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OPEC Presents: QE4 And Deflation
Submitted by Raúl Ilargi Meijer of Automatic Earth
OPEC Presents: QE4 And Deflation
Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said only yesterday in The Price Of Oil Exposes The True State Of The Economy point out how bad the global economy is doing. QE has been able to inflate stock prices way beyond anything remotely looking fundamental, but energy prices have now deflated instead of stocks. Something had to give at some point. Turns out, central banks weren’t able to inflate oil prices on top of everything else. Stocks and bonds are much easier to artificially inflate than commodities are.
The Fed and ECB and BOJ and PBoC may of course yet try to invest in oil, they’re easily crazy enough to try, but it will be too late even if they did. In that sense, one might argue that OPEC – or rather Saudi Arabia – has gifted us QE4, but the blessings of the ‘low oil price stimulus’ will of necessity be both mixed and short-lived. Because while the lower prices may free some money for consumers, not nearly all of the freed up ‘spending space’ will end up actually being spent. So in the end that’s a net loss as far as spending goes.
The ‘OPEC Q4? may also keep some companies from going belly up for a while longer due to falling energy costs, but the flipside is many other companies will go bust because of the lower prices, first among them energy industry firms. Moreover, as we’re already seeing, those firms’ market values are certain to plummet. And, see yesterday’s essay linked above, many of eth really large investors, banks, equity funds et al are heavily invested in oil and gas and all that comes with it. And they are about to take some major hits as well. OPEC may have gifted us QE4, but it gave us another present at the same time: deflation in overdrive.
You can’t force people to spend, not if you’re a government, not if you’re a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That’s the perfect picture of Japan right there. There’s no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you can’t force people to spend, you can’t create growth either, so that myth is thrown out with the same bathwater in one fell swoop.
Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices.
It’s like a parasite can live in your body for a long time before you show symptoms of being sick, but it’s very much there the whole time. A lower gas price may sound nice, but if you don’t understand why prices fall, you risk something like that monster from Alien popping up and out.
I had started writing this when I saw a few nicely fitting articles. First, at MarketWatch, they love the notion of the stimulus effects. They even think a ‘consumer-spending explosion’ is upon us. They’re not going to like what they see. That is, not when all the numbers have gone through their third revision in 6 months or so.
Welcome to the new era of QE4. As if on cue, OPEC stepped in just as monetary policy (at least the Fed’s) has dried up. Central bankers have nothing on the oil cartel that did just what everyone expected, but has still managed to crush oil prices. Protest away about the 1% getting richer and how prior QE hasn’t trickled down to those who really need it, but an oil cartel is coming to the rescue of America and others in the world right now.
It’s hard to imagine a “more wide-reaching and effective stimulus measure than to lower the cost of gas at the pump for everyone globally,” says Alpari U.K.’s Joshua Mahoney. “For this reason, we are effectively entering the era of QE4, with motorists able to allocate more of their money towards luxury items, while firms are now able to lower costs of production thus impacting the bottom line and raising profits.”
The impact of that could be “bigger than anything that has come before,” says Mahoney, who expects that theory to be tested and proved, via sales on Black Friday and the holiday season overall. In short, a consumer-spending explosion as we race to the malls on a full tank of cheap gas. Tossing in his own two cents in the wake of that OPEC decision, legendary investor Jim Rogers says it’s a “fundamental positive for anybody who uses oil, who uses energy.” Just not great if you’re from Canada, Russia or Australia, he says. Or if you’re the ECB, fretting about price deflation. Or until it starts crushing shale producers.
Bloomberg, talking about Europe, has a less cheery tone.
Eurozone Inflation Slows as Draghi Tees Up QE Debate
Eurozone inflation slowed in November to match a five-year low, prodding the European Central Bank toward expanding its unprecedented stimulus program. Consumer prices rose 0.3% from a year earlier, the EU statistics office said today. Unemployment held at 11.5% in October [..] While the slowdown is partly related to a drop in oil prices, President Mario Draghi, who may unveil more pessimistic forecasts after a meeting of policy makers on Dec. 4, says he wants to raise inflation “as fast as possible.” [..]
“The only crumb of comfort for the ECB – and it is not much – is that November’s renewed drop in inflation was entirely due to an increased year-on-year drop in energy prices,” said Howard Archer at IHS. The data are “worrying news” for the central bank, he said. Data yesterday showed Spanish consumer prices dropped 0.5% this month from a year ago, matching the fastest rate of deflation since 2009. In Germany, Europe’s largest economy, inflation slowed to the weakest since February 2010. [..]
Bundesbank President Jens Weidmann, a long-running opponent to buying government bonds, today highlighted the positive consequence of low oil prices. “There’s a stimulant effect coming from the energy prices – it’s like a mini stimulus package,” he said in Berlin.
Sure, there’s a stimulant effect. But that’s not the only effect. While I’m happy to see Weidmann apparently willing to fight Draghi and his pixies over ECB QE programs, I would think he understands what the other effect is. And if he does, he should be far more worried than he lets on.
But then I stumbled upon a long special report by Gavin Jones for Reuters on Italy, and he does provide intelligent info on that other effect of plunging oil prices. Deflation. As I said, it eats societies alive. I cut two-thirds of the article, but there’s still plenty left to catch the heart of the topic. For anyone who doesn’t understand what deflation really is, or how it works, I think that is an excellent crash course.
Why Italy’s Stay-Home Shoppers Terrify The Eurozone
Italy is stuck in a rut of diminishing expectations. Numbed by years of wage freezes, and skeptical the government can improve their economic fortunes, Italians are hoarding what money they have and cutting back on basic purchases, from detergent to windows. Weak demand has led companies to lower prices in the hope of luring people back into shops. This summer, consumer prices in Italy fell on a year-on-year basis for the first time in a half-century ..
Falling prices eat into company profits and lead to pay cuts and job losses, further depressing demand. The result: Italy is being sucked into a deflationary spiral similar to the one that has afflicted Japan’s economy for much of the past two decades. That is the nightmare scenario that policymakers, led by European Central Bank chief Mario Draghi, are desperate to avoid.
The euro zone’s third-biggest economy is not alone. Deflation – or continuously falling consumer prices – is considered a risk for the whole currency bloc, and particularly countries on its southern rim. Prices have fallen for 20 months in Greece and five in Spain, for example. Both countries are suffering through deep cuts in salaries and state welfare. Yet Italy, a large economy with a huge public debt, is the country causing most worry. [..]
Like Japan, Italy has one of the world’s oldest and most rapidly aging populations – the kind of people who don’t spend. “It is young people who spend more and take risks,” says Sergio De Nardis, at thinktank Nomisma. In recent years, young people have been the hardest hit by layoffs, he says. Many have left the country to seek work elsewhere. People tend to spend more when they see a bright future. Italian confidence has steadily eroded over the past two decades … In Italy, as in Japan, the lack of economic growth has become chronic.
Underpinning economists’ worries is Italy’s biggest handicap: a huge national debt equal to 132% of national output and still growing. Rising prices make it easier for high-debt countries like Italy to pay the fixed interest rates on their bonds. And debt is usually measured as a proportion of national output, so when output grows, debt shrinks. Because output is measured in money, rising prices – inflation – boost output even if economic activity is stagnant, as in Italy. But if activity is stagnant and prices don’t rise, then the debt-to-output ratio will increase. [..]
Sebastiano Salzone, a diminutive 33-year-old from the poor southern region of Calabria, left with his wife five years ago to run the historic Cafe Fiume on Via Salaria, a traditionally busy shopping street near the center of Rome. Salzone was excited by the challenge. But after four years of grinding recession, his business is struggling to survive. “When I took over they warned me demand was weak and advised me not to raise prices. But now, I’m being forced to cut them,” he says. [..] Despite the lower prices, sales have dropped 40%, or 500 euros a day, in the last three years.
