JC Flowers Sees U.S., U.K. Inflation Best Way to Reduce Debt

J. Christopher Flowers, chairman and chief executive officer of private equity firm JC Flowers & Co., said inflation is the best way to cut debt as central banks in the biggest advanced economies push ahead with monetary easing.

“Let’s get the economies moving,” he said at the Bloomberg Doha Conference today. “I am not saying what happened in Germany in the 1920s. I am saying a modest amount -- a little bit of inflation, which we really need to amortize debt.”

The Bank of Japan said last week it will double the monetary base by the end of 2014 through purchases of government bonds, in an attempt to end two decades of stagnation by increasing inflation to 2 percent. The move means the world’s four biggest developed-market monetary authorities -- the BOJ, the Fed, the European Central Bank and the Bank of England --are aligned in their commitments to spur growth and return their economies to full strength.

Japan’s net debt soared from 81 percent of economic output in 2006 to 113 percent in 2010 and may rise to 145 percent in 2013, according to International Monetary Fund data. The ratio for both the U.S. and the U.K. is forecast to rise to 88 percent from 84 percent last year.

U.K. Chancellor of the Exchequer George Osborne expanded the Bank of England’s flexibility to reach the 2 percent inflation target amid strains in the economy. Still, some members of the central bank’s policy-setting body have raised concern that more stimulus could undermine confidence in their commitment to low inflation.

U.K. Inflation

U.K. consumer prices will rise 2.7 percent this year, according to the median estimate in the latest Bloomberg survey in March, while the economy may grow 0.9 percent.

“The U.K. has had no difficulty creating quite a lot of inflation in recent years, it’s just that we haven’t had any growth to accompany it,” Stephen King, chief global economist at HSBC Holdings Plc, said in an interview in Dubai yesterday.

For Japan, the question isn’t achieving the inflation target “but rather, is it the right kind of inflation?” King said. “If the yen continues to weaken, it is likely to improve growth on the export side but at the same time the weaker yen may drive up import prices, hence leading to higher price inflation, but not higher wage inflation.”

The yen has weakened more than 12 percent this year. Japan’s economic growth may slow to 1.2 percent this year from 2.05 percent in 2012, according to Bloomberg’s survey.

‘Like a Rocket’

Japan was “very out of favor, which made it inexpensive,” Flowers said. “That has changed in the last six months where it’s taken off like a rocket.”

The U.S. economy is expected to grow 1.9 percent this year, according to Bloomberg’s survey, while the euro area may shrink 0.2 percent. HSBC is forecasting a contraction of about 0.5 percent for the latter, King said.

Flowers said the euro area was lagging behind the U.S. in taking action to revive economic growth and end a debt crisis that has put the survival of the single currency in question.

“One future is that Europe manages to pull its socks up and keep the euro going and get back to growth eventually, and the other is that it doesn’t and things fall apart, the euro comes apart,” he said.

Before it's here, it's on the Bloomberg Terminal.