Deflation Watch pt 153 - International Edition

ninky_2

Generali wrote: »

It's all about supply and demand,

but not everything is a straightforward the potato (with their intrisic worth as a food item and short shelf life unless tinned or what have you). it seems that in all western economies a lot of what is purchased is the result of manufactured demand, not natural demand. as times get tighter and people possibly become more savvy to the pointlessness of some of these goods, frugality becomes fashionable etc then demand will drop. we will get the deflation in these goods as you suggest. however i really don't think we are going to get supermarkets charging significantly less for the potato / food. deflation may be experienced by the farmer in this instance but not by the final consumer.

sabretoothtigger

in all western economies a lot of what is purchased is the result of manufactured demand, not natural demand.
demand will drop. we will get the deflation in these goods as you suggest

This presumes the whole world revolves around the western world. What if 3bn people elsewhere who arent in the west do something different, could this have an effect

Maybe demand doesnt drop and in fact this is a positive scenario, we just need to export something useful and if we dont prices will rise on us anyway.

I agree local food vs luxury goods are a bit different, I guess this is what PPI is about. I dont think the west will starve but you may not get such nice food or the more luxury items

Technology items I have noticed are not falling in price so fast. The disposable culture will become less so, people will make it last a bit longer but the opposite is true somewhere else

deflation is unsustainable. It will only come in the form of sudden deleveraging shocks. I do think that the bulk of deflation has passed. It is now more of a mindset, rather than a fact.

We are in disinflation and moving toward slow and selective inflation of assets.


Read more: http://www.businessinsider.com/what-to-do-now-the-bulk-of-deflation-has-passed-2010-9#ixzz0zA4pY0CG

Generali

ninky wrote: »

but not everything is a straightforward the potato (with their intrisic worth as a food item and short shelf life unless tinned or what have you). it seems that in all western economies a lot of what is purchased is the result of manufactured demand, not natural demand. as times get tighter and people possibly become more savvy to the pointlessness of some of these goods, frugality becomes fashionable etc then demand will drop. we will get the deflation in these goods as you suggest. however i really don't think we are going to get supermarkets charging significantly less for the potato / food. deflation may be experienced by the farmer in this instance but not by the final consumer.

TBH ninky I don't think you can make a distinction between different sorts of demand.

Take the mobile phone for example. When I was a Generalissimo they simply weren't available. In the 1980s they were for YUPPIES and Poseurs. 15 years ago they we still a bit flash. Today they are indispensable for the vast majority of people, especially to those in the poorer parts of Africa where they are making a massive difference to peoples' lives and seriously improving the lot of many people by, for example, making markets much more efficient. Efficient markets mean consumers pay less and producers get more effectively!

However, it is worth looking at Japan. In the 1980s, the Japanese were prodigious consumers. It wasn't uncommon for example to buy a TV just because your favoured brand had released this years model so you could chuck the last one out. Then deflation and the lost decade (now into it's 21st year) hit. In the 1990s there was a spate of books on how to feed your family for JPY100/day and other ways to live very cheaply.

I'm not sure whether it's helpful to call demand 'manufactured' or 'natural'. In the end, someone either wants to buy something or they don't. Their motivation for doing so is immaterial really.

The point you make about essentials is a good one and I think that one of the reasons that the statisticians are measuring high inflation is that essentials are rising in price whereas non-essentials are not to generalize at least. Shifts in consumption patterns that are implied by that are, I think, hard to pick up.

I had another think about this and wanted to add that even in essentials you could see deflation. The reason is that if many of the economies of the world are experiencing deflation, the price of things like wages and land may well fall. Interest rates would most likely be very low too. These are all big components of the price that you pay for most things, essential or otherwise.

tomterm8

Generali wrote: »

I had another think about this and wanted to add that even in essentials you could see deflation. The reason is that if many of the economies of the world are experiencing deflation, the price of things like wages and land may well fall. Interest rates would most likely be very low too. These are all big components of the price that you pay for most things, essential or otherwise.

Technology is an interesting factor to consider. There are a number of innovations that are very significant in food, coming through the pipe line. For example, there is research on how to grow meat in test tubes. Other work is going into synthesising food additives via bacteria. There is also work on genetic modification - essentially designing crops to be more productive. In addition, there is work on aquaculture.

If any of these innovations are successful, you are looking at a revolution in food production, with significant impact on supply and therefore food prices.

Bullfighter

What has dawned on me (thanks to Generali's posts) is that deflation is self reinforcing - a positive feedback mechanism.

Since the total value of all the mortgages/public debt determines the money supply, and most are paying off debt or defaulting, the broad money supply is shrinking and will continue to shrink.

Someone once described deflation as everybody being sensible, all at once.

My overall view is still a near term violent swing towards (hyper)inflation - if only because governments and central banks very existence are predicated on inflation - eg governments haven't figured out a way to tax deflation.

Generali

Bullfighter wrote: »

What has dawned on me (thanks to Generali's posts) is that deflation is self reinforcing - a positive feedback mechanism.

Since the total value of all the mortgages/public debt determines the money supply, and most are paying off debt or defaulting, the broad money supply is shrinking and will continue to shrink.

Someone once described deflation as everybody being sensible, all at once.

