Posted on 03/21/2020 7:16:34 AM PDT by ConservativeMind
Typically, deflation is a sign of a weakening economy. Economists fear deflation because falling prices lead to lower consumer spending, which is a major component of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions. This further lowers demand and prices.
However, for a period of approximately five years, prices of consumer goods went down in Switzerland without any widespread negative impact on the country's economy. In fact, their economy prospered in the midst of falling prices. This has caused some economists to revise their opinion about the ill effects of deflation, with some arguing that as long as there isn't too much deflation, consumers and producers in an economy can find an equilibrium.
The Switzerland Case for Deflation
In early 2015, Switzerland's central bank introduced negative interest rates in an attempt to curb investor demand for the country's overvalued currency. The debt crises in neighboring countries, in combination with economic instability in Eastern Europe economies, had driven up demand for the Swiss franc by investors looking for a currency safe haven.
In the aftermath, economists expected the Swiss economy to go into a recessionary tailspin. On the contrary, the economy grew and the country posted a low unemployment rate of 3.3% in 2016. Prior to the central bank's activity, wages had declined by 0.6% on an annualized basis but this was offset by a decrease in the general level of prices. Overall, the country experienced a net increase in spending power.
brought to you by the Liquidity Trap, with lovely black swan
one classic way to end the trap is massive asset deflation, including gold/silver, don’t hold your breath for a bottom
Buckle up bucko, its going to be a bumpy ride
12 years old and growing, maybe 40 yrs (Reaganomics)
The Gigantic Sucking Sound is the Capital Destruction of the Western World Economies
Another question,is inflation good?
What?
The Fed or somebody provides short-term cash over night to various financial critters, to facilitate transactions among them.
Some autofellatory quant (or many) decided to get cutesy with it, and do complicated transactions between that rate, and US Treasury bills -- and make an infinitesimal amount per trade, based on the difference.
What to do? Borrow 50 times your own stake, to pump up the numbers.
So when Russia and Saudi Arabia made crude oil fall 30% in a day, everybody rushed to buy US Treasuries.
Their rate briefly went to 0.31%.
This meant the hedge funds needed cash NOW. ("Margin call.")
So they had to start selling EVERYTHING to raise cash.
Selling, drives prices down.
Prices going down, meant that other people who had borrowed to fund risky guesses, suddenly had to come up with more cash for collateral for their bets.
So THEY started having to sell, too.
Like Dominos.
In the meantime, the bankers, those noble vermin, got a case of the vapors and refused to lend to each other, even overnight.
Right at the same time all the Boeings and Fords of the world said, "You know how we spent hundreds of billions over the last 10 years buying back our own stock, funded with debt, so we could make the C-level executives rich enough to buy 2nd houses for their third mistress?" "Well, we're out of cash, so we're going to to use that $12 billion line of credit from the banks, before they take it away."
EVERYBODY wanted CASH up front, at the same time.
With fractional reserve lending, the bank only has a few percent, of the money lent out, sitting in vaults. They play the percentages that something like this just isn't going to happen.
But it gets worse.
There's 250 trillion of debt in the world by some estimates.
Guess how much leverage there is in derivatives (complicated stock and bond swaps, where each party (heh) "promises" to come up with the money if they guess wrong?).
Try 1.5 quadrillion. One thousand, five hundred TRILLIONS.
And all this, mostly, on the backs of the US taxpayer, who makes and average of $50,000 /yr.
These people should all be injected with Coronavirus, AIDS, Ebola, oven cleaner, fentanyl, krokodil, and then left to rot.
And then *really* punished.
But first, go after the UTTERLY corrupt Congress that wrote the laws to allow this kind of thing: quite a price to pay so they could continue to molest children. (That part is literal. Remember when the Speaker of the House, back in the Clinton years, had to resign for "Structuring" money ? Breaking down transactions to < $10,000 at a time so he didn't have to report it. The payments were hush money to boys he had molested when he was a teenager.)
Switzerland is not a good example. It is not in isolation from the rest of the world. One country doing this is one thing. The whole world, is another.
I tried my best to sound like an economist that always hedges everything he says.
Another question,is inflation good?
I define inflation as a lot of money chasing limited resources.
Is deflation, limited money or no money chasing limited goods?
