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

wotsthat

tomterm8 wrote: »

The lenders borrow at the deposit window at 0.5%, then lend to the government at 1.9%; what is deranged about that?

I'm in! Can you send me a link where a private investor or, say, a pension fund can borrow at 0.5% and then lend at 1.9%?

HAMISH_MCTAVISH

ILW wrote: »

Guess it's just my protestant upbringing where getting into debt was considered quite close to murder on the moral scale. .

Which is a bit weird, given that the bible condemns moneylenders and usury frequently, but doesn't seem to reserve quite such a place in hell for borrowers.;)

tomterm8

wotsthat wrote: »

I'm in! Can you send me a link where a private investor or, say, a pension fund can borrow at 0.5% and then lend at 1.9%?

You can only do it if you are a bank.

grizzly1911

ILW wrote: »

Think you're on your own there.

There are more of us than you think.

I wonder what they will do when we are gone?

ILW

HAMISH_MCTAVISH wrote: »

Which is a bit weird, given that the bible condemns moneylenders and usury frequently, but doesn't seem to reserve quite such a place in hell for borrowers.;)

I said protestant, whats the bible got to do with anything?

Generali

Inflation continues to slow in the Eurozone as a whole with outright deflation in many countries:



So what's causing this massive drain on demand? What kind of catastrophic economic decisions and culture could result in the Eurozone mess? The excellent Martin Wolf (who I often disagree with but I still really rate) in the FT has an idea:

[FONT=&quot] http://www.ft.com/cms/s/0/291a5ca6-42ec-11e3-8350-00144feabdc0.html#ixzz2jqISa27z

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[FONT=&quot]Export surpluses do not reflect merely competitiveness but also an excess of output over spending. Surplus countries import the demand they do not generate internally.
[/FONT]
[FONT=&quot]
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[FONT=&quot]When global demand is buoyant, this need not be a problem provided the money borrowed by deficit countries is invested in activities that can subsequently service the debts they are incurring.
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[FONT=&quot]
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[FONT=&quot].....in current conditions, when short-term official interest rates are close to zero and demand is chronically deficient across the globe, the import of demand by the surplus country is a “beggar-my-neighbour” policy: it exacerbates this global economic weakness. [/FONT]

Hmmm. Sounds bad. What is the consequence of Germany's massive trade surplus? A surplus that is almost as big a China's:

[FONT=&quot]So what, in brief, is happening? The answers are: creeping onset of deflation; mass joblessness; thwarted internal rebalancing and over-reliance on external demand. Yet all this [the huge German surplus] is regarded as acceptable, desirable, even moral – indeed, a success. Why?

The explanation is myths: the crisis was due to fiscal malfeasance instead of to irresponsible cross-border credit flows; fiscal policy has no role in managing demand; central bank purchases of government bonds are a step towards hyperinflation; and competitiveness determines external surpluses, not the balance between supply and insufficient demand.[/FONT]

Worth reading the whole article as my editing doesn't do it justice.

ILW

Generali wrote: »

Inflation continues to slow in the Eurozone as a whole with outright deflation in many countries:



So what's causing this massive drain on demand? What kind of catastrophic economic decisions and culture could result in the Eurozone mess? The excellent Martin Wolf (who I often disagree with but I still really rate) in the FT has an idea:

[FONT=&quot] http://www.ft.com/cms/s/0/291a5ca6-42ec-11e3-8350-00144feabdc0.html#ixzz2jqISa27z

[/FONT]

Hmmm. Sounds bad. What is the consequence of Germany's massive trade surplus? A surplus that is almost as big a China's:



Worth reading the whole article as my editing doesn't do it justice.

Does nobody ever ask themselves why the whole world wants to buy German goods and are prepared to pay a premium for them?

michaels

German goods are cheap for the quality - because the german exchange rate is artificially weakened by the rest of the Eurozone.

I have previously suggested that globalisation, leading to inequality, leading to excessive savings (by the winners form globalisation) and borrowing to consume(by the 'losers') were the key drivers of the credit crunch and it appears this is true for countries as well as individuals.

The artificially weakened currencies of Germany and China of course lead directly to underconsumption as well because they push down the purchasing power of those countries earnings.

ILW

michaels wrote: »

German goods are cheap for the quality - because the german exchange rate is artificially weakened by the rest of the Eurozone.

I have previously suggested that globalisation leading to inequality leading to excessive savigns and borrowing to consume were the key drivers of the credit crunch and it appears this is true for countries as well as individuals.

The artificially weakened currencies of Germany and China of course lead directly to underconsumption as well because they push down the purchasing power of those countries earnings.

I would suggest that the basic cost of building a BMW is pretty close to that of an equivalent Vauxhall. But the BMW will sell for 30 or 40% more and people are happy to pay this. That more than covers any currency issues. Don't see the better off Chinese queing up to buy Omegas though.

michaels

ILW wrote: »

I would suggest that the basic cost of building a BMW is pretty close to that of an equivalent Vauxhall. But the BMW will sell for 30 or 40% more and people are happy to pay this. That more than covers any currency issues. Don't see the better off Chinese queing up to buy Omegas though.

So thinking this through - if German firms produce goods that bring in big fat profit margins then lots of people will want to exchange their own money (in pounds or dollars or yuan) for euros to buy the German goods and buy shares in the profitable German companies.

For every buyer of Euros of course there needs to be a seller. Given the suggested imbalance in supply and demand (lots of people want to buy German stuff, Germans don't want to buy as much foreign stuff) you would expect the price of Euros to be bid up in terms of dollars etc until Germans start buying more foreign stuff becuase it seems cheap (in Euros) and foreigners start buying less German stuff as it seems expensive.

Thus economic theory says however good Germany is relative to other countries the market will adjust to produce a balance...