My overall view is still a near term violent swing towards (hyper)inflation - if only because governments and central banks very existence are predicated on inflation - eg governments haven't figured out a way to tax deflation.

There are 2 types of deflation, the sort that tomterm8 alludes to which results from stuff getting made more efficiently and thus cheaper (aka 'good deflation') and the sort that you allude to ('bad deflation' or 'debt deflation' or 'the thrift paradox').

I think hyperinflation is unlikely for 2 reasons. Firstly it is uncommon. Secondly I think people get a bit carried away when talking about hyperinflation. Hyperinflation isn't inflation of 10% or 20% or even 30% a year. It's inflation running at such a rate that prices are changing on a daily or weekly basis, thus making any sort of economic planning impossible. Effectively money becomes all but worthless.

Andy Flower described hyperinflation very nicely on a cricket commentary over here a while back. He bought a T Shirt for ZWD4,000,000,000. He really loved the T-Shirt and it became a favourite and, as many men do, he wore it until it was a sorry state.

He wore it again in Zimbabwe in this sorry state and was offered ZWD10,000,000,000 for it!

(I can't remember the actual numbers he used so made some up. They are in the right area I think)

Bullfighter

Generali wrote: »

There are 2 types of deflation, the sort that tomterm8 alludes to which results from stuff getting made more efficiently and thus cheaper (aka 'good deflation') and the sort that you allude to ('bad deflation' or 'debt deflation' or 'the thrift paradox').

I think hyperinflation is unlikely for 2 reasons. Firstly it is uncommon. Secondly I think people get a bit carried away when talking about hyperinflation. Hyperinflation isn't inflation of 10% or 20% or even 30% a year. It's inflation running at such a rate that prices are changing on a daily or weekly basis, thus making any sort of economic planning impossible. Effectively money becomes all but worthless.

Andy Flower described hyperinflation very nicely on a cricket commentary over here a while back. He bought a T Shirt for ZWD4,000,000,000. He really loved the T-Shirt and it became a favourite and, as many men do, he wore it until it was a sorry state.

He wore it again in Zimbabwe in this sorry state and was offered ZWD10,000,000,000 for it!

(I can't remember the actual numbers he used so made some up. They are in the right area I think)

You're right about the term hyperinflation, hence my clumsy use of (hyper)inflation.

Hyperinflation is rare, however you have to agree that the preferred state of monetary policy is inflationary. China and the US are pursuing QE and bailouts which, if seen through, can only get bigger and bigger in a crazy game of escalado. I just can't see a 'soft landing'.

sabretoothtigger

Everyone thinks Chinese currency is undervalued. If the value of it rose suddenly it would make the trade weighted dollar index fall much faster since so much is imported from china to usa, I guess thats how it works.

Also a rising currency would likely make chinese stock prices (not value) fall and maybe the housing too because the unit they are valued in is worth that much more in the world. It would then make more sense to take cash out of china, cash in investments and spend it on maybe nice imports and thats why chinese communism doesnt want that to happen.
Central government controls the peoples wealth and its unreleased worth

I think china likely has retained the power to do whatever it wants whenever, the usa ultimately is going to be a ragdoll tossed about in white waters





a random google turned up something seems relevant -

Friday, September 14th, 2007...8:52 am
The Crack-Up Boom

http://rudeawakening.agorafinancial.com/2007/09/14/the-crack-up-boom/

ninky_2

Generali wrote: »

I'm not sure whether it's helpful to call demand 'manufactured' or 'natural'. In the end, someone either wants to buy something or they don't. Their motivation for doing so is immaterial really.

.

yes and no. when means are plentiful this may be true but if you are down to your last pound are you going to spend it on something to eat for that day or a text bundle? this is where motivation is important. natural demands tend to be closer to our basic requirements for well-being (food, shelter, clothing/warmth, medicine). of course then there is another level of demands that claims (and sometimes does) facilitate our access to meeting these demands - mobile phones can come into this as well as credit cards and pawn brokers as services / products.

what capitalism has done is succesfully put in our path more and more levels of these products that seemingly need to be accessed in order to meet our basic needs. computers, cars, the right clothing, smartphones....and so it goes on.

Generali

ninky wrote: »

yes and no. when means are plentiful this may be true but if you are down to your last pound are you going to spend it on something to eat for that day or a text bundle? this is where motivation is important. natural demands tend to be closer to our basic requirements for well-being (food, shelter, clothing/warmth, medicine). of course then there is another level of demands that claims (and sometimes does) facilitate our access to meeting these demands - mobile phones can come into this as well as credit cards and pawn brokers as services / products.

what capitalism has done is succesfully put in our path more and more levels of these products that seemingly need to be accessed in order to meet our basic needs. computers, cars, the right clothing, smartphones....and so it goes on.

True however there is a lot more to demand than just essentials.

Also, what is an essential? Ok food is essential but is bread an essential? It would be pretty unusual for 'food' to go up in price by itself. More likely something like the Russian fires this your summer will cause in this case wheat to rise in price. So perhaps you start to eat rice a little more often or potatoes.

In 'The West', people have gotten richer so they get to buy stuff not just to keep themselves alive. I think that's a good thing myself. I don't think that's capitalism though, even people in non-capitalist countries want consumer goods. No matter what the system of Government and economy I'd rather have a washing machine than bash my clothes against a rock.