Inflation and deflation are NEVER PURE. Something’s deflate, some inflate. During the Depression not everyone was going broke but that is what we THINK happened when we read history.
Fortunes were made during the great depression. Some survived by the skin of their teeth and some went broke.
Now the interesting question is was it luck or mgt (decision making) If you went broke, it was bad luck. if you survived or made money it was good management. But the reality is luck and mgt cards are both needed.
The article is 100% BS. I have lived here for over 20 years and the cost of living has NEVER decreased.
Sure, officially we have had a few years where “costs” supposedly went down - but that was done via tricks. The most notable being the composition of the “shopping cart” used as a bench mark - replacing pork for beef and chicken for pork being the main example. IOW if I bought the same things today as I did several years ago, I would pay significantly more.
Another major factor is the disparity of prices between Switzerland and it’s neighbors, partially due to the exchange rate (CHF - EUR). A vast majority of the citizens here do their shopping in Germany or France where prices for the exact same product are between 20 and 50% cheaper AND the VAT is refunded (note Germany has a 20% VAT). This puts downward pressure on prices in Switzerland, but not enough to offset.
Here one quick example:
Coop Switzerland, 1 kg Hot dogs (Wiener) - 16,75 CHF / 15,78 EUR / $16,98 ($7,71 / Pound)
Edeka Germany, 1 kg Hot dogs - 7,32 CHF / 6,90 EUR / $7,42 ($3,37 / Pound) [the price in EUR is even cheaper as the 20% VAT is refunded which makes it 5,75 EUR!)
But the flip side of deflation is that it means the currency is getting stronger -- it purchases more.
The idea that we need some inflation to maintain economic growth is utter nonsense.
Well, I guess if you want the national economies of the world to go bankrupt...
The FED bases its mechanics on a 2% inflation rate. That way, in theory, the 30 year bond is paid for with money worth half of what they borrowed.
In a deflationary scenario, they are paying that money back with money worth more than what they borrowed. It is a losing proposition.
To make this worthwile, you would need to hoard cash, and that cash would have to remain “legal.” In a true deflationary crash, they would issue new currency based on a ratio of the old. Your hoarded currency would become worthless.
Even gold would lose its “value” to the dollar. Case in point: It was worth $1,700 last week (or so) and today its worth $1,500. The ONLY difference is that countries are scrambling to get dollars to pay off their dollar denominated debt. This drives the dollar index higher...and everything else lower.
I have seen the impact on gas. But on any domestically produced product you will not see any difference. You might see some on imports—but since everyone is shut down...you wont see that either.
Good thoughts, no solution (you are honest)
Reminds me of the Year of Jubilee. We didn’t like it so never followed it. But there is much merit in the idea.
Just because we didn’t like it doesn’t mean that God didn’t implement it.
We have the example of the demise of the USSR in our lifetime. The USA, China and Europe may go through the same thing but different.
The most interesting thought for me about the USSR is NOBODY wanted to put the USSR back together again.
Inflation’s good for people who owe money... (the money they use to pay off their debt is worth more)
Deflation’s good for people who have saved money...(their money is worth more)
No. If you have severe deflation, you will pray for inflation.
Weve had deflation in computer and video products for the last 20 years. Compare your first Intel 286 computer which cost $3000 in 1989 to your $800 iPhone.
- Higher productivity
- Cheap to harness, newly found energy sources
- Buying cr@p from China
- Lowering interest rates
- New inventions
You are against all of these, unless the government steps in to compensate by expanding the money supply to not only correct for the benefit, but another couple percent beyond?
Thats crazy talk.
You are against all of these, unless the government steps in to compensate by expanding the money supply to not only correct for the benefit, but another couple percent beyond?
No, you said that, I did not. It is your crazy talk.
As to your list. None of that causes deflation. Prices can drop through normal supply and demand dynamics. When they do, the market seeks equilibrium and adjusts to the needs and wants of the consumer. Inflation and deflation are monetary phenomena. Deflation is a general decrease in prices across an economy. Inflation is a general increase. One particular item dropping in price is not deflation.
Lowering interest rates is likely to contribute to inflation.
I know I will get arguments here. So please understand, I am not crazy. I learn things here too.
What we need is wage inflation. We need to stop immigration, raise import tariffs and make everything here.
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