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Keynesian Madness: Central Banks Waging War On Price Stability & Savers

Tyler Durden's picture




 

Submitted by Detlev Schlichter via his blog,

There is apparently a new economic danger out there. It is called “very low inflation” and the eurozone is evidently at great risk of succumbing to this menace. “A long period of low inflation – or outright deflation, when prices fall persistently – alarms central bankers”, explains The Wall Street Journal, “because it [low inflation, DS] can cripple growth and make it harder for governments, businesses and consumers to service their debts.” Official inflation readings at the ECB are at 0.7 percent, still positive so no deflation, but certainly very low.

How low inflation cripples growth is not clear to me. “Very low inflation” was, of course, once known as “price stability” and used to invoke more positive connotations. It was not previously considered a health hazard. Why this has suddenly changed is not obvious. Certainly there is no empirical support – usually so highly regarded by market commentators – for the assertion that low inflation, or even deflation, is linked to recessions or depressions, although that link is assumed to exist implicitly or explicitly in the financial press almost daily. In the twentieth century the United States had many years of very low inflation and even outright deflation that were not marked by recessions. In the nineteenth century, throughout the rapidly industrializing world, “very low inflation” or even persistent deflation were the norm, and such deflation was frequently accompanied by growth rates that would today be the envy of any G8 country. To come to think of it, the capitalist economy with its constant tendency to increase productivity should create persistent deflation naturally. Stuff becomes more affordable. Things get cheaper.

“Breaking news: Consumers shocked out of consuming by low inflation!”

So what is the point at which reasonably low inflation suddenly turns into “very low inflation”, and thus becomes dangerous according to this new strand of thinking? Judging by the reception of the Bank of England’s UK inflation report delivered by Mark Carney last week, on the one hand, and the ridicule the financial industry piles onto the ECB on the other – “stupid” is what Appaloosa Management’s David Tepper calls the Frankfurt-based institution according to the FT (May 16) -, the demarcation must lie somewhere between the 1.6 percent reported by Mr. Carney, and the 0.7 that so embarrasses Mr. Draghi.

The argument is frequently advanced that low inflation or deflation cause people to postpone purchases, to defer consumption. By this logic, the Eurozonians expect a €1,000 item to cost €1,007 in a year’s time, and that is not sufficient a threat to their purchasing power to rush out and buy NOW! Hence, the depressed economy. The Brits, on the other hand, can reasonably expect a £1,000 item to fetch £1,016 in a year’s time, and this is a much more compelling reason, one assumes, to consume in the present. The Brits are in fact so keen to beat the coming 2 percent price hikes that they are even loading up on debt again and incur considerable interest rate expenses to buy in the here and now. “Britons are re-leveraging,” tells us Anne Pettifor in The Guardian, “Net consumer credit lending rose by £1.1bn in March alone. Total credit card debt in March 2014 was £56.9bn. The average interest rate on credit card lending, [stands at] at 16.86%.” Britain is, as Ms. Pettifor reminds us, the world’s most indebted nation.

I leave the question to one side for a minute whether these developments should be more reason to “alarm central bankers” than “very low inflation”. They certainly did not alarm Mr. Carney and his colleagues last week, who cheerfully left rates at rock bottom, and nobody called the Bank of England “stupid” either, to my knowledge. They certainly seem not to alarm Ms. Pettifor. She wants the Bank of England to keep rates low to help all those Britons in debt – and probably yet more Britons to get into debt.

Ms. Pettifor has a highly politicized view of money and monetary policy. To her this is all some giant class struggle between the class of savers/creditors and the class of spenders/debtors, and her allegiance is to the latter. Calls for rate hikes from other market commentator thus represent “certain interests,” meaning stingy savers and greedy creditors. That the policy could set up the economy for another crisis does not seem to trouble her.

Echoing Ms. Pettifor, Martin Wolf flatly stated in the FT recently that the “low-risk-seeking saver” no longer served a useful purpose in the global economy, and he approvingly quoted John Maynard Keynes with his call for the “euthanasia of the rentier”. “Interest today rewards no genuine sacrifice,” Keynes wrote back then, obviously in error: Just ask Britons today if not spending their money now but saving it for a rainy day does not involve a genuine sacrifice. Today’s rentiers do not even get interest for their sacrifices, thanks to all the “stimulus” policy. And now the call is for an end to price stability, for combining higher inflation with zero rates. It is not much fun being a saver these days – and I doubt that these policies will make anyone happy in the long run.