For hard-pressed individuals, low and falling prices can seem a godsend; but low prices lead to business closures, lower wages and job cuts – a lethal spiral. Since Italy entered recession in 2008 it has lost 15% of its manufacturing capacity and more than 80,000 shops and businesses. Those that remain are slashing prices in a battle to survive.
Home fixtures maker Benedetto Iaquone says people are now only changing their windows when they fall apart. To hold onto his €500,000-a-year business, Iaquone says he is cutting prices. By doing so, he is helping fuel the chain of deflation from consumers to other companies.
In Italy’s largest supermarket chains, up to 40% of products are now sold below their recommended retail price, according to sector officials. “There is a constant erosion of our margins,” says Vege chief Santambrogio.
What Italy would look like after a decade of Japan-style deflation is grim to imagine. It is already among the world’s most sluggish economies, with youth unemployment at 43%. As a member of a currency bloc, Rome’s options are limited [..] Italy’s budget has to follow European Union rules.
Lasting deflation would force more companies out of business, reduce already stagnant wages and raise unemployment further [..] The inevitable rise in its public debt could eventually lead to a default and a forced exit from the euro.
Many in southern Europe say the EU should abandon its strict fiscal rules and invest heavily to create jobs. They also say Germany, the region’s strongest economy, should do more to push up its own wages and prices. Mediterranean countries need to price their products lower than Germany to make up for the fact that their goods – particularly engineered products such as cars – are less attractive. But with German inflation at a mere 0.5%, maintaining a decent price difference with Germany is forcing southern European countries into outright deflation
Italy’s policymakers are trying to stop the drop. Prime Minister Matteo Renzi cut income tax in May by up to €80 a month for the country’s low earners. But so far the emergency measures have had little effect – partly because Italians don’t really believe in them. A survey by the Euromedia agency showed that, despite the €80 cut, 63% of Italians actually think taxes will rise in the medium-term. Early evidence suggests most Italians are saving the extra money in their paychecks. If so, it will be reminiscent of similar attempts to boost demand in Japan in the late 1990s. The Japanese hoarded the windfalls offered by the government rather than spending them.
That same process plays out, as we speak, in a lot more countries, both in Europe and in many other parts of the world: South America, Southeast Asia etc.
Deflation erodes societies, and it guts entire economies like so much fish. Deflation is already a given in Japan, and in most of not all of southern Europe. Where countries might have saved themselves if only they weren’t part of the eurozone.
If Italy had the lira or some other currency, it could devalue it by 20% or so and have a fighting chance. As things stand now, the only option is to keep going down and hope that another country with the same currency Italy has, i.e. Germany, finds some way to boost its own growth. And even if Germany would, at some point in the far future, what part of that would trickle down to Italy? So what’s Renzi’s answer? An €80 a month tax cut for people who paid few taxes to begin with.
Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power. If that is not clear, don’t worry; you’ll see so much of it you own’t be able to miss it.
And don’t think the US is immune. Most of the Black Friday and Christmas sales will be plastic, i.e. more debt, and more debt means less future spending power. Unless you have a smoothly growing economy, but that’s not going to happen when Europe, Japan and soon China will be in deflation.
And yes, oil at $50-60-70 a barrel will accelerate the process. But it won’t be the main underlying cause. Deflation was baked into the cake from the moment that large scale debt deleveraging became inevitable, and you can take any moment between the Reagan administration, which first started raising debt levels, to 2008 for that. And all the combined central bank stimulus measures will mean a whole lot more debt deleveraging on top of what there already was.
We’ll get back to this topic. A lot.
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too bad for salzone that he and his wife aren't tbtf
love the oil price decline, the planet is just flat out colder, and heating homes is priority number 2. The planet managers are quite the murderous bunch, but they do want to maintain lifestyles they like. The mistake is to assume you are safe from things preppers are afraid of.
Deflation is not a good thing for those:
Who love Money
Who love Growth
Oh Well. Time for Entropy now.
Road trip!
Yep, the western economies are doing a faceplant after tripping over their ineffective economic policies.
When we have money that is based on debt at interest we must have an ever growing base just to provide the additional money to pay that interest on the debt. If the economy goes backwards as in deflation then there is not enough money to service the debt of that original money. That is the VIG for the bankers and they absolutely require it to stay financially alive. I say fuck 'em and start over with a new treasury based money that in NOT based on debt. It was done before and it can happen again.
UGH !. Deflation is not about lower prices. Deflation is not about spending either. Deflation is about not BORROWING to spend.
Deflation is a contraction of the money supply
Our money supply is debt ... Debt is our money supply
When no one takes on new debt you get deflation.
Fucked up system flawed at its very core
Funny you say that..
"When no one takes on new debt you get deflation."
I have some clients in Banking and they are getting more verbal and concerned about "Making Loans".
This is a small boutique bank the serves a fairly affluent (small) client base.
They would let a guy off the street originate for them if he could produce.
It's getting bad out there.
Hard to read this author when it is so poorly written.
And yes, I do cringe at "deflation" too, like this author, because it is just such a sad state of affairs when my dollar retains purchasing power and my labor isn't levered by the financial engineers.
/s
If businesses are forced to close under a deflationary spiral, then the reality is the the inflationary credit expansion was responsible for the fake growth in the first place and it was not organic, so I will always maintain that forces of deflation are a direct natural result of excessive inflation. Wish the author would acknowledge the "good times" during credit expansion and why deflation is such a force right now.
When will Mr Yellin unleash the idle $9 trillion of free reserves Kraken?
That's it!! blame the "victims" for going out of business!!
/s :)
Ugh!
>>an oil cartel is coming to the rescue of America and others in the world right now.
Yeah, thats wrong. The Saudis dont care about America. They are beating the crap out of Putin for messing around in Arabia with Iran and Syria. They know correctly Bam is ineffective and decades of oil savings are being put to use.
The twofer is that its messing up Shale.
This has very little to do with monitary policy.
I agree, poorly written. Japanese people save, and don't go into debt until buying a house or Condo. Japanese government, not so much. So, blame the people for not spending? Fuck that. Blame the Gov. for making policies that benifit them and their friends. Blame the government that makes raising children sooo expensive, many can't afford to have them. Blame the price fixing JA fuckers for selling $20. watermelons. Blame the people for voting for their own demise.
Case in point: Prime Minister Abe has called for a new election. His LDP party has stated that they will not be sending any representatives to speak to foreign journalists at the Foreign Correspondents Club of Japan. Gee, I wonder why?
It would be nice if we could just push the reset button, but there are too many kleptomaniacs, plutarchs and all-around megalomaniacs in charge for that to ever happen. Let the temporary lower prices in many things be a blessing to your prepping.
So, I'm saving $3-5 a tankful. Where's the Rolex aisle?
FORWARD SOVIET!
So here are a couple observations that I'm not seeng thrown out there much yet........
- America in the last 10-15 years has gone from a major oil consumer to major oil producer, and our economy has changed accordingly, (The Shale Miracle or revolution) yet people want to pretend the dynamic is still consumer based entirely?
- In the same period we have gone from oil consumers to oil producers, we have 6-10x our public debt, mostly in wars inflating the price of oil or at least keeping the flow of it moving for inflation to occur, bailouts, and entitlement payments to assure the inflation volacity dynamic continues?
-in the last 7-8 years, work force participation rates in America have plummeted to late 1960's levels, yet life expectancy rates continue to climb and are at all time highs?
I could list off more, but you get the idea, talking about a comparative analysis on an economic level between America 1985-2000 and America 2000-2015 is just pure non sense, yet 95% of the MSM continues to do it?
I guess people have always taken some comfort in this comparative fantasy, but it has zero predictive quality to it, and most likely will lead you to your (our) ruin, if followed:)
The smart fellow that figures out how to exploit the coming decay cycle in this country will likely be wealthy.
Even a 5 year old knows -- What goes up...
The ones already in position:
Mortuaries
Estate Auctioneers
Export Specialists
Overseas Logistics
There is a big wave of boomers and silents that are getting ready to croak off and nobody in this country needs all their stuff.
It will be sold off and shipped out to countries that can afford all the schwag and nick-nacks...
