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

Generali

The first estimate for Eurozone inflation is out for October and it shows falling prices across the Eurozone. And that's in the face of US Dollar strength which should be inflationary.

Bantex_2

And the UK wan't to tie our economy to these jokers?

michaels

Falling inflation and inflationary expectations means we are seeing pronounced tightening in real interest rates....which of course can not be offset by reducing nominal rates - what does that leave for central banks?!

Off topic does anyone else suspect the current oil price situation is the US and Saudi trying to put a squeeze on Russia and Iran?

Generali

michaels wrote: »

Falling inflation and inflationary expectations means we are seeing pronounced tightening in real interest rates....which of course can not be offset by reducing nominal rates - what does that leave for central banks?!

QE. The effectiveness of the ECB QE'ing as the US increases rates remains to be seen. I suspect that what happens in that case is that the ECB effectively finances a huge investment boom in the US: the potential for the mother of all carry trades is pretty clear (for the uninitiated, a carry trade is the finance version of Stoozing: you borrow money cheaply and invest in something higher yielding).

michaels wrote: »

Off topic does anyone else suspect the current oil price situation is the US and Saudi trying to put a squeeze on Russia and Iran?

Too conspiracy theorist for me: if that's the case, why does the US still ban oil exports?

http://www.businessweek.com/articles/2014-11-05/bhp-billiton-starts-exporting-u-dot-s-dot-oil

Interesting times old fruit, interesting times.

michaels

Generali wrote: »

QE. The effectiveness of the ECB QE'ing as the US increases rates remains to be seen. I suspect that what happens in that case is that the ECB effectively finances a huge investment boom in the US: the potential for the mother of all carry trades is pretty clear (for the uninitiated, a carry trade is the finance version of Stoozing: you borrow money cheaply and invest in something higher yielding).



Too conspiracy theorist for me: if that's the case, why does the US still ban oil exports?

http://www.businessweek.com/articles/2014-11-05/bhp-billiton-starts-exporting-u-dot-s-dot-oil

Interesting times old fruit, interesting times.

Interesting example of game theory and first mover advantage on QE? Carry trades are of course inherantly unstable....

The unplanned favourable consequences of a policy do not need to be planned for it to later be persued as a policy objective once they becomes apparent. I am not convinced the Saudis are currently following a 'maximising strategy' with their oil production and pricing strategy.

Generali

michaels wrote: »

Interesting example of game theory and first mover advantage on QE? Carry trades are of course inherantly unstable....

I like Warren Buffet's description of a carry trade as picking up nickles in front of a steam roller: mildly profitable for a while but very risky.

TBH I suspect it's that people want to invest in the US. If you want to make money over time then backing the US economy has been a great idea for the last 100+ years for the most part.

michaels wrote: »

The unplanned favourable consequences of a policy do not need to be planned for it to later be persued as a policy objective once they becomes apparent. I am not convinced the Saudis are currently following a 'maximising strategy' with their oil production and pricing strategy.

I read an interesting piece this (last?) week which claimed that the current Saudi strategy is to try to force US shale oil companies to become swing producers and it's better for the Saudis to be able to lock in contracts at current prices than to sell on the spot market. That kinda fits with the BHP story I linked to but then that could just be a piece of propaganda to make me think that.

N1AK

Graham_Devon wrote: »

I can see the issues, but with Generali's point, bar the wages, all other costs would also be falling...so if the person makes widgets and his widgets fall in price due to deflation, so does the cost (bar wages) of all the materials, power etc to make the widgets.

The general public in normal day to day jobs have had pay cuts in real terms for a good few years now. Indeed, many have taken REAL pay cuts.

Let's just take one of half a dozen reasons I, certainly nowhere near an economics expert, know this is a problem.

So let's say people accept pay cuts (big if) if there's deflation. What does that do to taxation: Income tax falls, national insurance falls, VAT falls, corporation tax falls.

You know what won't fall? The size of the national debt and the interest payments we need to make. So now you have have a government asking to borrow money while it's ability to pay is decreasing, lenders want higher rates to account for the risk...

There is a reason why people who understand economics fear deflation.

StevieJ

Bantex wrote: »

And the UK wan't to tie our economy to these jokers?

Wow I remember the days when these 'jokers' were sold to the British people as a paragon of virtue.

purch

For many years the idea of ZERO Inflation was an unattainable dream for the BUBA.

Now it's about to become an all to attainable nightmare !!!!

Graham_Devon

N1AK wrote: »

Let's just take one of half a dozen reasons I, certainly nowhere near an economics expert, know this is a problem.

So let's say people accept pay cuts (big if) if there's deflation. What does that do to taxation: Income tax falls, national insurance falls, VAT falls, corporation tax falls.

You know what won't fall? The size of the national debt and the interest payments we need to make. So now you have have a government asking to borrow money while it's ability to pay is decreasing, lenders want higher rates to account for the risk...

There is a reason why people who understand economics fear deflation.

Telling that you have deleted the bit in my post which stated my understanding that it's bad for debt. And then go on to describe how "those who understand" know it's bad for debt.

It's almost as if you couldn't have made that point above without first editing my post.

My last paragraph does says...

Sounds very much like another house of cards created by massive debt? Deflation, inflation, it's all bad for those with debts, and the economies seem unable to cater for these debts, with every result, bar more debt, being bad.