Euthanasia of the Japanese rentier

What the “euthanasia of the rentier” may look like we may have chance to see in Japan, an ideal test case for the policy given that the country is home to a rapidly aging population of life-long savers who will rely on their savings in old age. The new policy of Abenomics is supposed to reinvigorate the economy through, among other things, monetary debasement. “In as much as Abenomics was intended to generate strong nominal growth, I have been a big believer,” Trevor Greetham, asset allocation director at Fidelity Worldwide Investment, wrote in the FT last week (FT, May 15, 2014, page 28). “Japan has been in debt deflation for more than 20 years.”

Really? – In March 2013, when Mr. Abe installed Haruhiko Kuroda as his choice of Bank of Japan governor, and Abenomics started in earnest, Japan’s consumer price index stood at 99.4. 20 years earlier, in March 1994, it stood at 99.9 and 10 years ago, in March 2004, at 100.5. Over 20 years Japan’s consumer prices had dropped by 0.5 percent. Of course, there were periods of falling prices and periods of rising prices in between but you need a microscope to detect any broad price changes in the Japanese consumption basket over the long haul. By any realistic measure, the Japanese consumer has not suffered deflation but has enjoyed roughly price stability for 20 years.

“The main problem in the Japanese economy is not deflation, it’s demographics,” Masaaki Shirakawa declared in a speech at Dartmouth College two weeks ago (as reported by the Wall Street Journal Europe on May 15). Mr. Shirakawa is the former Bank of Japan governor who was unceremoniously ousted by Mr. Abe in 2013, so you may say he is biased. Never mind, his arguments make sense to me. “Mr. Shirakawa,” the Journal reports, “calls it ‘a very mild deflation’ [and I call it price stability, DS] that had the benefit of helping Japan maintain low unemployment.” The official unemployment rate in Japan stands at an eye-watering 3.60%. Maybe the Japanese have not fared so poorly with price stability.

Be that as it may, after a year of Abenomics it turns out that higher inflation is not really all it’s cracked up to be. Here is Fidelity’s Mr. Greetham again: “Things are not as straightforward as they were….The sales tax rise pushed Tokyo headline inflation to a 22-year high of 2.9 percent in April, cutting real purchasing power and worsening living standards for the many older consumers on fixed incomes.”

Mr. Greetham’s “older consumers” are probably Mr. Wolf’s “rentiers”, but in any case, these folks are not having a splendid time. The advocates of “easy money” tell us that a weaker currency is a boost to exports but in Japan’s case a weaker yen lifts energy prices as the country is heavily dependent on energy imports.

The Japanese were previously thought to not consume enough because prices weren’t rising fast enough, now they may not consume enough because prices are rising. The problem with going after “nominal growth” is that “real purchasing power” may get a hit.

If all of this is confusing, Fidelity’s Mr. Greetham offers hope. We may just need a bigger boat. More stimulus. “The stock market may need to get lower over the next few months before the government and Bank of Japan are shocked out of their complacency…When domestic policy eases further, as it inevitably will, the case for owning the Japanese market will be compelling once again.”

You see, that is the problem with Keynesian stimulus, you need to do ever more of it, and make it ever bigger, in an effort to outrun the unintended consequences.

Whether Mr. Greetham is right or not on the stock market, I do not know. But one thing seems pretty obvious to me. If you could lastingly improve your economy through easy money and currency debasement, Argentina would be one of the richest countries in the world today, as it indeed was at the beginning of the twentieth century, before the currency debasements of its many incompetent governments began.

No country has ever become more prosperous by debasing its currency and ripping off its savers.

This will end badly – although probably not soon.

Takeaways

What does it all mean? – I don’t know (and I could, of course, be wrong) but I guess the following:

The ECB will cut rates in June but this is the most advertised and anticipated policy easing in a long while. Euro bears will ultimately be disappointed. The ECB does not go ‘all in’, and there is no reason to do so. My hunch is that a pronounced weakening of the euro remains unlikely.