These boomers kids will be much too concerned about eating and not too concerned that the had to sell off Dad's old Joe Namath football to a rich chinese oil pimp or gold banker...
My thoughts exactly. Opportunities will be there but we must think differently.
Consumers will only buy what they NEED in the future and will look for quality relative to price. Smart consumers will buy quality used goods away from mainstream retail. They will negotiate and barter (both goods and services). They will fix equipment, vehicles, tools, etc. rather than buy new ones. They will look for alternative materials at lower costs. And lastly they will do without many luxury items that were once routine for them
Producers who create quality goods and services at reasonable prices or provide exceptional service will do well. Entrepreneurs who look at the above trends and create platforms to facilitate this new paradigm will do well.
Cheap temporary plastic goods will become undesirable and long lasting quality well made and useful items will be more valuable.
Long clean water, quality organic food and AU / AG
I don't think your right. I do sell quality components like cables connectors, but no one buy them and since 5 to 6 monthes things are going downhill not one is buying! they prefer to buy the juck made in china fro the quarter of the price i sell. I am currently selling at buying price and i am looking only to empty my e-store and close down. If i don't manage to sell at the cost price in a 2 to 3 weeks i am starting to sell at a loss in the beginning of 2015 and close down. There are NO sale neither quality nor anything. No one is buying!!!
But cable connectors aren't exactly what people really NEED. Isn't it a bit of a luxury item? People will stop buying those all together.
what are pepole buying in black fridays? TVs and the like those need cables to be connected. ANyway what i sell too are usually companies and business much less individuals. Since business are not buying that mean they are not selling either and so on....
Does a new TV always need a new connector? I don't think so but I'm not very informed on that.
If they do, doesn't the equipment come included with cables?
I don't think your right. I do sell quality components like cables connectors, but no one buy them and since 5 to 6 monthes things are going downhill not one is buying! they prefer to buy the juck made in china fro the quarter of the price i sell. I am currently selling at buying price and i am looking only to empty my e-store and close down. If i don't manage to sell at the cost price in a 2 to 3 weeks i am starting to sell at a loss in the beginning of 2015 and close down. There are NO sale neither quality nor anything. No one is buying!!!
"Consumers will only buy what they NEED in the future and will look for quality relative to price. Smart consumers will buy quality used goods away from mainstream retail."
Just an example: I got off the disposable razor/cartridge carousel last month when I bought a couple of used 1960s era Gillette razors. Built like a tank and still going strong after 50 years. 100 quality razor blades cost about $10 and will last me over 2 years, versus the cartridges they sell in the grocery for $18 and last me a couple months.
You don't need a weatherman to know which way the wind blows.
And I've been shaving with a straight razor that was made in the 1800s. I recently found one that was made in the early part of the 20th century that was owned by either my great uncle or my great grandfather, put a new edge on it, and man oh man, does it give a nice shave.
I actually wish the old straight razor would come back into fashion. It was the perfect imagery...you'd get the wealthy banker in the chair, all lathered up, and standing over him was the lowly barber, scalpel-sharp blade in hand, scraping the tiny hairs off his neck...gliding over the jugular...one small slip and Mr. Banker would have a very bad day...
It was an image of just how dependent these folks ARE on our good graces...
It is coming back into fashion. Not as widespread as it should be, but there are more and more people who are getting into it. There's some nostalgia involved, not to mention $3-$6 per razor for something decent if you go with cartridge razors. (Cheap disposables shred my face.)
I haven't shaved since I was 24. I wonder how much I have saved over the decades.
There is a Barber shop I go to that uses one to shave the back of your neck and your beard too.
They have one of the old hot foam machines that they step on an the foam dispenses.
The Old Man that I get once in a while is a one arm bandit and he comes at ya with that straight razor like no-ones biz...
Scared the shit out of me the first time I sat in that chair... He starts stropping that razor... Man it was rich.
It grows on you.. It's the closest, smoothest shave I have ever had. for 20$ you get a cut n shave.
Benefits of living in a one horse town.
You are describing the rural economy of 1933.
Use it up.
Wear it out.
Make it do,
Or do without.
This was the family motto in rural South GA that my father grew up with, and he lived by it even in the prosperous years. Fortunately, a lot of it rubbed off on me. All my life, I have sought out the "deals", and long ago learned they are out there if you look for them. The term is frugal, and like so many other aspects of life, frugality is a learned habit. So many people seem to lack self-restraint when spending , or actually feel embarrassed by being called cheap or tight, which is truly sad.
"There is a big wave of boomers and silents that are getting ready to croak off and nobody in this country needs all their stuff."
Everybody WANTS their stuff (or, more correctly, the cash proceeds from their stuff). Problem is, none of the Gen Xers or Millennials can afford it. So you're right: mass liquidation sales coming. Never thought of the overseas aspect though. Ship it, baby!
Thanos
Might I add also those who love the status quo of centrally planned economies and are feeding from the through of government in one form or another.
Where is the coldernesssseeessesss?
As a person who has worked UNDER the oceans surface, a decade, surface of the oceans for longer, built boats as well...
ocean tempurature is not colder.
Hmmmm, but but buttholio !
If you have worked Alaska fishing fleet, commercial diving Atlantic, and had directly related to ocean employment;
there is no way in hell one can "believe" "the planet is just flat out colder".
Of course, for some, not necessarily you, the world remains believably flat.
Thank you for your comment!
Its good to get real-life feed back once in awhile instead of armchair ideology. I'm in the Rockies at over 9000' altitude. As far as the eye can see from mountain to mountain there is anywhere from 50% to 100% die-off of all species of trees (evergreen and deciduous). Forest Service employees state that there is nothing either in the historical record or a thousand year's worth of tree ring data that comes even close to matching what is presently ocurring biologically in these mountains. We are talking total ecotonal change on the near term horizon. Longer term one can only imagine what the impact on all wildlife will be. I've read that in northern BC and the NWT near the Artic Circle much the same is happening.
It's remarkable how so many foks on this site are in cavalier denial.
Death is coming, but not from AGW. Think bigger. Have you noticed fungus in these dieing/dead trees...?
skepsis101,
Thank you.
Hands on, eyes seeing, is far more relevant than he said she said they said.
Exceptionally so with education and/or functioning brain.
"normalcy biased" is my bumper sticker.
Of course that is written after the two words "You are"
Comprehension is not a common content of remarks related thereto, usually flak.
BC & NWT I heard, Rockies I had not.
Humans have no feet remaining, as targets.
Best to you.
Are you sure that is not just Fukushima radiation?
ocean temperatures are flat and the rate of 'warming' has decreased and is projected to decrease even further
Why anyone would think that the this planet's climate should stay constant from this point on is beyond me. A simple read of history will show you that this planet has significantly warmed and cooled. Civilizations prospered and declined because of it. Silly puppets....
http://www.c3headlines.com/are-oceans-warming/
Pretty sure the climate is pegged to the gold price..
Sophist Economicus
Projected is variables facade.
"Place your bets!"
I am betting upon population decrease to continue.
Hey, I am talking biomass.
Huh?
Exactly.
Never stop asking why, or one may just keep believing.
Earth is projected to be in next ice age in 900- 1200 yrs.
BTW - did you see that photo of Ivanka Trump in a bunny outfit to the right? That´s what I want for Christmas. Rich or not I don´t care.
I am getting a bit bored with this doomer pron. Doesn´t do it for me anymore. It´s like someone or something is continually feeding a meme with the joke on the top-hand right side. I think JM Keynes was laughing his head off when he realized who was going to pay for his excesses realizing that survival for everyone eventually drops to zero. I admit it´s very amoral. It´s a good thing to leave something after you have shed your mortal coil as an "Inglisher" would have put it. But still things have a tendency to take care of themselves. Learning from this and coming debacles will be worth as much or more as any dollar amounts passed on. You know...a fool and his money...and so on.
de-implotion...
where there is trouble... there is opportunity
I don't spend because I want to end government.
