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

Graham_Devon

wotsthat wrote: »

The likely effect is that demand for your services reduces as customers defer purchases.

Ok. That's a real example, so I'll roll with this.

Customers are ALREADY deferring purchases. So what's gonna change from today?

The same was said when VAT fell (but more importantly rose), and, as far as I understand it, customers didn't rush to purchase items before VAT went up and the world didn't end. Infact, there was very little, if any, impact on retailers.

The same with stamp duty holidays....it doesn't make THAT much difference. It's all negligible.

I don't think that many would defer purchases for a set amount of time. When people want something, they want something, and unless they KNOW for sure it will be 10,20,30% less expensive in a years time, how likely is it that they will do without?

As was said the other day, the weather is stated to have little effect now on purchases, as purchases are already cut down to essentials for many. So the delfation effect is likely to be.....from the point where we are at now....negligible at best.

I mean, how does a customer KNOW their purchase will be less expensive in 5 years time? We've had this conversation many times over houses and how silly it is to wait and hope to purchase cheaper. So why use it to say deflation is bad?

I'm not simply arguing here, it just seems that the argument about how it will have adverse effects on the man in the street are wishy washy at best. If deflation is such an ugly monster, surely it would prfoundly effect us?

Graham_Devon

ILW wrote: »

I can see no reason why we could not have deflation in prices without deflation in wages, purely due to efficiencies and buying from overseas low wage economies. Everyones a winner.

Neither can I. We can have inflation without inflation in wages, so why not the other way around?

Seems more scare stories to me, and I don't mean to offend anyone by saying that. Just we have had lots of similar scare stories over the past 5 years.

tomterm8

ILW wrote: »

I can see no reason why we could not have deflation in prices without deflation in wages, purely due to efficiencies and buying from overseas low wage economies. Everyones a winner.

It can work that way on a gold standard; we have a currency where the supply of money is not fixed. Basically, the job of the bank of england is to keep inflation at a slight positive level of inflation so people can plan ahead easily. It hasn't done a good job so far.

wotsthat

Graham_Devon wrote: »

Customers are ALREADY deferring purchases. So what's gonna change from today?

The mindset. Lack of confidence vs expectations of price cut.

Graham_Devon wrote: »

I don't think that many would defer purchases for a set amount of time. When people want something, they want something, and unless they KNOW for sure it will be 10,20,30% less expensive in a years time, how likely is it that they will do without?

Depends what it is I suppose - groceries no. A BMW though?

We have an inflationary mindset. We can't KNOW that prices will rise but we do expect it. If you expected a prospective purchase to be cheaper in a years time it would certainly be easier to defer it.

I'm not sure that some mild deflation would be that bad but, on balance, I would have thought low inflation would be preferable not least because the national debt is massive.

purch

Generali wrote: »

I think it's easy to forget how bad inflation was in the late 70s. Ask Volker and Thatcher/Howe (or indeed manufacturing workers) how easy it was to drive inflation out of the economy.

Yes. I won't forget those times in a hurry.

Now times that by 10 and you have how hard it will be to get yourself out of a real deflationary spiral.

Generali

Graham_Devon wrote: »

Well, I have, in effect, just like millions of other have, taking no rise at all, or rises far below inflation.

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.

I'm not currently seeing many downsides of inflation for your everyday average joe.

If the downside is for those with debts reliant on inflation to pay them back - well, I understand that, but again, why should your average joe being paying the price of the indebted reliant on inflation?

The prospect of falling wages in a deflationary environment is a very real prospect. We are accepting little or no pay rises in an inflationary environment, so I see little reason why we would accept falling wages after a period of deflation (dependant upon what deflates of course).

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.

The point is that people don't normally take pay cuts. Normally the way to force a pay cut on someone is to fire them and then they are unable to get a new job at the old wage.

Quite possibly, what saved the British economy in 2008-9 was workers voluntarily taking pay cuts. That is extremely unusual.

And yes, this is part of the debt house of cards. Debt for consumption is rarely a good idea.

Generali

michaels wrote: »

Using the UK as an xample the extent to which we are 'living beyond our means' probably apporxiamtely euqates to the trade deficit so a couple of percent of GDP. However the dislocaton resulting from a govt/banking default would knock GDP by a lot more than this and thus result in a permanent loss of output so it doesn't feel like the right way forward.

Look at 'poster-child' Iceland and the total amount they have produced/consumed over the last 5 years, it is far below what they would have done if they had stagnated at the pre-crash levels over the same period.

Bit disingenuous there old chap.

The choice Iceland faced wasn't stagnation or debt repudiation. It was debt repudiation and suffering or making good rich foreigners and suffering.

I suspect that Iceland will be a much better place to be in 2 years than Greece or Cyprus, weather notwithstanding.

ILW

purch wrote: »

Yes. I won't forget those times in a hurry.

Now times that by 10 and you have how hard it will be to get yourself out of a real deflationary spiral.

Surely deflation can be cured overnight just by increasing purchase taxes such as VAT.

Inflation is another matter when it gets out of control.

StevieJ

mcfisco wrote: »

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

I wonder how that one will finally pan out? Many are shorting Japan govt debt as not sustainable at current miniscule rates? whilst acknowledging that most debt is owned internally, I guess that can't go on for ever.

"It's extremely corrosive," he says. Deflation, adds Jerram, will steadily sap Japan's nominal growth and deprive the government of tax revenue. Eventually, Japan may no longer be able to finance its borrowing. The country will then either have to default on debt that's about twice the size of the economy or devalue its currency to reduce the real value of liabilities. "That's the unavoidable endgame," says Jerram, who has analyzed the Japanese economy since 1987. "As long as it's in the future, everybody can pretend it's someone else's problem."

Generali

ILW wrote: »

Surely deflation can be cured overnight just by increasing purchase taxes such as VAT.

Inflation is another matter when it gets out of control.

Try to think about it from the linkages in my earlier post.

Inflation = too much money and not enough output
Deflation = too little money and too much output

Putting up taxes will cut output by sending companies bust but the deflation will do that anyway.

Fundamentally the problem is that companies have a lot of fixed costs that they can't pay if they are getting progressively less money for their goods. In consumer electronics it's not been a problem as manufacturers have been getting more efficient as prices have fallen. There's only so much more efficient a hairdresser or car mechanic can be and jobs like that are a huge part of any economy let alone a mature one like the UK's.