In my humble opinion, and contrary to market consensus, the ECB has run the least worst policy of all major central banks. No QE thus far; the balance sheet has even shrunk; large-scale inactivity. What is not to like?

Ms Pettifor and her fellow saver-haters will get their way in that any meaningful policy tightening is far off, including in the UK and the US. Central banks see their main role now in supporting asset markets, the economy, the banks, and the government. They are positively petrified of potentially derailing anything through tighter policy. They will structurally “under-tighten”. Higher inflation will be the endgame but when that will come is anyone’s guess. Growth will, by itself, not lead to a meaningful response from central bankers.

Abenomics will be tried but it will ultimately fail. The question is if it will first be implemented on such a scale as to cause disaster, or if it will receive its own quiet “euthanasia”, as Mr. Shirakawa seems to suggest. At Dartmouth he claimed “to have the quiet support of some Japanese business leaders who joined the Abe campaign pressuring the Shirakawa BoJ. ‘One of the surprising facts is what CEOs say privately is quite different from what they say publicly,’ he said….’in private they say, No, no, we are fed up with massive liquidity – money does not constrain our investment.’”

 

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Thu, 05/22/2014 - 19:03 | 4786793 mademesmile
mademesmile's picture

Kept Calm
for
Too Long

Thu, 05/22/2014 - 19:04 | 4786800 Slave
Slave's picture

Money has to be circulating and not on the sidelines.

Keynesianism 101

Thu, 05/22/2014 - 19:08 | 4786810 negative rates
negative rates's picture

Very low inflation is your inability to access the very colladeral your life depends on.

Thu, 05/22/2014 - 19:30 | 4786866 TeamDepends
TeamDepends's picture

In the end ,the Keynesians cut off their big toes to spite their eardrums.  What?  Who writes this crap?  I'm outta here....

Fri, 05/23/2014 - 09:44 | 4788257 BigJim
BigJim's picture

Detlev is The Man!

Thu, 05/22/2014 - 19:07 | 4786808 lordbyroniv
lordbyroniv's picture

650k Bitchez !!!!!

 

http://comics.ha.com/c/item.zx?saleNo=7093&lotNo=92191

 

Geeks win under Keyneisain Economix !!

Thu, 05/22/2014 - 19:20 | 4786842 CheapBastard
CheapBastard's picture

I stumbled upon a "Saver" the other day and promptly called the Smithsonian Emergency Alert Squad because he was such a rare species. They quickly came, handled the Rare Saver carefully and gingerly placed him in a jar and carried him off to the vault for posterity as a "Curiosity Display."

Thu, 05/22/2014 - 19:59 | 4786942 rbg81
rbg81's picture

Savers are sooo last century.  Anyone who is dumb enough to follow "the rules" and pay taxes is a slave to the Free Shit Army.  And because the FSA is smart enough to vote for a living, they must be made bigger and given MOAR.

Thu, 05/22/2014 - 20:08 | 4786943 rbg81
rbg81's picture

Uh, yeah.

Thu, 05/22/2014 - 21:34 | 4787138 chemystical
chemystical's picture

"No country has ever become more prosperous by debasing its currency and ripping off its savers. This will end badly..."

Well of course not, but the Ziofilth don't exactly represent or give a shit about their host countries or the humans therein.

"Kept Calm for Too Long"

The market or the people?  Kristallnacht was almost 76 years ago.  Maybe come this Nov the masses will find some anti-kabbalah mystical numerogical significance to the numbers 7 and 6.

Thu, 05/22/2014 - 19:03 | 4786795 Crawdaddy
Crawdaddy's picture

That was their plan all along. Put good people in the poorhouse and put bad examples on a pedastal.

Thu, 05/22/2014 - 19:13 | 4786826 CrashisOptimistic
CrashisOptimistic's picture

There is sort of a wherewithal centric presumption in Japan.

They think they can affect things via policy.

There Is Nothing They Can Do.

They import 5 million barrels every day of the good stuff and pay $109 Brent for it.  That adds up to 3% of GDP that leaves the country each year, a drain, that must be offset just to get to zero growth.

And psssst, that doesn't even count what leaves the country to pay for nat gas/LNG.

