Jeremy Warner of the Telegraph is berating the heir-presumptive of the ECB, Axel Weber, for being anti-inflation:
Yet it is plainly better to be attempting to choke off an inflationary boom than to be in a Depression wondering how to get out. In a deflationary debt spiral, monetary policy becomes almost wholly impotent. However low rates go, people will still be keener to pay down debt than invest and consume. The risks of Depression are therefore much worse than those of inflation.
To be fair, I overreacted to his previous Stagflation post, where he admits that inflation is unlikely and deflation would be worse. But for someone on the Telegraph to hint that pushing the inflation target out to 4% may be a lesser evil is pretty amazing.
Sterling is down 2c today on the investment figures that Chris discussed.
Another straw in the wind is the way that UBS has warned of the consequences of more savage cutting. See this from Ed Conway’s blog:
Taking too sharp an axe to the deficit would “endanger tax revenues, Britain’s sovereign rating, the recovery of the banking sector and the UK labour market,” the strongly-worded report argues. With confidence in British policymaking gone, the pound would risk plunging to $1.05 against the dollar and slumping beyond parity for the first time against the euro
Everyone seems to agree now that the pace of recovery, and not the scale of the deficit, is the real problem. See this on Stephanie Flanders’ blog. Talking of the Man with a Shovel, she says:
On the basis of his testimony – and that of other members of the Monetary Policy Committee (MPC) – it is the state of the recovery that is clearly their major concern. We heard several times that “risks to the Committee’s central view of a gradual recovery of output remain to the downside”. Subtitle: we’re not out of the woods yet. Britain’s banks, households and government all need to get their balance sheets in order over the next few years, and bring down their stock of debt. That has long been a reason to expect a weak recovery. But, as King and his colleagues noted, the weakness of the recovery in the eurozone gives us another one.
This reminds me of the punchline to Slash and Grow (October 2009):
If the next British government proceeds upon the basis of deficit reduction before growth, it risks achieving neither.
I’m not claiming a toldyouso here: for most of the intervening few months, I was relatively bullish. It is only since this around this time on 6th Feb I have thought the double-dip the biggest worry. I don’t think economics is really about predictions as such; more tracing out consequences if X or Y happens. And coming up with ideas for what to do: hence the column today.