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Fallout: The Financial Crisis

U.K., U.S. weather deflation fears

Christopher Werth Aug 10, 2009
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Fallout: The Financial Crisis

U.K., U.S. weather deflation fears

Christopher Werth Aug 10, 2009
HTML EMBED:
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TEXT OF STORY

Bill Radke: Of course, Europe is asking those same kind of interest rate questions. Last week, the Bank of England held rates steady but made a surprise move to pour billions more dollars into the British economy. Today the U.K. paper, the Telegraph, says the bank is worried about deflation and prolonged stagnation. From London, here’s Christopher Werth.


Christopher Werth: The U.K. had been abuzz with talk of “green shoots” lately. British manufacturing numbers are up, and consumer spending has been better than expected.

That’s why it came us such a big surprise when the bank decided last week to increase its program to buy up nearly $300 billion in government and corporate bonds in order to increase the country’s money supply. Conventional wisdom says adding more money to the economy risks inflation. But Vicky Redwood of Capital Economics says with such a lack of economic growth, prices actually risk going down, and that any recovery would be wiped out if deflation took hold.

VICKY REDWOOD: We’ve still got a significant risk of a W-shaped recession, or double-dip recession where the economy starts to grow again for a quarter a two, but then loses some of its momentum and slips back into recession further ahead.

Redwood says the same forces of spare capacity, where companies lower prices to compete for what little demand is out there, threatens pushing the U.S. into a similar deflationary spiral.

In London, I’m Christopher Werth for Marketplace.

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