There Is Nothing They Can Do.  Elect anyone they want.  Try any policy they want.

There Is Nothing They Can Do.

Thu, 05/22/2014 - 21:51 | 4787178 Crawdaddy
Crawdaddy's picture

Magically this phenomenon occurs the world over. Dumb voters! /sarc

Fri, 05/23/2014 - 09:50 | 4788272 BigJim
BigJim's picture

 That adds up to 3% of GDP that leaves the country each year, a drain, that must be offset just to get to zero growth.

It's not quite that simple. You don't need to have a 0% trade deficit to have 'growth'. And if the Japanese own a lot of productive capacity offshore, it can use those foreign earnings (assuming they're repatriated, obviously) to pay for imports.

Japan's in deep shit, but it's been in deep shit for so long it's obvious that it could carry on this way comfortably for quite some time.

If you can borrow yen cheap, and service the debt, I suspect Kyle Bass is right - do it, buy physical gold, and go to sleep for ten years.

Thu, 05/22/2014 - 19:08 | 4786796 knukles
knukles's picture

Keep Calm. Snort Your Xanax

 

 

"ECB will cut rates in..."  What difference does it make?
"Abenomics will"... "fail...."  Already has... No such thing really, just more tax and spend, been there, done that...

There is no solution other than fiscal and structural reforms, beginning with the banking system and removing money from politics.
Good luck with that.

It's probably already too late for any meaningful "reforms"... and no I have no good alternative suggestions other than "duck" and "jump you fuckers"

 

Thu, 05/22/2014 - 19:04 | 4786797 Slave
Slave's picture

Keynes was a fraud.

Thu, 05/22/2014 - 19:13 | 4786830 Bay of Pigs
Bay of Pigs's picture

They took his shitty ideas and made them worse.

#WINNING!

Fri, 05/23/2014 - 09:51 | 4788278 BigJim
BigJim's picture

His teachings just gave .gov an academic fig leaf behind which they could carry on doing what they were doing already.

Thu, 05/22/2014 - 21:56 | 4787188 Anusocracy
Anusocracy's picture

If government stopped making the problems it claims it is needed to fix, the dupes may wake up and realize that government is really not necessary.

Thu, 05/22/2014 - 19:06 | 4786806 ted41776
ted41776's picture

everything is awesome

Thu, 05/22/2014 - 19:08 | 4786813 Rainman
Rainman's picture

I gotta gets moar gold.

Thu, 05/22/2014 - 19:11 | 4786823 seek
seek's picture

How low is too low?

2% inflation?

In 35 years at 2% inflation, consumer purchasing power is cut in half. And savers are getting about 0.1% risk-free interest today.

These guys won't stop trying to fuck over people until they're dead.

 

Thu, 05/22/2014 - 19:27 | 4786856 Miffed Microbio...
Miffed Microbiologist's picture

Until they're dead? Oh no Seek, there's still money to be squeezed from heirs by these leeches.

http://my.firedoglake.com/oldfatguy/2014/04/11/government-confiscates-ta...

Miffed;-)

Thu, 05/22/2014 - 19:17 | 4786836 Conax
Conax's picture

The words inflation and deflation should be reversed when applied to finance.

Inflation should have meant the currency was swelling in its purchasing power.

Deflation should have meant a loss of purchasing power.  Shrinkage of value. 

By making something as negative as loss of value to sound positive, they have gotten the silly muppets to look forward to the theft of the fruits of their labor.

Nancy Reagan passed out WIN buttons.. (Whip Inflation Now)

It was a bad thing in those daze.

 

Thu, 05/22/2014 - 21:51 | 4787176 chemystical
chemystical's picture

"Nancy Reagan passed out WIN buttons.. (Whip Inflation Now)"

She did?  Perhaps, but that was 1974 and Gerald Ford introduced the phrase the public during an Oct address to Congress.  Nancy at that time was the First Lady of California, and her hubby was about to toss his hat into the ring and challenge Ford for the (R) nomination in what would be a contentious primary.  Doubtful she supported Ford by handing out those buttons, but I understand your point.

I have one of those buttons in my memoribilia collection. 

edit: the button is as worthless now as it was then

Thu, 05/22/2014 - 19:29 | 4786863 noob
noob's picture

ha ha , for those with something to lose...

