the headlines during the 2007/09 financial crisis, albeit that the majority of commentators focus on the “cost of goods and services,” better known as CPI, as opposed to “credit demand and the velocity of it within the financial system.”
The World’s central bank elite have done their best to “CON-vince” the herd that it will not happen on their watch and that they have the tools to stop the return of it, by way of chucking even more debt at a fundamental debt problem and by a delusional mantra that they actually control interest rates, at least the ones that matter to most living mortals outside of banking.
The “tools” referred to aren’t new as they would have you believe, they have been used during previous bouts of credit deflation, whether you look back in history to the l920s/1930s global deflation or indeed Japan’s more recent example:
Think of it as financial boats, be they stocks, bonds, commodities or real estate, lifted by a tide of ever higher debt levels (inflation) versus the tide of debt falling, by way of reduced demand/repayment, or via default on problem debt (deflation), when those same financial boats fall in value until they reach a level that attracts fresh buyers.
The 1980s saw Japan’s financial boats elevated to unsustainable levels, thanks to the tsunami of debt which transpired under the noses of the Bank of Japan and other policy-makers, who ironically are supposed to preside over financial stability.
We have focussed on two asset classes, stocks and property (by way of land prices,) as they are the ones closest to the electorate, showing the relationship between the pair.
“Charmer Carney,” the expensive Canadian boss at the Bank of England, is the latest central banker to have to acknowledge that deflation is likely this year for the UK under his watch. Predictably, he was quick to provide “CON-fidence” that he had the tools to keep it at bay, lower interest rates and more QE, failing to recognise that 5-years use of these tools had failed to hold it at bay.
As such perhaps it’s worth a peak at those same two asset classes for the UK:
The Nationwide house price history has been used, as the data stretches back to 1952, where we can note the flat-line of the 1950s and 1960s when credit use was far more disciplined than the rising tide that commenced from the mid-1970s. Note also the flat-line for the UK’s main stock-index, the All-Share.
As with the example of Japan the two asset classes are linked and previous deflation scares, 1989 and 2008, both following stock-market tops, ushered in recessions and credit deflation with lower property prices.
It was over 24 years ago, on the 29th December 1989 that Japan’s Nikkei stock index hit its peak price of 38,957, with many commentators at the time predicting a target of 100,000. Prime property in Tokyo’s Ginza district was selling for $93,000 per square foot and the boom created enough wealth for the Japanese to buy landmarks like the Rockefeller Centre, whilst the land on which the Emperor’s palace sat was valued at more than the whole of California.
But the 1990s turned inflation into deflation as the debt tide slowed and then went into reverse. Stimulus packages and bailouts failed to prop up Japan’s stock and property markets and to prevent the deflationary collapse. Fast forward 24 years and the Nikkei 225 remains 54% lower, whilst land prices are 76% below that peak price level, with some prime property in Tokyo having falling to less than 1% of its peak value .
Many argue that the UK is not like Japan. That is true! Japan was in a much better position to fight off deflation than the UK is presently thanks to the high savings rate that Japan had going into the bust, whereas the UK hasn’t.
Japan’s bubble of the late 1980s didn’t deflate overnight and it wasn’t the result of a single catastrophic event. It has taken a long, long time for the easy credit that had inflated the stock and the real estate bubble to resolve.
Twenty plus years of hindsight can make for a lot of clarity and the idea that central bankers and their political masters can create inflation via the printing press has the case study of Japan against it.
“Those who cannot remember the past are condemned to repeat it.”