Is the UK at risk of Japanese style deflation?
Adam Posen, a member of the Bank of England's MPC, has today warned UK investors of the potential risk of a Japanese style deflationary period in the UK. This warning is ever more important because this particular member of the MPC was brought on board because of his knowledge of the Japanese economy and the troubles which that area has encountered over the years.
He cited a number of parallels between the UK situation and the Japanese situation of the 1980s/90s with the UK government needing to sell more and more sovereign debt to foreign investors who may not be long-term holders, the fact the manufacturing industry has all but disappeared and the UK banking arena is still fragile. Things could be potentially worse for the UK when you consider that the Japanese economy was a worldwide player and the UK is in nowhere near the same league.
While it is unlikely that the UK will encounter a double dip recession it is not inconceivable that we could see a slowdown in the economy. The knock on effect to sentiment would be potentially catastrophic and with no funding available for the present UK government it is difficult to see where any potential future bailouts would emerge from.
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