Squeal Like a Pig

http://www.youtube.com/watch?v=9gLN3QoN-q8

Thu, 05/22/2014 - 19:33 | 4786872 medium giraffe
medium giraffe's picture

Constant growth is implausable on a planet with finite resources and finite markets, yet we have built a system that demands it.  Such a system is bound to fail, saying otherwise only serves to demonstrate the ignorance of the speaker, whom is probably lost in a confusion of memes and false paradigms.

Thu, 05/22/2014 - 19:35 | 4786877 power_shift
power_shift's picture

Waging war on "price stability and savers." Welcome to Communism ran through a bank. Somewhere Karl Marx is laughing his ass off in the after life.

Thu, 05/22/2014 - 19:40 | 4786895 orangegeek
orangegeek's picture

Yellen wants inflation.

 

World isn't spending.  World is heading to deflation.

 

Too bad Yellen.

Thu, 05/22/2014 - 19:50 | 4786918 disabledvet
disabledvet's picture

economists (at least American ones) only say two things: "yes the market can only go higher" and "interest rates have never been lower." everything else is just "what puts the money on the table."

Thu, 05/22/2014 - 20:20 | 4786978 RMolineaux
RMolineaux's picture

Mr. Schlichter should be a Englishman with his dry, subtle humor.  His observations on the Japanese experience are right on target.  Time was when savers were praised for their contribution to capital accumulation.  Do we no longer need to make capital investments?  Or is it OK to make them based entirely on the issuance of more debt?  It seems to me that the savers offer a safer path.

Thu, 05/22/2014 - 20:25 | 4786982 The Proletariat
The Proletariat's picture

"Spend it for a rainy day"  Signed, Dumbfuck ignorant incompetent zombie mutha fuc.....errr, I mean,  95% of the population in "developed" countries

Thu, 05/22/2014 - 20:50 | 4787043 franciscopendergrass
franciscopendergrass's picture

I don't about you guys but I buy more when prices are lower and buy less when prices are higher.  Where do the central banks get the idea that inflations is bad?  Either they are idiots or completely lying to the people.  Deflation is bad for debtors, i.e., countries that are $17 trillion in debt

Thu, 05/22/2014 - 22:16 | 4787224 Coopster
Coopster's picture

The central banks are worried about deflation, but perhaps they should be more concerned about what causes deflation.  In Japan's case, they had a spectacular stock market bust, as well as a huge propertly bubble and bust.  How many trillions of wealth were lost between these two events?  How many people were made poorer?  If you lose your investments and the value of your house tanks, you're not going to be spending the money that you used to.  You'll make your car last a few years longer, won't buy as many clothes or gadgets, you'll basically be spending a lot less money, not because you want to, but because you have to.  You may think twice about having another child.    Same with US in 2007-2008.  How many people lost their houses, or are underwater, how many lost investments?  How much wealth was lost?  Obviously, quite a bit, because people aren't spending, so we have deflation (or low inflation).  It's bubbles that are constantly springing up and bursting that are causing loss of wealth. Creating inflation is not going to bring back that lost wealth.  Well, it might after 50 years, but as ZH says, we're all dead in the long run.

 

Thu, 05/22/2014 - 22:33 | 4787263 billsbest
billsbest's picture

Referring to central bankers as being "Stupid" is an idiotic description in itself. They are NOT stupid. It only appears that way as they do what's BEST FOR THEMSELVES, not us.

Thu, 05/22/2014 - 23:15 | 4787342 AdvancingTime
AdvancingTime's picture

It appears the central banks of the world have made the crux of their existence a balancing act. You can almost imagine these bankers standing atop a fence. On one side lays a field of inflation and on the other a deep pit of deflation.

A new round of easing by central banks to combat a slowdown in growth may again be in the cards but do not be surprised if this time it is less successful. The magic of this policy is losing its luster. More on this subject in the article below.

http://brucewilds.blogspot.com/2013/11/central-banks-try-to-balance-on-f...

 

 

Fri, 05/23/2014 - 01:09 | 4787521 smacker
smacker's picture

"How low inflation cripples growth is not clear to me."

