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FSA’s Turner warns of the deflationary risks of deleveraging


FSA chairman Lord Turner has warned of the deflationary dangers of global economies having to deleverage their public and private debt at the same time.

In a speech yesterday in Frankfurt, Turner warned “we are far from out of this crisis”, setting out the huge deleveraging challenge to be faced. “It is far deeper and more difficult to escape than many of us initially thought,” he added.

Turner told delegates that meeting this challenge would require a combination of debt servicing, debt-writedown and forms of controlled debt monetisation.

Turner said that in previous debt fuelled crises leverage has tended to shift from private to public sector. However, he warned that with both private and public sectors forced to deleverage simultaneously, there was the risk of “self-reinforcing downward deflationary spirals’.

He said: “We face indeed the danger that the very policies which we know are essential for greater long-term stability – higher capital and liquidity requirements in the banking system and sounder fiscal policies underpinned by disciplines on public debt issuance – may in the short run produce deflationary effects which depress our economies and thereby undermine our ability to delever.”

Out of the options to achieve  deleveraging- real growth, debt servicing, debt restructuring or inflation- Turner said everyone is in favour of real growth. But he warned this would be difficult to achieve given the current economic conditions. “We need to be realistic about how real growth can possibly come to the rescue,” he said.

To deal with the eurozone crisis, he said the central bank must be free to use all possible levers, including quantitative easing. But he warned this is impossible where there is subsidiary sovereign debt- debt issued by a political authority which does not issue its own currency- as it would lead to national debt indiscipline.

As a result, he suggested radical reform of the eurozone was required. He said: “The eurozone architecture needs to combine tight political and market discipline of subsidiary sovereign debt with the creation of Eurobonds, and with an acceptance that if necessary the ECB can conduct quantitative easing operations at the eurozone aggregate level.”


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. He hasn`t got a bloody clue! Reeling out some speech written by his staff to give him the perceived status he thinks he has. Gravitas? Not a chance. They must have been chuckling to themselves behind his back, what a wonderful figurehead he is! How about some clever ideas for a change not warnings?

  2. And all this comes from a man in charge of an organisation who, according to an economist during a conversation at a gala dinner their most seniour staff had never heard of a CDO never mind what is what a CDO actually is. PS this was in June 2007. Oh dear oh dear oh dear what hope os there for our future.

  3. He is correct to warn that the policies pursued may aggravate the very things he is warning about. Deflation is more the risk.

  4. If you read Adair Turner’s speeches (and yes, I do and have) you will find he inhabits a world of macro-economics and macro-prudential levers, and the speech reported in this article is no exception. to his having adopted that position.

    One item in his speech raises his search for what he calls “real growth”, something he then freely confesses that he finds nearly impossible to trace from a singularly restricted vista of the macro.

    Specifically so given the various “macro” levers he sees as potentially deployable. Deleveraging on the scale he envisages at the macro level instantly transforms itself into the very real risks of a self reinforcing spiral of deflation.

    But step back for a moment Lord Turner, and as you survey the economic instability and its inherent risks from the lofty vantage point of the macro, it would be worth considering which body was empowered by UK statute to achieve “financial stability” some 12 years ago.

    And when you measure its levels of abject failure in achieving that objective, you might just also, even somewhat modestly, recognise who acts as Chairman of that very body.

    Lord Turner, if you perhaps spent just a little time at the level of ordinary people, you might, no matter how ironically, find that solutions present themselves, solutions that would, for example, encourage and produce “real growth”.

    Lord Turner, have you ever considered looking for “real growth” solutions, other than at a macro level, or is that quite literally, beneath you?

    The “macro” world you inhabit cannot exist without the “micro” world in which millions of ordinary people live.

    Have you ever wondered if from those millions of individuals answers might arise which no one man, no matter how elevated, could conceive, let alone produce?

  5. this commentary and papers on defaltionary risk was penned by CITI and other equity analysts at least a week ago, so I doubt anybody on his staff wrote this, obvious piece of plagiarisim. His conclusion is howefver not the same, there is no way the Germans are going to allow the ECB to indulge in QE, the printing presses are turned off.

  6. However academically brilliant Lord Turner is, I agree with Mike Fenwick that he would be much better off considering the micro-economic implications of his grandiose plans. He might also be taken more seriously if he didn’t puntuate his speeches with endless Americanised business gobbledygook (‘deleveraging’ and ‘self-reinforcing downward deflationary spirals’ indeed!) Thank goodness we didn’t join the euro – another of his big ideas!

  7. Dear Mr Turner

    I’m sorry to have to tell you that Mike Fenwick has it in one.

  8. Turner is just one of a number of arrogant, over-promoted twits who pontificate about things they have no real idea about. Great minds don’t go into politics or economics or the civil service or banking – that’s why we finish up with a society run by second rate individuals, albeit often with loud mouths and an unjustifiably high opinion of themselves.

    The problem facing western economies has been generated by people like him over a period of 50 years or more. The western world has been living beyond its means for decades and is now drowning in a sea of debt ! China, India, and those other economies which have the natural resources or willing labour markets will become ever-more able to dictate terms to the rest of the world. Europe (including the UK), and the US are in serious decline – economically, socially and morally and there isn’t a road back.

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