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

ILW

michaels wrote: »

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...

That is were the theory sort of falls down. Most Germans consider foreign engineered products to be cheap tat and will go on buying domestic even at a higher price.
German industry is either brilliant at marketing itself, or their products are actually better. I am not sure which.

michaels

ILW wrote: »

That is were the theory sort of falls down. Most Germans consider foreign engineered products to be cheap tat and will go on buying domestic even at a higher price.
German industry is either brilliant at marketing itself, or their products are actually better. I am not sure which.

It doesn't have to be 'stuff', it could be holidays or houses or 'hos, eventually they become cheap enough that that even to German consumers they seem a better bet - if instead of a new Merc you can buy a town house in Chelsea or Necker Island or whatever eventually the Merc will not seem like the best value for money available.

ILW

michaels wrote: »

It doesn't have to be 'stuff', it could be holidays or houses or 'hos, eventually they become cheap enough that that even to German consumers they seem a better bet - if instead of a new Merc you can buy a town house in Chelsea or Necker Island or whatever eventually the Merc will not seem like the best value for money available.

But the currency effect is nowhere that scale and never will be.

michaels

The only other option is that Germany runs a current account surplus forever and funds its trade partners by lending back the surplus forever although with interest on that lending eventually the exponential model collapses when the extra lending to pay the interest on the original lending becomes unsustainable...

Generali

michaels wrote: »

It doesn't have to be 'stuff', it could be holidays or houses or 'hos, eventually they become cheap enough that that even to German consumers they seem a better bet - if instead of a new Merc you can buy a town house in Chelsea or Necker Island or whatever eventually the Merc will not seem like the best value for money available.

Or indeed for foreign buyers, a holiday home in the Med might be better value than a Merc.

Eventually this will sort itself out as Germans can't keep selling more than they buy forever unless they're going to give their customers the money.

michaels

Looks like the ECB have been following your 'blog':
http://www.bbc.co.uk/news/business-24851483

grizzly1911

michaels wrote: »

Looks like the ECB have been following your 'blog':
http://www.bbc.co.uk/news/business-24851483

If people/businesses don't feel comfortable taking on debt how can you force them to take it?

Aren't some of mega corporates sitting on hefty cash piles too?

If they don't take up the debt in sufficient numbers doesn't the whole model fall apart?

With low interest rates in most industrialised countries and QE, along with other initiatives, flooding liquidty how long do we keep the taps wide open, before we turn them off and try something else?

ILW

Looks more a panic measure than anything else. They just do not know what to do.

Then again, it is still mainly the people that got us all into the mess that are still making the decisions.

purch

Europe’s Central Bank, Defying Doomsayers, Holds Rate Steady

The European Central Bank’s president, Mario Draghi, is taking a wait-and-see approach as the threat of deflation hangs over the euro zone and the region’s unemployment remains stubbornly high.

With more than 19 million people officially listed as unemployed in the euro zone, falling prices would be another weight on the labor market, corporate profits and growth. And because falling prices put stress on borrowers — leading some to default on their loans because their houses or other assets are worth less than what they paid for them — it could further weaken Europe’s still-fragile banking system.

Economists have warned that urgent near-term action is needed since deflation is so hard to fight once it is entrenched. Some are calling for a Federal Reserve-style “quantitative easing” campaign, in which the central bank would begin a major bond-buying program to flood the market with liquidity meant to buoy prices.

http://www.nytimes.com/2014/02/07/business/international/european-central-bank-holds-interest-rate-at-0-25.html?ref=business&_r=0

Slump in euro zone money supply growth highlights deflation risk

money supply growth slowed sharply in December and loans to the private sector contracted further, putting pressure on the European Central Bank to take fresh action to counter the threat of deflation.

Data released by the ECB on Wednesday (Jan29) showed that euro zone M3 money supply - a general measure of cash in the economy - grew at an annual pace of 1.0 percent, slowing markedly from 1.5 percent in November.

"The weakness of the monetary aggregates remains a warning sign that the fight to ward off deflationary pressures has not been won yet," said ING economist Peter Vanden Houte.

"Moreover, with credit growth remaining constrained, the risks to the recovery remain."

http://www.reuters.com/article/2014/01/29/us-eurozone-m-idUSBREA0S0K920140129


:eek:

Generali

purch wrote: »

Europe’s Central Bank, Defying Doomsayers, Holds Rate Steady




http://www.nytimes.com/2014/02/07/business/international/european-central-bank-holds-interest-rate-at-0-25.html?ref=business&_r=0

Slump in euro zone money supply growth highlights deflation risk


http://www.reuters.com/article/2014/01/29/us-eurozone-m-idUSBREA0S0K920140129


:eek:

The Eurozone is sending out mixed messages: Spanish 10 year yields are down to 3.64% with Italy heading the same way yet the threat of deflation is very real there especially as the prices of both food and oil look set to fall this year.

2014 could be an interesting year as the US continues to taper and plays merry hell with international flows. Ghana put up its interest rate to 19% yesterday to try to stem capital outflows.