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Ze, 'Ow you say, Deflation Watch. Eurozone edition
Comments
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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.
I'm not arguing that Iceland had a choice, more point was about total consumption over a period in two scenarios, scenario 1 GDP falls 25% in y1 and then grows 2% pa in years 2-10. scenario 2 GDP is stagnant for 10 years. At The end of year 10 GDP is the same in both cases however the total amount consumed during the decade is much lower in the default and deflation scenario 1.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.
(1) In consumer electronics it's not been a problem as prices have fallen as manufactuers have been getting more efficient
(2) Paying for capital/fixed costs - back to my point about not being able to set negative nominal interest rates and thus the asymetry between inflation and deflation.I think....0 -
Not if the fixed costs are also deflating.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.0 -
Not if the fixed costs are also deflating.
They can't because they're fixed!
If I'm MegaCorp and I borrow $1billion at a rate of 5% then bondholders aren't going to say to me, "Poor old thing, we have deflation now so I'll accept a lower coupon [interest payment]". My landlord isn't going to cut my rent and my workers won't take a pay cut. This is FUBAR not SNAFU for me.
That's the reality of running a business in deflationary conditions. Even if the landlord wants to help me out he's gotta make the mortgage or he get repossed. My workers have fixed costs: car payments, rent so they can't take a pay cut because they can't afford it.
The economy as a whole is just the sum of everyone that is in the economy: you, me, them, everybody.0 -
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.
Which costs are fixed that cannot also fall in a deflationary environment?
Are we simply talking debts again and protecting the indebted corporations? At what point do we understand they are being protected anyway at the cost of everyone, and possibly society itself?0 -
It does appear that the only real fixed cost is debt. So non indebted companies would flourish at the expense of leveraged ones. Is that not just an aspect of business?0
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Graham_Devon wrote: »Which costs are fixed that cannot also fall in a deflationary environment?
Are we simply talking debts again and protecting the indebted corporations? At what point do we understand they are being protected anyway at the cost of everyone, and possibly society itself?It does appear that the only real fixed cost is debt. So non indebted companies would flourish at the expense of leveraged ones. Is that not just an aspect of business?
Debt and wages are the main fixed costs. There are no companies working without debt, not really.
When I talk about employers in this way I'm talking about the hair salon down the road and the local builders, not just Apple and Toyota. The system of trade works from debt as a necessity and debt isn't a bad thing.
If there was no debt you'd be living a C10th life for the most part. No medicine, no cotton, you'd have to build your own house from what you could grow, steal or scavenge. Certainly no complex supply chains to make electronics or consumer goods unless you could make your own transistors(!).0 -
Debt and wages are the main fixed costs. There are no companies working without debt, not really.
When I talk about employers in this way I'm talking about the hair salon down the road and the local builders, not just Apple and Toyota. The system of trade works from debt as a necessity and debt isn't a bad thing.
As you'll know, I don't really like the fact that we will try anything, and put the masses of the population at a disadvantage, solely to shelter those who took massive risks.
You have now suggested you are talking about the local hairdressers and the local builders. I have to say, I don't think these sort of companies would be devastated and therefore fold if we ran at say 2% deflation.
Even 10% and they would probably cope. I honestly don't think these local companies have drowned themselves in debt.
They have, afterall, coped with everything else thrown at them since 2006, including a large loss in the numbers of customers. No tears have been shed for them. That was just business and those who didn't take risks didn't suceed. So howcome we have to shed atear for them when it comes to deflation? It's not about them, it's about the banks, the large coroprates etc.
I just cannot believe that deflation is such a major problem that will effect everyone badly. I can see how it would effect the banks and and the large coroporate. But to be completely frank....I really couldn't give a fig. They have been bailed out numerous times at our cost. WE today are paying the price via little or no wage inflation and highish, persistent inflation. More importantly, the highest inflation is on the stuff we cannot avoid....of which, the companies offering such products are releasing large profits.
As your hairdressers or local builder what their real problems are and they will tell you. Price increase, running costs. It's not that they can't max themselves out with debt or that they fear the prices of the goods they buy to run their business will get cheaper.
Theres nothing wrong with debt. But there is alot wrong in assuming every company is up to their eyeballs in debt and any decrease in profits will have them fold.
If it's "just business" when they can't compete due to rising costs. It's "just business" that the indebted companies will fold because they can't pay their debts.0 -
I work for a company that doesn't have any debt.
However, normal business functions require that debt is in the system. We buy on payment terms from suppliers and pay 30 days after goods arrive in the country (they price this in but still have to finance quite large sums); shipping lines don't get paid until after arrival, haulage companies are paid in arrears etc. Then Tesco want 60 day terms (and take 70).
Debt is used to oil the normal business functions - you don't need to be 'up to your eyeballs' in it to see that modern life is dependent upon it.0
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