Euro crisis faces another stage?

Graham_Devon

Bond yields have fallen to the lowest level in modern history in Germany, France and the eurozone’s core states, signalling a high risk of deflation and mounting concerns about sanctions against Russia.

The yield on German 10-year bonds fell to a record low of 1.11pc in intra-day trading, partly on safe-haven flows. French yields dropped in tandem to 1.5pc. These levels are far below rates hit during the 1930s or even during the deflationary episodes of the 19th Century.

“Yields fell this low in Genoa in the 15th century but there has been nothing like this in Europe in modern times,” said professor Richard Werner, from Southampton University. “This reflects the weakness in nominal GDP and a slow economic implosion caused by credit contraction. The European Central Bank is at last starting to act but it is only scratching the surface.”

German, French and Dutch yields have been sliding for months as the eurozone recovery wilts and several countries flirt with recession, but the latest plunge reflects a confluence of forces.

“Investors may fear that the worsening tensions with Russia could be the external shock that finally pushes the eurozone into a deflation trap,” said Simon Tilford, from the Centre for European Reform.

I don't pretend to know - what would the knock on effect to the UK be? If any at all?


http://www.telegraph.co.uk/finance/economics/10999086/Europes-bond-yields-lowest-since-15th-century-Genoa-on-deflation-Russia-risk.html

Generali

Graham_Devon wrote: »

I don't pretend to know - what would the knock on effect to the UK be? If any at all?


http://www.telegraph.co.uk/finance/economics/10999086/Europes-bond-yields-lowest-since-15th-century-Genoa-on-deflation-Russia-risk.html

A while back (IIRC) you were saying that some deflation would be a good thing: prices falling is always good. Again, IIRC, you argued your point quite vigorously.

There's an increasing chance that you'll see what deflation looks like at close hand. Hopefully you're right and it will be great: falling prices, what's not to like right?

Conventional economic theory has it that falling prices mean that companies find it hard to pay their debts and suppliers which mean they have to cut prices to raise cash which means more companies will struggle to pay their debts and so on. (I simplify: a quick Google will tell anyone interested more).

For the UK the problem is much less marked as the UK isn't part of the Euro. Under deflation, the Euro may well appreciate in value vs the Quid. Falling prices in the Eurozone may be counteracted by a falling pound vs the Euro. Expect more calls from Europe for the pound to be fixed into the Euro!

Graham_Devon

Generali wrote: »

A while back (IIRC) you were saying that some deflation would be a good thing: prices falling is always good. Again, IIRC, you argued your point quite vigorously.

I was arguing from a consumer point of view. And also, I'd point out that I wasn't arguing that massive deflation would be good.

I mean, I don't mind deflation in my gas bill. And I quite welcome deflation in my petrol bill and household shopping bill.

I realise that, in many cases, this comes at a cost to companies. I'd have to be honest here and state I'd care more that some companies were struggling than others. As to how much companies suffer depends much on how they run their operations.

I'd argue it also creates opportunities for other companies. While one company doing things one way may struggle, a new company doing things differently may well prosper from the conditions.

Thrugelmir

Graham_Devon wrote: »

I'd argue it also creates opportunities for other companies. While one company doing things one way may struggle, a new company doing things differently may well prosper from the conditions.

Plenty of zombie companies around. That's one different factor this time compared to previous reccessions. Killing off the lame is good. Yes there's an impact on the employees. However allows new entrants into the market and the stronger companies to prosper and flourish.

wotsthat

Graham_Devon wrote: »

I was arguing from a consumer point of view. And also, I'd point out that I wasn't arguing that massive deflation would be good.

Difficult to consume if your employer is having to cut costs because people defer buying in expectation of cheaper prices. You might be expected to take a pay cut.

Falling prices don't necessarily translate into increased affordability.

Generali

wotsthat wrote: »

Difficult to consume if your employer is having to cut costs because people defer buying in expectation of cheaper prices. You might be expected to take a pay cut.

Falling prices don't necessarily translate into increased affordability.

This point has been made to our Devionian friend. His income is fixed IIRC so not a problem for him. That it's a problem for millions of others is apparently immaterial.

Bantex_2

I do wonder if people would defer purchases if there was mild deflation. Things seem to have changed over the last decade or so.

globalds

Isn't the history of recent deflation for the consumer just a feeling of buy it now while it is cheap as opposed to deferring purchases.
The trend might be down ..But in my experience it is hidden by the yo yo like effect of day to day price changes .

petrol is it seems going down because the pound is strong ..but it is more often seen through supermarkets offering 10p off a litre on a £60 spend ..something I grab but don't plan for.

TV's on the other hand are steadily falling in price or the tech gets better for no increase ..but I am aware that is governed by moors law and even knowing that ..If I want to watch Brazil lose in all their glory I needed to buy something about a month ago meaning my differed purchase would have a cost me.

ManAtHome

wotsthat wrote: »

Difficult to consume if your employer is having to cut costs because people defer buying in expectation of cheaper prices

Yup, can't think of a single 'tech' company which has been in business for more than a few months...

And I'm sure most people would give up eating, buying petrol, turning on the heating if they thought it would be a few quid cheaper next year.

Graham_Devon

wotsthat wrote: »

Difficult to consume if your employer is having to cut costs because people defer buying in expectation of cheaper prices. You might be expected to take a pay cut.

Falling prices don't necessarily translate into increased affordability.

Granted. If and might.

But what do you assume people will defer buying?

Gas? Food? Electric? Petrol? Medicines?

Maybe a fridge? But if your fridge is broke, what you gonna do? What a a couple of years for the deflation to feed through and save you £10 in the meantime making a trip to the shop everyday to buy fresh food?

You gonna put off the car repairs and do without the car as it might be cheaper to repair it next year?

You gonna defer the holiday? To when? You only have four to six weeks holiday a year, and if you have kids, a narrow window to take the holidays in, so what do you plan to do?

Maybe people will defer buying a computer. Flaw in that is that they would continually defer purchases as computers are continually falling in price, as is all technology.

Defer the kids school uniform? Defer the school trip? Defer the swimming lessons for the kids? They gonna walk around in rags as next year clothes may be a bit cheaper?

So what do you believe people will refrain from buying that they wouldn't currently refrain from buying today?

The reverse of the situation you describe is that people are jumping in today to buy stuff due to it being more expensive next year..... so I guess were all stockpiling?

HAMISH_MCTAVISH

Generali wrote: »

Conventional economic theory has it that falling prices mean that companies find it hard to pay their debts and suppliers which mean they have to cut prices to raise cash which means more companies will struggle to pay their debts and so on.

Yes, but of course it's much worse than that.

When companies see a reduction in income they cut costs so as to maintain profitability.

Inevitably, this means cutting headcount and/or pay to employees.

People wishing for deflation are wishing for increased unemployment and lower wages.

Complete lunacy.