I’ve got a letter in the FT here.   It is about whether deflation is such a spiffing idea, as Edward Gottesman the day before had asserted.  After pointing out some factual errors, the conclusion I make is fairly predictable:

His greatest error is to imply that savings are necessarily virtuous, and spending necessarily vicious. Everything depends on the economic context. Keynes showed in theory, and the Great Depression in practice, how low savings can cause incomes to plummet. Deflation encourages people to put off their spending, thereby exacerbating a cyclical downswing, and causing huge wastage of economic and human potential. It is the last thing we need right now.


6 thoughts on “Letter in the FT

    1. With pleasure! 1st 3 paras

      Sir, In defending deflation as a useful remedy to our modern economic ills, Edward Gottesman promotes several economic myths (“Why we should not fear the spectre of deflation”, February 15).

      The first is that deflation in the late 1800s saw higher growth than the recent, more inflationary past. This is not so: in per capita terms, 1870-1910 saw per capita gross domestic product increase by just 100 per cent, compared with 140 per cent for 1950-1990.

      A second is that low central bank rates have been the cause of low savings. This is again not so: a more accurate analysis would put excessive savings in the east as the cause of low interest rates in the west.

      Another myth is that “higher interest rates would deter financial speculation”. Mr Gottesman should consult the economic record of the 1980s in Britain, where high real interest rates accompanied soaring house and share prices, as well as profligate consumption.

      I take it that you can’t see the original article either: http://www.ft.com/cms/s/0/52cddeb6-199b-11df-af3e-00144feab49a.html

  1. Giles, you might also want to point towards his August 14 2007 letter which asked,

    “ Is now the time to implement Ben Bernanke’s “helicopter” strategy? Subprime mortgage loans in the United States tend to be highly localised. Instead of trying to fend off panic by liquefying assets held by banks that are unwilling to lend to other banks, this may be the moment to drop $100 bills from the air into neighbourhoods where many residents borrowed money that they cannot afford to repay.”



  2. Giles,
    I was only pointing to his apparent flip floppery.
    I agree that he was not entirely wrong in that 2007 letter.
    At the time I thought that efforts to underpin housing values and manage price declines were the right things to do. Rather than helicopter money to mortgagees, the government could have bought shares in homes where the owners were in difficulty leaving them in their homes and paying an appropriate mixture of mortgage interest, capital repayment and rent. I also advocated that social housing agencies (including councils as well as RSL) work jointly with developers to build out those schemes on site and those already with planning permission and largely worked up, in exchange for agreements on affordable housing for sale on the market or to RSLs or equity sharing, plus training, local employment initiatives and sustainable innovations.
    Prior to Oct 08 I was working with a number of developers on very exciting schemes in partnership with local RSLs and Regeneration Agencies that would have led to some innovative and highly integrated new communities that would also have wrong life and economic development to the neighbouring areas. Some of the most radical architects were involved.
    This would have allowed time for the economy to be weaned off the less sustainable and onto the more sustainable.
    (Perhaps you saw Redwood banging away at the ‘inflation’ scare on last night’s Newsnight.)

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