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Written by Adrian Ash  |

January 25, 2010

Deflation In Everything But The Cost Of Living

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More on the inflation vs. deflation debate—this time, the grim situation facing Britain.

• Stagflation setting in
• Bank of England ‘happy to slit its throat’
• Time to swap the pound for gold?

In a follow-up to Brad Zigler's look at the inflation vs. deflation debate last week, contributor Adrian Ash looks at the situation across the pond. This article originally appeared on BullionVault.

THEY WERE SUPPOSED to avert depression. The Bank of England continues to tout their "success".

But it looks like the best that money-printing and zero rates might now deliver is '70s-style stagflation, plus '30s-style wealth destruction and a glacé cherry on top.

Giving Britain its "stag" - as in stagnation - are economic output, wages, capital investment, real estate prices and now, perhaps, a return of the bear market in London shares. Whether or not GDP shows an uptick for the end of 2009, this is the deepest British recession since 1931. Business investment sank to a 6-year low on the last quarterly data, and the number of people out of work for 12 months or more has risen by two-thirds since Northern Rock was bailed out, breaking the dam of bail-outs worldwide in late 2007.

Stepping in with a very 21st century version of drowning, not waving, "The number of people in part-time employment increased by 99,000 to reach a record high of 7.71 million" between Sept. and November '09, says the Office for National Statistics. "There were 1.03 million employees and self-employed people working part-time because they could not find a full-time job...the highest figure since records for this series began in 1992."

And as if this slow, soft depression wasn't enough, the UK has actually got real deflation - as technically defined - meaning a contraction in the money supply.

Down by almost £22 billion in December, the broad money supply in the UK - known as M4, and encompassing all private UK holdings of Sterling notes & coins, all Sterling deposits held at mainland banks & building societies, and all certificates of deposit, commercial paper & debt securities issued by UK banks and building societies of up to 5 years' maturity - shrank at the fastest pace on record.

This monetary deflation came even as the Bank of England created £6.8bn from thin air, and spent it on government bonds in its bid to inflate our way out of recession, "easing with quantity". It also came as the cost of living jumped at its fastest pace ever on the UK's official measure...giving us a whole heap of "flation" to add to our "stag".

Recession AND inflation? Wasn't deflation in all things except the cost of living supposed to be impossible...in the same way that "pass through" from Sterling's fastest-ever decline on the currency market wasn't supposed to show up in prices but only in export sales...?