Starve the beast yeah!
So long sad times! Go 'long bad times!
Filler up with OPEC Super-Ethel Q E 4
Because deflation is a problem does not make inflation the answer.
"Because deflation is a problem does not make inflation the answer."
Exactly!
All QE is net negative. They just cause capital misallocation.
Every hyperinflation was an answer to those siren songs calling for more currency to avoid deflation but the moneyprinting just damages and ultimately destroys that very capital.
Best example is Hungary, the world recorder in hyperinflation in 1946:
The estimated total value of the country went from over $10billion in 1940 to less than $700,000 in 1946 while the nominal value of the currency increased 10^21 fold.
It is true the Nazi and Soviet hordes did not help either. However, they actively forced it to help loot and destroy the country.
The Hungary Games , few people know that's where it started.
I read it on the interweb.
Inflation IS the answer for bankers and govt bureaucrats. The Fed is the nexus of both. Inflation is what keeps them ALIVE! Deflation is the answer for everybody else.
All this means for me is if i see my bank balance improve due to less money spent on gas then i might get a few silver maple leafs before christmas.
Hummers will be making a comeback. Reaganomics/consumerism is alive and well!
Ok, author provides absolutely zero proof why deflation "guts" and economy. So, saying "delfation = bad" is not good enough. I think we've tried the whole "inflation=good" thing and we've gotten a few boom/bust cycles and it was truly all a mirage.
Second, I'm not sure this is true delfation just like the last 5 years really hasn't been inflation. Any thought that this is currency war vs Russia? Interesting that the oil price drop pretty much coincides exactly with the start of sanctions.
Inflation at 2% is good for the following....FED, US TREASURY, politicians who promise never ending benefits to special interest groups, politicians that want alot of people on welfare.
Deflation is good for anyone with a job and makes money cause prices continue to go down. politicians that like to promise people stuff. Oh yeah, deflation is actually pretty good for gold too.
Deflation is bad for a over-levered nation that can't handle even a doubling of zirp.
Yes, deflation is good for gold contrary to popular (mainstream) opinion. But it is all so bad for people with a job. Mainly because they will either have to work harder or they will be laid off.
We live in a world dominated by multinational publicly traded corporations. They have shareholders who care for only 1 thing: profit margins. If prices are lowered and a company sells fewer items then profit margins go down. Pressure is put on management to fix this or else they are out. With low interest rates they can borrow and buy back shares which is what corporations have been doing since 2009. There is a limit to this tactic which they will reach soon. They have also been laying off workers (mainly high wage workers) and distributing the work amongst the remaining workers. If you are employed at one of these corporations you most likely are doing 2 to 3 jobs and being paid for 1. This gutting of employees will continue and accelerate with deflation. At some point all of the work cannot be done effectively and customers leave in droves which continues the layoffs and finally ends in a fire sale of the company or bankruptcy.
This death spiral is very obvious to most in any given company but almost impossible to reverse because shareholders are the ultimate power and their representatives in a corporation are the accountants. Accountants have green eyeshades and see only in that monocular. You could be the most valuable designer or programmer but get laid off because you made "too" much money according to the accountants.
I see very few corporate heads with vision or the willingness to stand up to shareholders. Most will siphon off as much loot as they can and abandon ship before the fire sale. For those of us paying attention there will be an alternative economy to work in that flys under the radar utilizing barter, bitcoin, AU / AG, and emphasizes local wholistic goals, goods and services that benefit all parties. This will accelerate the demise of shareholder only driven corpse (not a typo).
Yep.
Also...where are all the Bank failures and collapsed equities?
Sure the energy stocks are being annihilated...meh.
XOM makes a fortune with oil at five bucks a barrel.
Everyone here bitches about the MIC....and certainly the dollar amounts are criminal. But look at how little they actually make.
There's no"ship" in your Navy. That says to me metals prices are still way over valued.
And of course the source for the absolute "Total" collapse in demand is the amount of debt created by Wall Street and all of it STILL being bailed out by Washington.
As these so called Race Riots (TM) spread well, let's just call that true Final Demand shall we.
I stopped reading Automatic Earth a few years ago because those idiots are contrarians. But that's ok right? No they are contrarians to the contrarians!
I stopped reading Automatic Earth a few years ago because those idiots are contrarians. But that's ok right? No they are contrarians to the contrarians!
"Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices."
Finally, someone is making sense. Deflation is a CONTRACTION in the money supply.
Less money, less spending- velocity slows to a crawl.
Less spending, less money. Prices fall since there are more goods chasing less money.
Prices fall, means less profits. People get laid off because no-one is buying the things they make.
People who don't work don't have any money, and people who don't have any money don't spend what they don't have. Money supply CONTRACTS accordingly.
Play again at a lower level.
THIS IS DEFLATION!!!!
What are the causes of deflation?
1. Debt. Money that goes towards debt service is not really money that circulates in the economy. Eventually a banker might bu a mega yacht or a diamond necklace for his wife, but mostly, interest on loans goes back into the debt machine.
At the initial stages of debt, there is a nominally higher economic return, including interest, on borrowed money. I just borrowed 500 bucks on my credit card to buy parts for a tractor that is worthless now but will be worth 5000 when I'm done fixing it. But when the debt cycle gets to the point that debt is rolled over, and Peter loans money to pay Paul, debt becomes a negative force in the economy, driving in one direction- DEFAULT.
Default is the vanishing act of all that money that was here today, and poof! is instantly gone. That's how fast deflation can take over.
2. War. War is actually the default process in action. Imperial wars are faught in order to keep the debt economy afloat. In other words, the deflation is violently exported to somewhere else besides the Imperial center. Other places are robbed of their wealth and that wealth is used to prop up the Imperial economy. But then comes the over-reach- the stretched supply lines, the horrible expense of maintaining the war, which then suddenly no longer helps the economy, but becomes an absolute detriment and a net deflationary drag.
Well, here we are. Remember, Cash is King in a deflation. In a deflation, your gold will drop from 1100 to 35, and then it will be confiscated. Hedge accordingly. (Firearms and ammo, cattle, extended family, defensible arable land with water, the requisite manual skills).
Yes, yes, you are one of the few who understand what it is. But I would argue strongly that perhaps we are/have been in the grips of DEFLATION for at least 7 years since 2007 and probably before then.
The author's premise that NOW we're in deflation cause oil dropped is silly since all he keeps talking about is that it isn't about prices. We KNOW that. It is all about debt and the debt super-cylce hit a little road block in 2007 and 2008 and yet here we are again.
Good for us the Feds and bankers got all their processes down so they'll be able to save us again in the next year or two.
You are partially right except to say that the first signs of the diminishing marginal utility of the debt supercycle showed much earlier than 2007
Hence the reason for the gargantuan expenditure of great sums that were artificially pushed into the global economy throughout the late 90s and 2000s in order to deliberately create asset bubbles of astronomic proportions.
Since 2000 we have effectively lived a mopping-up operation. It is ongoing of course but I surmise that if the decrease in crude prices persists AND if the Swiss referendum shoudl turn out to be a "yes" tomorrow, the denouement should accellerate considerably over the following 6 to 12 months.
It WILL be a contraction in the money supply when the Shale Drillers default on their bonds.
From the legal point of view, money is the exclusive property of the central bank.
You do not legally own the money and credit that are created and circulated within the economy. The money or credit received at the end of the month in compensation for work, does not legally belong to the person that worked for it. The person can make use of the money but it does not legally belong to him/her.
When money supply and credit are expanded artificially and aggressively, your purchasing power is diminished.
The decline in purchasing power however, is not simultaneous across all levels of society.
Rather, purchasing power declines as the new money and credit make their way through the economy. Starting from the central bank, the entities that have access to new money and credit first, have an asymmetrical purchasing power advantage over entities that come down stream from them.
When money and credit are expanded continuously, the effect compounds so that the asymmetry in purcashing power eventually channels title of ownership towards the ultimate owner of the currency.