Well, Detlev knows the answer to this. Price and wage inflation reduces the true value of debt, so it allows borrowers (govt, commercial & private sectors) to stoke up their debt levels again to maxx out their borrowing capability. And to keep doing it. This generates growth as the new debt is spent on buying more stuff. And of course it increases bank profits.

On the effects of deflation...gov would have us believe that it stalls consumer spending as people put off buying stuff knowing the price will be lower next week etc. This is wrong. What actually happens is that there's a once-off reduction in excess spending - where people buy more than they actually need - to a slightly lower level. Spending then continues at the slightly lower level. People move to buying what they need, not what they don't need.

Fri, 05/23/2014 - 03:10 | 4787606 Ghordius
Ghordius's picture

"In my humble opinion, and contrary to market consensus, the ECB has run the least worst policy of all major central banks. No QE thus far; the balance sheet has even shrunk; large-scale inactivity. What is not to like?"

that all the EUR shorting bets went wrong? that an "insane experiment" is actually... working, so far? that political capital actually... exists?

lots of things not to like about the EUR. I, for example, dislike the fact that the EURUSD market is supposed to be one of the biggest, deepest, most liquid markets of this world... and yet there is enough speculation to send it up and down like a children's game

I also dislike the fact that the EUR can't strive to be a good currency, with a good policy. the global currency environment allows only "least worst policies", best seen in the rates

but there you have it: the EUR is not an action. it's a reaction to the current global reserve currency's political path since 1971, first through the experience of the intra-european currency and devaluation wars, then through the "grid" pegging, and now through the actual EUR

Fri, 05/23/2014 - 03:22 | 4787612 Ghordius
Ghordius's picture

"The argument is frequently advanced that low inflation or deflation cause people to postpone purchases, to defer consumption. By this logic, the Eurozonians expect a €1,000 item to cost €1,007 in a year’s time, and that is not sufficient a threat to their purchasing power to rush out and buy NOW! Hence, the depressed economy. The Brits, on the other hand, can reasonably expect a £1,000 item to fetch £1,016 in a year’s time, and this is a much more compelling reason, one assumes, to consume in the present. The Brits are in fact so keen to beat the coming 2 percent price hikes that they are even loading up on debt again and incur considerable interest rate expenses to buy in the here and now. “Britons are re-leveraging,” tells us Anne Pettifor in The Guardian, “Net consumer credit lending rose by £1.1bn in March alone. Total credit card debt in March 2014 was £56.9bn. The average interest rate on credit card lending, [stands at] at 16.86%.” Britain is, as Ms. Pettifor reminds us, the world’s most indebted nation."

agree that political economists should stop trying to interfere in people's decisions to save or to buy (I believe this is ZH's "central planning" meme)

but in defense of Britons: they have this great love for private homes, and so they are culturally willing to accept a lot of political-economic tampering and leverage for their "castles". don't fight culture, it won't work and... you have no right to do so from the outside. Britons love their homes, period. And so the Pound has to work differently, and take this aspect in consideration. the rest is all... consequences

Fri, 05/23/2014 - 07:30 | 4787852 Last of the Mid...
Last of the Middle Class's picture

Bankers worship inflation. It is the alter on which they offer up the masses. The "some inflation is good" line is the crack in the door that allows the Fed to control what you can buy with your pocket full of fiat. The "inflation is under control" line is the mantra all news outlets must spout in order to divert attention away from what is essentially taxation without representation. And it works. Joe normal works for a living and doesn't get that some greedy shit is busily printing money as fast as he can to save the asses of friends who created a run on something somewhere for the sake of greater than normal profits. His printing money costs you money every second of every day and the beauty is that it is hidden away and hard to see. The economist/banker/politican/oligarch cartel is a cancer on an otherwise healthy economy. Kill it off and the normal process of bad decisions clearing out the dead wood of our economy can begin.

Fri, 05/23/2014 - 16:25 | 4789677 TheRedScourge
TheRedScourge's picture

By their "low inflation kills consumption" theory, nobody should own a smartphone or a computer, since the prices for a certain amount of computing power has been in freefall since 1980. I can't remember the last time I went to the store and said "I'll wait a week, because that steak will be 5 cents cheaper versus my purchasing power by then."

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