Posted on 11/28/2014 7:01:49 AM PST by blam
Mike Bird
November 28, 2014
Eurozone inflation figures just released put the rate at 0.3% in November, down from October's 0.4% and in line with estimates.
With the recent impact of oil prices, that means deflation isn't just a possibility for the eurozone: markets are now suggesting it's the most likely outcome in a few months' time.
Analysts had forecast that that the rate would come in at 0.3% again, though some suggested it could fall as low as 02%
The ECB currently targets 2% inflation, but that target was last reached in the summer of 2012.
These numbers increase the chance that the ECB will have to ease policy: that might mean buying sovereign bonds (QE). Economists at Credit Suisse and BNP Paribas believe this announcement could come as early as December, while others think it will come at the beginning of next year.
(snip)
(Excerpt) Read more at businessinsider.com ...
Earlier today, in typical German fashion, the chief of the Bundesbank poured cold water on Europe's latest round of demands that Germany carry the weight of the rebound from the triple-dip on its shoulders, as usual, when Buba President Jens Weidmann Friday rejected calls for a German stimulus plan, saying only structural reforms and more competitiveness would kick-start eurozone economies."
I can see numerous problems with true deflation, the most obvious is that government simply cannot deal with it. We’ve already seen examples of this during the great recession. Suppose that your house is worth 300K on year and 200K next year. Does anyone for a moment even fantasize that the tax rate would stay constant, with government salaries and expenses shrinking with revenues? At the very least, you could bet that “home reassessments” would be the VERY first thing in the budget to be axed.
Means the US Dollar is going to continue to surge against the Euro...
Here is why governments fear deflation far more than inflation:
1. Inflation (not hyperinflatioin) can be managed greatly by the central bank. Deflation cannot be managed.
2. Inflation can be confined to its own country - it doesn’t necessarily spread to other countries who have strong currencies/economics. I.e., it doesn’t cross borders. Deflation crosses borders and can be infectious from one nation to another.
3. Inflation does not necessarily feed more inflation. Deflation feeds more deflation.
For years I’ve said we are in a very unusual circumstance where we have both inflationary pressures and deflationary pressures, and they have held each other in check.
While QE whatever has been scary, and inflationary, as the fiat money is not in circulation, is having no inflationary effect.
Deflation in Europe and Japan is certain, and falling oil prices commodity prices here are an added deflationary pressure that could just flip things to deflation. In deflation, cash is king. All other assets are a disaster.
Not an economist, nor did I play one on TV - but I think most experts will support what I’ve said.
The single biggest reason why this government is hell-bent on maintaining an open-borders policy is to stave off the deflationary pressures that most of the industrialized world is facing due to demographic changes.
“The single biggest reason why this government is hell-bent on maintaining an open-borders policy is to stave off the deflationary pressures that most of the industrialized world is facing due to demographic changes.”
And Japan is unwilling it seems to move towards an open-borders policy. The ongoing monetary and fiscal stimulus in Japan does not seems to be very effective.
In Japan these days, more adult diapers are sold than infant diapers.
But can fiat money be kept out of circulation forever? The only way I can see that happening is if we have a repeat of the Latin American Debt Crisis of the 80's which was basically taking an excess of money and throwing it into a furnace to be eliminated. In the 70's, the 'oil crisis' had caused banks to be overloaded with deposits from the oil producing countries. There were only so many good places to invest these deposits, so they loaned them to questionable countries in Latin America. Of course, they defaulted, and eliminated all of the excess liquidity. Something like that will have to happen now, or we will experience inflation. Not sure if either eventuality is good though.
Deflation itself keeps fiat money from being spent.
Again, as cash is king, and the real value of all other assets are falling, it’s always better to put off a purchase until the new, lower price comes out.
You’ll never buy a $15,000 car knowing that in a few months the same car will be $14,000 - just like in today’s computer world - why buy a $1,000 computer when you know tomorrow it will probably be $800?
Bringing up another deflationary pressure: technology. Today’s technology will be cheaper tomorrow.
When cash is king, you won’t want to spend it........
I believe what you are saying is true, but I have to ask. Given today’s demographics of the “I want it now” mentality and the very long stretch of normalcy bias, I think people by and large will be spending their cash as they think they see deals all around them. What then?
And what do you do in the meantime when you need a computer?
Globalism since the 1990’s has resulted in a tremendous overcapacity situation in most industries. As a result many manufacturers are pricing to cover variable costs in an effort to gain market share. Many of these manufacturers, particularly in the third world, are directly or indirectly subsidized by governments to keep workers employed and prevent social unrest. Government subsidies distort the market by depressing prices while and distorting efficient investment of capital.
Prolonged deflation will lead to:
1) Higher tariffs and trade wars. Tariffs are a weapon to counter subsidies by other countries.
2) High unemployment and social unrest putting pressure on government.
3) Armed conflict between nations. Wars effectively employ displaced workers in the armed forces and in factories producing war material. Surplus populations are reduced during war. Patriotic fervor replaces social unrest and anti-government activities which threaten the government. Populations are also willing to endure hardship during war they will not accept during peacetime.
Expect more armed conflict and violence as governments take action to deal with high levels of unemployment due to deflation.
Deflation is a myth. It cannot occur in any system with an expanding money supply.
You're thinking of the first case.
If you think deflation is a myth, just take a look at Japan right now. I think they're entering something like Year 25 of their "Lost Decade," and it is absolutely a deflationary cycle.
Yes and that is why they have been in a recession for almost 20 years. No new spending for newly created families.
And to think in the 1980’s the pundit class said Japan would be a world power for the foreseeable future and that our children should learn Japanese. The foreseeable future lasted what 10 to 15 years.
Also those on fixed incomes would seem to benefit since their money would be worth more in buying value. This would include those on welfare. -tom
When you pay $6 for a cup of coffee or $15o for a pair of basic jeans in some Euro capital isn’t that largely due to taxes? How much of that $6 is even due to the price of the product?
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