The reason why the largest owners of land, real estate and factories are corporations, is in large part due to this dynamic.
http://www.newscientist.com/article/mg21228354.500-revealed--the-capital...
Nonsense. If the money supply remains constant, and the production of goods and services increases - then prices fall by way of the simple mathematical relationship of total money / goods and services.
Debt just complicates the picture. If borrowings are ONLY for increasing productive capacity and not to take vacations or trade in an older car, then the velocity of money remains more or less constant.
Borrowing to buy the new car means 1 more gets produced and it counts as an increase in GDP. But nowhere is the math done to say that now we have to reduce future GDP because we 'borrowed' (read stole) it from our future selves to pump up our standard of living beyond what we are actuallly producing in the present time. Barring some unforseen meta-game changer such as real fusion and free energy for everyone - this means that the standard of living has to come down in the future.
Notice that when there is deflation and prices are falling - the standard of living rises for all productive individuals because they are producing more with the same money supply. Since we are what we produce - even if the nominal price appears lower - for the most part (knowing that supply / demand still applies everywhere except in the mind of keynesians), the greater production means that we are more - even if it remains a constant percent - of what we were before. ie our lot has improved.
"...when there is deflation and prices are falling - the standard of living rises for all productive individuals because they are producing more with the same money supply"
Exactly. This is very different from the current regime, where increasing money supply makes us better in name only (nominally). In the end, the Fed can only buffer collapse of the financial system. It cannot promote real production in the long run.
Sooner or later one of the pencil heads developing economic policy somehere is going to realise that getting the public to spend more requires that they earn more. This is not such a radical idea as it is the one that fixed the 1930s depression. Until this idea takes hold we will continue to be treated to the battle of wits between unarmed opponents that has had centre stage for the last few years. We see one side arguiing for austerity, which has never worked and the other for more debt, which has no chance of solving a problem caused by too much debt. To get the public spending requires either or a combination of debt or interest cancellation and improved wages...and nothing else will help.
Do the "elite" care if you spend more? I doubt it.
Oh duh.
As if "they" can make the sheeple earn more just like that.
The fact is Americans are mostly unemployable fat slobs who demand they become millionaires by age 30 and be on DWTS
While Asians are still lean and mean working machines grateful to be working in a heated building!
The only way out of this mess in America is years of real hardship and hunger to lose all that flab along with the entitlement mentality.
DWTS and the Kartrashians have to go too.
Now watch how much worse it gets as the Banksters (Feral Reserve) give up on giving fat slob Americans easy money to spend cause they see it didn't work!
That's right; Ferguson is just a warm up for what will soon spread across the nation.
Got ammo??
Cut taxes ....sales tax ,property tax, and income tax ....
... and watch the economy boom. It's that simple really. It worked before. Enough examples of that. Government is the problem!
Eliminate labor taxes. Only institute investment profit taxes.
That is perfect! Yes, I totally agree...labor should NOT be taxed, as it is not 'profit'. It is an exchange of one thing of value (time) for another (wages). Now, if the wage earner were to take his wages and invest in the markets and triple his money, THAT would be the profit he should be taxed on.
But you are right, the earned wages should NOT be subject to taxation.
I compare this to the 'end the corporate tax' argument. The idea is that you don't want to discourage the day-to-day business operations of these entities that help run the economy. Well, labor is another of those entities...end the labor tax as well as the corporate tax! Why are we taxing ANYONE on the everyday operations they need to do in order to function? Tax only the actual PROFITS that may result from the transactions, not the transactions themselves.
The great depression was fixed by WWII not some balloon heads at the federal reserve
<”…Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power. If that is not clear, don’t worry; you’ll see so much of it you own’t be able to miss it…”>
This guy’s a fool. We need deflation for decades to offset the sick, rich-win–big inflation the Fed bankers love and have fostered for decades. As prices fall, yes they are falling, people buy more. Just look at the sick ‘Black Friday’ mass hysteria. To “save” a few bucks on another stripped-down TV set, people will stand on line in the rain for days. Price means everything in a nation of debt-ridden, marginally employed masses. People without jobs still need the newest I-Phone to be happy and the oligarchs need happy little people. Will people finally run out of credit and quit being gluttonous consumers of Chinese-made crap? Maybe, time will tell. For now, hurray for deflation and f*** the bankers
i am a regular reader of ZH. One day they complain about inflation and how the central bank or govrment are stealing people money, which is in away i agree, the second they complain about deflation and how things will go bad because prices are going down. Could anyone please tell where prices should go? No one is happy when they are going up nor when they are going down!!!! Although i feel things are wrong i do feel Benrnake was right from the beginning and all those concpiracy theory are just thril because people don't anythig to do in their lives and want just to spice their lifes up do create them!!!!
No one knows.
where "should" prices go?
"should" without a central bank is not the same as with.
look at history in the US before the FED, using measures like a pair of shoes or a suit.
I think this history shows over a long period - averaging out booms and busts - a fairly stable price with mild DEFLATION. (increasing productivity, increasing division of labor, etc.)
that's my reading of it, this from reading "contrarians" like Rothbard and other Austrian Econ influenced business and economic historians (and a supply sider or two like Wanninski thrown in).
Our fiat money is debt based. Deflation = Debt Slaves escaping the plantation. Bernanke did his job. He heaped more debt onto the slaves' backs. Yell'in will do the same, after they get a good crash out of the stock facade (market). They need this as a smoke screen to heap another load of debt onto the slaves. Just tell the slaves that they won't get to buy their freedom in their old age (401K's) and they'll agree to a thinner (inflation) gruel today!
jezz... inflation is bad for people but good for companies and banks, deflation is good for people and bad for companies and banks. Banks is not govenment structure now, so it's not for people, it's for companies and corporations, and this is why they have their own way to calculate inflation and deflation. It's facking simple.
In the short run oil prices will drop - then supply will adjust lower - high cost producers will be killed off - and the price will rise again.
It is the supply side of supply and demand.
Lower prices will also increase demand - and that also self corrects by making the price go up. That is the demand side of supply and demand.
Equilibrium price of oil is a short term issue - less than a year - and will self correct -
Inflation and deflation should be looked at over a longer time horizon. Say 5-10 years.
Worrying about deflation/inflation month to month is stupid -
OMG prices dropped .2% - print another $500 billion stat!!
I doubt we will ever see any long tern deflation in the USA - and certainly not because the price of gas goes down to $2 a gallon.
What was the price of gas 10 years ago? $1.85 a gallon.
So even if it breaks $2 a gallon it is still higher than it was 10 years ago.
Please check this premise:
"Inflation and deflation should be looked at over a longer time horizon. Say 5-10 years."
"What was the price of gas 10 years ago? $1.85 a gallon.
So even if it breaks $2 a gallon it is still higher than it was 10 years ago."
Is that gas price taking into account inflation over that 10 year period?
Worrying about anything is stupid.
Doing something about it is not.
We clearly don't need to be concerned with inflation on a tight interval until inflation starts ramping up quickly and then we need to be watching hourly.
Who really knows when and how this "reactor" of sorts is going to blow?
It could end tonight with a nice big thermonuke exchange... It could go on and on... Like a coyote turd, turning to dust on a rock out in the desert.
Any way it goes, it's not trending towards "better" and that is a fact.
Both gas prices were in nominal dollars -
You want inflation adjust prices of stuff - before you calculate the rate of inflation of individual items.
Sounds like something the FED would come up with - because it is how they look at things.
It is how they can claim the price of something is less now even though it costs 2X as much as it did 20 years ago.
Does it seem logical to say something that costs you 2X as much as it did 20 years ago - is "really" cheaper than it use to be?
The assumption - that your income has also grown at the rate of inflation is where the train comes off the tracks.
I understand what you are saying - and use to look at things the same way - but you are missing my point.
Let me try again.
Say inflation has been running at 3% for the last 10 years
So it takes ~~$1.35 today to equal $1 ten years ago.
But who gives a fuck -- The thing I use to pay $1 for is now $1.25 - has its price really deflated?
