Ze, 'Ow you say, Deflation Watch. Eurozone edition

Generali

Excuse the casual racism in the title please.

Deflation is the dragon that refuses to rear it's head yet refuses to die entirely. Kinda like an anti-Santa.

Eurozone broad money growth is down to a little over 2.5% and CPI heading towards 1%. I predict a big old bunfight at the Frankfurt Corale as the Germans want higher rates and the South (and French) want them pushed lower.

Could the Generali non-prediction come true for a few hundred million lucky Euro-denizens? Ze time ee weel tell! Remember kids, debt deflation => falling money supply => falling prices (less money chasing the same number of goods). QE is not the same thing as increasing the money supply if the transmission mechanism (bank creating credit) is broken.

Graham_Devon

I like the definition of inflation being like anti-santa.

But anti-santa for who?

Prices falling, for us mear peasants, would be good? No?

I understand that it's bad for bankers, business etc. But for the man on the street? I can't see how falling prices is a bad thing. I guess were back to the rising house prices is a good thing scenario again.

wotsthat

Graham_Devon wrote: »

Prices falling, for us mear peasants, would be good? No?

I think we need to remember that we've lived in an inflationary environment for a long long time. As such we probably don't over analyse our purchasing logic.

If I get a loan for, say a conservatory on the back of the house, then I'd weigh up the cost of the credit against saving and delaying the purchase. Automatically I assume in the thought process that if I wait 5 years the conservatory will be more expensive.

What if I expected the price of that conservatory to be cheaper in five years? I'd be more likely to delay purchase in a deflationary rather than inflationary environment. Good news for me maybe but bad news for the 'peasant' making conservatories - they've got to wait 5 years for the order.

Generali

Graham_Devon wrote: »

I like the definition of inflation being like anti-santa.

But anti-santa for who?

Prices falling, for us mear peasants, would be good? No?

I understand that it's bad for bankers, business etc. But for the man on the street? I can't see how falling prices is a bad thing. I guess were back to the rising house prices is a good thing scenario again.

The trouble with deflation is this.

You work for The Man. He has outgoings:

- Raw materials 30
- Your wages 30
- Debt incurred to start and run the company costs 30

Then he has revenue of 100. He makes a profit of 10 so he's happy with his profit and you're happy because you have a nice job with a decent income.

Now let's put deflation of 10% into the model. Are you taking a wage cut? No siree. You work hard and do a good job. The bank still wants its money back but raw materials and revenue both fall by 10%.

Costs:

- Raw materials 27
- Your wages 30
- Debt incurred to start and run the company costs 30
=87

Revenues fall to 90.

Another 10% deflation and revenues fall to 81 while costs only fall to about 84. Now the boss is losing money every week so he doesn't want to run his business. Either you take a big pay cut or he packs in the business and you lose your job entirely!

That's why most deflation is bad. Some deflation is good IMHO but that's a bit complicated for now. What we might have now would most definitely be of the bad deflation sort.

Kennyboy66

Graham_Devon wrote: »

I like the definition of inflation being like anti-santa.

But anti-santa for who?

Prices falling, for us mear peasants, would be good? No?

I understand that it's bad for bankers, business etc. But for the man on the street? I can't see how falling prices is a bad thing. I guess were back to the rising house prices is a good thing scenario again.

Why not offer to take a pay cut then, surely the price of labour falling would be good ? No ?.

Just like inflation, deflation brings winners & losers.

For people without debts on secure fixed incomes, it's probably great.
For the self employed offering services it may be bad.

I'm not sure why the fantasy of falling prices while incomes and employment remain the same persists as some kind of Goldilocks fantasy. It's basically impossible.

ILW

A decent bit of deflation would suit me.

tomterm8

wotsthat wrote: »

I think we need to remember that we've lived in an inflationary environment for a long long time. As such we probably don't over analyse our purchasing logic.

If I get a loan for, say a conservatory on the back of the house, then I'd weigh up the cost of the credit against saving and delaying the purchase. Automatically I assume in the thought process that if I wait 5 years the conservatory will be more expensive.

What if I expected the price of that conservatory to be cheaper in five years? I'd be more likely to delay purchase in a deflationary rather than inflationary environment. Good news for me maybe but bad news for the 'peasant' making conservatories - they've got to wait 5 years for the order.

I've heard that before, but of couse in a perfect economically theoretical world it wouldn't work like that. You might be able to buy the conservatory for less but you would also get paid less.

Deflation is bad in the same way that runaway inflation is bad: it becomes harder to predict the price at which you break even, introducing risks that reduce competition.

Deflation is bad in ways that are worse than inflation: a whole range of economic activity is inelastic (such as wages, debt repayments) resulting in unemployment and companies going bankrupt.

Deflation is much worse than inflation if it becomes a debt-deflation spiral where people fear they are unable to repay their debts so stop spending, making others fear they are unable to repay their debts... slowly getting to the point economic activity collapses and banks go insolvent.

michaels

Now suppose you work at the BOE, fiscal stimulus is ruled out becuse of the deficit so you want to suport a flatlining economy by cutting interest rates.

Of course to borrowers what matters is real interest rates so you turn to the big interest rate knob and - whoah - it is at zero already but with falling prices real interest rates are dangerously high and stiffling the economy. Oh well I am sure that bit of deflation is good for those few people who are in work and have no debts....

antrobus

Deflation has had something of a bad press, largely because the last period of deflation anyone can think of occured in the 1930s and co-incided with the Great Depression, and so the two have been firmly connected in the popular imagination.

But deflation isn't all bad. After all, there is pretty widespread deflation in a number of markets, such as computers or TVs, and nothing particularly terrible has happened as a result.

mcfisco

If you want to live in a capitalist world, you need to accept that the x axis can't always be heading up.

an article on how the Japanese have adjusted to deflation
http://www.businessweek.com/magazine/content/11_06/b4214014587950.htm

tomterm8

antrobus wrote: »

Deflation has had something of a bad press, largely because the last period of deflation anyone can think of occured in the 1930s and co-incided with the Great Depression, and so the two have been firmly connected in the popular imagination.

But deflation isn't all bad. After all, there is pretty widespread deflation in a number of markets, such as computers or TVs, and nothing particularly terrible has happened as a result.

No, that's not true. Ireland, latvia, japan and many more have been in deflation in recent times or are in deflation now.

Japan's GDP is still nowhere near where it was twenty years after the start of its deflationary depression.