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

purch

Yes the US was the catalyst that caused the GFC, but it appears to be coming out of the initial stages much earlier than many other parts of the World.

Europe/Eurozone is lagging a long way behind as many of it's problems were more deeply entrenched.

The US coming out of recession will be painful for the zone.

wotsthat

Generali wrote: »

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.

Draghi's policy seems to be based on messages rather than action.

The drift towards deflation continues - wonder if productivity is increasing sufficiently for it to be the 'nice' sort. Doubt it.

Generali

wotsthat wrote: »

Draghi's policy seems to be based on messages rather than action.

The drift towards deflation continues - wonder if productivity is increasing sufficiently for it to be the 'nice' sort. Doubt it.

I guess the problems start if Germany get dragged up with the USA and starts suffering some domestic inflation.

Where then for the ECB?

purch

wotsthat wrote: »

Draghi's policy seems to be based on messages rather than action.

He is an Italian central banker.

They are used to doing what the Bundesbank told them to do, so being in charge and making actual decisions on their own is a new concept.

michaels

I think this thread may need resurrecting given the performance of the EUR economies. Cunninly they are avoiding 'recession' by having year after year of zero growth.

http://www.bbc.co.uk/news/business-28783850

Thrugelmir

Generali wrote: »

I guess the problems start if Germany get dragged up with the USA and starts suffering some domestic inflation.

No inflation in Germany.....

Thrugelmir

michaels wrote: »

I think this thread may need resurrecting given the performance of the EUR economies. Cunninly they are avoiding 'recession' by having year after year of zero growth.

France and Italy have structural issues that simply printing money won't resolve. Perhaps before your time. But akin to the days of pre Maggie in the 80's.

michaels

Thrugelmir wrote: »

France and Italy have structural issues that simply printing money won't resolve. Perhaps before your time. But akin to the days of pre Maggie in the 80's.

I think that's the nicest thing anyone has ever said to me.....

I would have thought being in the position to printy-printy and devalue would be pretty useful prior to undertaking the pain of structural reform....

Generali

michaels wrote: »

I think that's the nicest thing anyone has ever said to me.....

I would have thought being in the position to printy-printy and devalue would be pretty useful prior to undertaking the pain of structural reform....

If the current problems force structural reform on the continent of Europe then so much the better. Unfortunately many people would prefer to keep their own jobs and see their kids unemployable until their 40s. It reminds me of the UK housing market: better to prevent the neighbours from building a house in the back garden even if it means the kids live with you until their 40s.

Japan has successfully avoided structural reform for a quarter of a century now and is continuing to do so under Abenomics despite the immense amount of pain inflicted on the young of Japan. It's almost like the young only exist to make good on the pensions old people promised themselves.

Crashy_Time

Generali wrote: »

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.

But in the modern world if me lose job entirely, me no pay banker man any more, banker man no likey.