What is the chance that the basket of the stuff you buy now and 10 years from today will cost you less now than it will in the future?
I say almost zero - so there will really be zero deflation.
The FED wants to get all bent out of shape if the prices drop BELOW a 2% INCREASE.
Now how fucked up is that?
Somebody on ZH comments pointed out over a month ago, that the "savings" are not a boost to GDP unless they are spent in their entirety on other items. And then, its just a wash: it doesn't increase anything unless total spending increases, which is not going to happen because wages aren't increasing. Sure, there are companies that will sell more stuff because its the "mix" that's going to change. But what if people decide to pay down debt? Or just plain old "save" it?
I think this is very bad news for GDP numbers , and nobody sees it except here on ZH: The Shale Revolution is probably responsible for a large part of the employment numbers, as well as the GDP numbers from increased crude production. Back those numbers out, and well, it won't be pretty.
PS- Don't look to The Fed to react, remember their CPI does not include Food or Energy.
How these lower prices effect a particular nation will vary and will effect both their currency and how competitive they will be going forward. The decision by OPEC members Thursday to keep their production ceiling unchanged has sent crude prices into a tailspin. Dropping oil prices add a new surprising new dimension to the stability of the world financial system.
While often heralded as a godsend to the economy and the end consumer we must remember lower prices hurt both producers and those in the business of oil exploration, drilling, and sales. The shale boom has been one of the bright spots in the economy in recent years and acted as a tailwind that accounted for much of America's growth. Expect this to come to an abrupt halt and with it thousands of jobs. The article below delves deeper into the dark side of falling oil prices.
http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html
The decline in oil prices is far from over. As Meijer points out in his previous link (author, above) production is likely to INCREASE as oil producers worldwide need more money to make up for the shortfall in income.
Investors got hit with -30% moves in shale stocks yesterday, margin calls are guaranteed and they will sell OTHER stocks to meet them. IMHO. This is not the great gift the media says it is.
I agree oil prices will continue to decline, the question is how fast they will come back and how far.
I also agree this is not the great gift the media says it is.
This concept that oil shale production will be INCREASED (at least to the degree they can) when the price for oil drops has a historic precedent in the days before the dust bowl.
Timothy Egan wrote in The Worst Hard times (paraphrased):
-The government propaganda urged Easterners to borrow money, hop on a train, go to the "great plains" and break up the sod to plant wheat.
-In the spring, "Suitcase farmers" would come to the "great plains" (actually a desert) and break sod to plant wheat using this borrowed money. They went back east.
-They returned in the fall to harvest the wheat, and head back east.
- When the prices dropped, they had to break more ground (destroy the sod layer on top) to plant more seed to harvest more wheat to pay off their debt.
- When prices dropped by 50%, twice as much sod was destroyed to plant twice as much grain, etc. The even more abundant grain drove down the prices and so forth.
-This only worked during the years of rare abundant rain.
-The rain stopped. The dust came.
Another interesting point is, that at one time, during the wheat surplus, the "paper" price of wheat at the commodities market went to zero, and even very briefly, to -$0.05 (negative 5 cents a bushel), yes, theoretically you would be paid to take ownership of this stored wheat.
Cash was king.
Interesting, it could happen again. Except the oil spigot pumps 24/7 ....it doesnt take a whole summer to accumulate, between Friday and Monday, when you & I were off enjoying the "weekend", pumps were pumping.
The shale boom was a chimera, based solely on .5% money seeking anyplace it can find a return. The typical well returned oil for 2-3 years...then peters out. The only way to pay off investors is to take in new money and drill new holes. Once the cheap money goes away, the ponzi will fail.
BUT, really, who cares? The entire financial system is fucked, and the shale boom is just a minor eddy in the whirlpool.
I used to be shocked by the anger and passion of some ZH'ers, but now i realizee what people will be feeliing after the crash will be apocaliptic in comparison. Rant on, while others can share your pain.
Nonsense again. Savings that are not spent become available to entrepreneurs and the formation of capital which leads to productivity increases or gains in production (two sides of the same coin). This only works when centralist entities are NOT interfering in the capital formation proces (like now where they are punishing savers in a vain attempt to get the economy going though consumption).
This is the greatest gift Saud made to the CBs of first world who can now use lower energy prices to complete money throwing at the Oligarchs and hope it trickles down to the unwashed. 2015 to be banner year!
Not good for the long term but long term is now a perspective that is as relevant to the MSM as KK's "no" panties on her rounded ass to the people press.
"I am now going to throw 300 billion E to the EU", sings Juncker. "First it has to be laundered in my Lux laundry-mat and then be blessed by ECB/Mutti in that two headed jackassery Euro thatchery in Frankfurt."
Some Euro dreaming.
Lets hope the banksta derivative mountain does not melt under global fiat warming like the snow on the Austrian Alps.
Maybe Cameron will throw some of those Euro illegals into the Channel as bait to catch Putin's navy.
Is the battle of River Plate coming to the white cliffs of Dover?
We are in an illogical world when the Pope says his prayers barefooted in the park with the Mufti of the Blue Mosque, all the while Erdogan folds his arms to stop Kobani being burned by the fundamentalist ISIS.
"Whose side are you on ?"-- "Who me? Are you talking to me? Are you talking to me? You must be, as there is nobody else here but me !"--- Feel like taking a Taxi to Kobani, Mr Erdogan?
Meanwhile an old wrestler fights a media hyped boxing match in Moscva, the first of four.
9 and a half weeks to earn a few million bucks. Retirement is a bitch for an American has-been hero.
The way oil prices dropped just as QE3 "ended", someone might think oil was being propped up to that point by the FED buying oil futures much like the FED at the same time was nakedly shorting PM's. Don't know though, just a thought.
The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system.
Everyone paying attention knows that the size of the derivatives market is about 20 times larger than the global economy. About 95% of the $230 trillion in US derivative exposure is held by four US financial institutions, the article below looks into how this could collapse the economic system.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html
That makes my head spin. So how will those 4 banks offload that toxic waste into someone elses back yard?
Where can I learn more about derivitives? Who are they sold to? Do they have a maturity or expiration date? I read your blog post, and I'll look up the author's books you mentioned, thanks.
"someone might think oil was being propped up to that point by the FED buying oil futures much like the FED at the same time was nakedly shorting PM's. Don't know though, just a thought."
I don't think the Fed can buy oil futures directly; however, the banks can used as the proxy for the Fed to do that. This brings up the question who is the real proxy, the Fed or the banks.
For a while I was one of the people concerned we would see the world tumble into a massive deflationary cycle as debts went unpaided and credit collapsed. Now I have come to think inflation is getting closer every day. Note not all countries will experience the same rate of change.
I contend the "major deflationary period" is mostly behind us and it has not been disinflation as much as inflation being kept in check because of several factors, including where the money flowed, weak demand, dropping velocity of money, and the onetime benefit of lower interest rates.
Before you discount the possibility that we will move directly from where we are into stagflation then hyperinflation please consider that hyperinflation paves the way for governments and those in power to make a transition to a replacement currency and a reset of the whole system.
http://brucewilds.blogspot.com/2014/11/deflation-i-think-not.html
I wonder how many derivitives are written with the price of oil/oil infrastructure as one variable?
the deflation crowd cracks me up. fifteen years ago oil was $10/bbl.
6 years ago it was $100/bbl.
nothing moves in a straight line. fifteen years from now it will be > $200.
Just messin witcha :)
"nothing moves in a straight line. fifteen years from now it will be > $200."
The Great Depression didn't last forever, either. But 1930-33 was devastating, during the deflation. Unemployment soared to around 25%. The DOW lost 90% of its value and took 25 years to regain the point value it had on September 5, 1929.
Nothing moves in a straight line, but in a deflationary collapse, prices collapse, before they move up again.
...and every other fool had a Chevy Suburban for which they owed a fortune to the banksters. Banksters were fat and happy. Then, all the jobs were shipped to China. The main reason banskters(and this author) hate low oil prices now is, that will mean less petro dollar recycling on Wall Street and in London. QE or war?
both qe and war are a given
"the deflation crowd cracks me up. fifteen years ago oil was $10/bbl."
I recall 12. I read that when it was that price, that inflation adjusted, it was equivalent to what it was during the Great Depression.
When gold was around 250, i saw a chart which indicated that inflation adusted, 250 was about equivalent to just above 35, when gold was fixed to that price.
Oil was 147 at the peak in 2008 and has deflated to under 70 recently. It was even under 50 before it bounced over 100 again, which could have been a dead cat bounce. Which means oil could fall below the previous low, at least on an inflation adjusted basis.
You say the deflation crowd cracks you up, but there is a 156 trillion dollar global debt bubble. Bubbles burst and deflate, as a matter of mathematics. It won't be funny when that occurs. Imagine waking up one day and you expect to spend your pay check, and you find out the companies bank just failed, so they have no money to pay you that week. Your paycheck just deflated to zero. Not so funny then, huh.
The Central Banks will print hundreds of trillions to cause massive inflation. It's their only logical way out. They have already decided on this.
The Federal Reseve starts QE4 next year.
It's Zimbabwe or bust. Then on to IMF SDRs.
People won't buy today if they think they can buy the same thing for cheaper tomorrow. That's the only thing anyone needs to know about deflation.
Yes, its true. My car's gas tank is on Empty, but I'm going to wait a week until gasoline prices come down a bit more.../s.
Negative real interest rates naturally lead people, with savings, to cut back. This author is parroting the old, tried bankster's lament that they can't increase the ratio of debt slavery to deposits.
"People won't buy today if they think they can buy the same thing for cheaper tomorrow. That's the only thing anyone needs to know about deflation."
People don't buy, because they don't have the money to spend. An iPhone 6 will be cheaper next year, but people camped out to buy them the day they came out.
If your refridgerator breaks down, you are going to buy a new one today, regardless what the price will be six months from now.
Or you will go on Craig's List and buy a used one.
The Sheeple may continue buying cheap new Chinese goods but there are many who are still capable of rational thought who will look for alternatives such as fixing broken things, barter and buying used. These will not expand GDP or the money supply.
To the extent that I can I try not to play within the FED driven debt serfdom. There are still non-GMO animals in the woods and if you look hard enough you can usually find the arrow that was used to put meat on your table. Ask Meat Trapper if he buys new refrigerators when one of his goes down.
Make it do, wear it out and do without --
fixing broken things, barter and buying used.
People won't buy today if they think they can buy the same thing for cheaper tomorrow. That's the only thing anyone needs to know about deflation.
Mr. Keynes speaks from the grave.
Really? That must mean that no one owns a computer or cell-phone or tablet or LCD or LED TV. We all know that prices are falling in those and have been for a long time. What you are saying falls into the same category as the keyensian broken window fallacy.
What else can you say about a school of non-scientific thought that depends on fallacies and myths to justify itself?
You are right that deflation is people not spending, forcing companies to lower prices.
But the real question is....what do you spend money on if you already have everything that you need?
How many TV's, blue ray players, chairs, tables, windows, game consoles, dishes and printers does one need? The answer is, not really that many.
Most households have everything they really need in terms of the above.
About a week before Black Friday, I bought a new office chair. I started putting it together, and one of the screws that's supposed to hold the bottom part just spun in it's hole. Packed up the whole thing, and took it back, and got my money back. Net for the store, a negative $139 bucks, because I had kept the receipt and gotten the money back. I didn't exchange it for another piece of chinese garbage.
Instead, I just got on Ebay, and ordered another shock absorber for the old chair for $19.99. I'll just fix the old one, instead of buying a new one.
What you call deflation, I simply call common sense. People are smarter than central banks.
Ebay is great for car parts too. GDP suffers when a new item isn't sold, like your chair or a new car. Only the $19.99 adds to GDP. We've relied on credit (and its not cheap for the consumer) to buy new and shiny stuff for way too long. There's a GDP sticker-shock event coming up, soon. Its not deflationary; its common sense conservation of the money we've got. Good job Fly!
GDP comes from production not consumption. The consumption is simply a trade of what has been produced by one for what has been produced by the other. We are what we produce. this is why the fake economy based on consumption driven by credit is doomed to fail or engender a system reset. Using credit to consume is simply stealing from our future selves, since by necessity our standard of living will have to fall to create the surplus we need to pay back the debt used to increase our current standard of living and simulate a greater GDP.
Why do you think the FED is pumping money into a system - they want individuals to borrow more to consume. Kick the reckoning can down the road. Delay as long as possible. But, at some point the bill must be paid - and unless we come up with some system changer such as free energy from fusion, a greater and greater portion of our production will go to pay back debt and INTEREST. With less to spend, our lifestyles will suffer = a lower standard of living.
If, on the other hand, the FED and CBs of the world stopped printing, let the money supply stabilize, rewarded savers which would lead to capital formation, kept their hands off of interest rates so that proper investment by entrepreneurs would happen (insead of all this malinvestment and paper speculation); then we would see success rewarded, failure punished (which is not happening now) and a gradual return to more prosperous times.
The longer it takes for this to come about, the greater the dislocation will be.
"Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending."
Inflation, inflation, inflation.
The horse comes before the cart. Inflation causes deflation, thus it is inflation that is bad, if anything is. A boom ends in a bust because a boom was created, not because a bust occurred.
Even if your costs collapse and your profits so at a long with all that wonderful bailed out leverage (yes,leverage is at an all time high folks) you still have to ring the register.
One look at the stock market says to me "you can't account for taste."
People just buy...we don't know why.
Save any chance you get. Stay at home and seek knowledge. Find the meaning in the words. Determine for yourselves that meaning is a force that guides and drives your life. Find a patron other than Government to support a modest life. Few material needs and filled with joy. And, don't neglect physical exercise. Jog at the beach, work out at the gym and always be thankful. Teach the kids what is important. When they are ready they will use the gifts you have given. Somebody will arrest Loyd Blankfein and Jamie Dimon. And governments will come and go. If any are to survive it will be the ones that understand what meaning is.
Geeze! I'll have a hit of that stuff! How much is that goin for an OZ?
Sounds dreamy!
It's free.
People can't buy unless they have money, people can't have or save money unless they have a job or an item or skill that is in demand... How much simpler can that get?..... For instance, I could be the best buggy whip maker in the entire world, however, I certainly would be rather penurious without a doubt....
Buggy whip maker or Community Organizer.
He had to blame Reagan for Nixon's treason. I vote -5 for this bankster shill. TPTB didn't want Reagan in the WH. Rockefellar told him he had to put Bush on the ticket. Then, they had him shot within 2 months. Reagan abandoned his spending cut plans after that.
break some windows damnit !
"Deflation is not about lower prices, it’s about lower spending"... And of course this... "Stocks and bonds are much easier to artificially inflate than commodities are."....
Says everything you need to know about the wooden stake and the blessed crucifix to the Central Banker!
"but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending."
"War is peace", "ignorance is enllightment" ... 1984 George Orwell
You must be a Keynesian economist!!
Try this:
Capital = Production - Consumption
Price of capital = Interest Rate
By investing capital you can increase your production rate, and or quality of product, and can therefore lower prices.
Consumers now have more capital to spend or to invest.
Fiat money = Fraud capital
When Central Banks create fraudulent capital, via fiat money, they destroy the real capital creation process. They just give the fraud capital to their supporters and therefore the consumer does not have the means to consume more.
Another JJJJJJJJJJJJJJJew with an opinion.
Bills that are currently increasing ("inflating"):
City taxes. City garbage, water, sewer, solid waste, "stormwater" rates. State taxes. Power company electric rates. Internet. Telephone. Food (at grocery store). Auto mechanic charges. Home insurance. Car insurance. Health insurance. Education (tuition).
Bills that are currently decreasing ("deflating")
Entertainment (because no money is left for it, so garden and read books, which is just fine). Clothing (because no money is left for it, so shop at Goodwill, etc., which is just fine). Travel (because no money is left for it, so go walk in the woods, which is just fine)
Conclusion: deflation is just fine with me, and I hope it will get around to affecting the items in the current "inflation" group.
The misallocation of capital brought on by credit in a business cycle requires deflation to reset the cycle back to an equilibrium. When you continue to delay deflation via liquidity injections, especially into the purses of banks and stock/bond markets, you compound the problem by taking capital which could be used for production and sink it into false equity valuations which are not productive.
This academic argument becomes a smoke screen for the real problem of debt slavery and the need to create increasing amounts of money to service an increasing debt load which only pays interest and never principle. Blackstone was kind enough to point out this problem in essays on fractional reserve banking in the early 1700's.
Monetary effects do not kill nations, parasites do. Parasites like banks, corporations and the State using the tools of creative finance, accounting and the law.
Articles such as this are designed to appeal to emotion rather than reason. I would prefer a good explanation for a rising dollar value in an economy with the largest debt load in history/ per capita/ etc. (the real debt load, not the ridiculous 18 trillion they have us focused on). I would prefer people begin to question what money is, where their productive value goes and why, and the value of leisure which is consumed by taxation to pay a debt created to benefit a few Elites at the expense of our children, grandchildren and every next generation as long as we allow it to continue.
Part of the reason the US$ is rising in exchange value is because it is the reserve currency of all the other currencies that are being devalued.
Beginning in 1971, sovereigns began accepteing US$ as reserve currency. In other words, the basis for monetary calculation is the US$. Ergo, despite different names such as Yen, Pound Sterling, Lira, French Franc and now the Euro, all these currencies are for all intents and purposes US$.
In this system, the devaluation or appreciation of one currency affects all others.
As the Fed churns out ever increasing quantities of money and credit, these sums are absorbed by all sovereigns effectively spreading inflation over a much larger economic landscape therefore mitigating inflationary effects in the US and stretching out in time the perceived "utility" of the system. Throughout this process, title to ownership of land, property and productive assetts is gradually transferred towards the finance industry.
As one economy after the other succumbs to the diminishing marginal utility of debt however, sovereigns can think of no other way to revitalize their economies than devaluing their currencies aggressively. Japan was the first up to bat throughout the 90s.
At some point, the old reserve currency will therefore appreciate against the onslought of devaluation of its constituent currencies fostering deflation-like effects despite an increasing monetary base and credit.
At some point however, asset price deflation will arithmetically set-in in the economy of the ultimate owner of the currency too.
I however suspect that something dramatic will happen before full fledge asset price deflation sets in....
In terms of a petro dollar or the need for American products following WWII, yes, but the present world is the very opposite of this scenario. Ultimately, the need for a currency is dependent on the need for its' products and services, for example, the rise of the yuan. The expansion of the Australian dollars as the need to purchase their resources soared.
Reserve status hollows out an economy as the requirement for a montary supply in excess of its' production creates an ever expanding debt, interest servicing, increased taxation, etc. This very problem led to the high inflationary period in the early eighties and Volker's response of ultra high interest rates to allay the risks associated with buying the dollar. It is the genius behind the SDR and the BIS as a global reserve currency serviced by the entire global population.
Increasingly, American wealth is defined by the false valuations in equities, bonds and real estate (similarly in Europe). These valuations do not fool the finance community. They are playing a game and profiting from it through wealth transfers, much like the 2009 transfer.
Ultimately, the value of a population and its' people are defined by their ability to service greater amounts of debt, increased production and the cost of the products necessary to keep them docile.
The US has begun to fail at servicing its' debt as the tax shortfalls demonstrate, productivity has slowed and the people are becoming more difficult to manage. While our willingness to service as global cannon fodder has value, even this may be tested by the Chinese or Russians.
Hard to say...
A heartfelt thanks for this dialogue.
"Ultimately, the need for a currency is dependent on the need for its' products and services,"
Do not underestimate finance as a service. UK and US use global finacialization to sustain hegemony. World reserve status is also maintained by credit market share. This is the cycle that must be broken for the blowback from the Triffin Dilemma to happen.
Since the currency is imposed unilaterally and arbitrarily by the state, there is no real need for the products and services of a sovereign.
Individuals must, under penalty of law, make use of the currency sanctioned by the state.
As legal owner of the currency however, the central bank is under no reciprocal obligation to guarantee the value of the currency. The central bank then lends money into the economy.
Money lent at interest is debt.
Thus, despite the fact that you may never have taken a loan to your name to buy a house or a car, merely by accepting money you are in debt.
The fact that you are in debt regardless of what you do, manifests though the diminishing purchasing power of your money.
This happens because as the central bank is not obligated to guarantee the value of the currency, then the central bank will always and everywhere expand the quantity of money and credit in circulation. Whether the economy is expanding or contracting, whether we are at peace or at war, whether there is prosperity or famine, the central bank will always expand the monetary base and credit.
This is the reason why regrdless of the persuasion of successive governments over decades, the result is always the perpetual erosion of wealth through the diminishing purchasing power of the currency. In actual fact, the more strident the politics and the more polarized society, the greater is the flow of profit towards the ultimate owner of the currency.
People demonize the armament industry or the oil industry and undobutedly these are two sectors that do indeed profit greatly from social and economic dislocation.
In actual fact however, neither the armament industry nor the oil industry earns as much as the ultimate owner of the currency and the entities that gravitate around it.
It is an arithmetical reality.
Somehow, I trust that you know what you are talking about.
I'm wondering where your to your bloglink is to send us to a blog to pitch your view of someone else's informed opinion.
I have to say that I enjoy the informed comments that do occer here from time to time.
I just wanted to point out to the group that I am offended by some slug who trolls for eyes on someone else's web page. I'm never going to look at his spew. If he can't attract an audiance without whoring himself out to begging for views here, he should go and get a real job at McDonalds.
That's where all the smart people work isn't it? Job security!
The one thing that will get us out of deflation is the creation of new goods and services that didn't exist yesterday or weren't legal that increase economic activity. Here's a classic example of how you can improve things with just a small change. In certain counties in the US, taxicabs are not allowed to pick up off the street. In other counties they are. If you live in one of the latter counties and there's commuter rail, there will be at least one cab at the train station waiting to pick up somebody whose car broke down, who is just visiting, etc. No cabs means that this behavior is probably illegal. They made it illegal to protect street car operations from having passengers 'stolen'. The streetcars are gone but the law remains.
Your governments are sucking the life out of the economy in thousands of different ways. Fix them, and we're going to lessen the pain. It's already too late to entirely avoid it.
There is no lower spending by Governments anywhere.......they are creating massive global debt
http://newworldorderg20.wordpress.com/2014/11/27/russia-and-the-u-s-sell-to-both-sides-of-india-pakistan-tension/
http://newworldorderg20.wordpress.com/2014/11/26/russia-has-signed-nuclear-agreements-with-ukraine-turkey-existing-finland-south-africa-india-algeria-argentina-vietnam-bulgaria-existing-belarus-existing-iran-and-u-s/
http://newworldorderg20.wordpress.com/2014/11/26/poland-gouging-own-citizens-over-russian-coal-as-government-doesnt-reduce-coal-imports/
http://newworldorderg20.wordpress.com/2014/11/29/chinas-industrial-and-commercial-bank-creates-offshore-yuan-center-in-los-angeles/
http://newworldorderg20.wordpress.com/2014/11/29/russias-rosneft-buys-french-oil-refinery-from-total/
http://newworldorderg20.wordpress.com/2014/11/18/u-s-using-russian-rocket-engines-to-launch-spy-satelites/
http://newworldorderg20.wordpress.com/2014/11/17/pentagon-to-spend-10-billion-on-problem-it-created-create-the-problem-offer-the-solution-war-is-the-new-economy/
Get ready for QE4 because it will be annouced in 2015. The Federal Reserve has to drive the dollar to 0.
Fed dont have to do SHIT...... what is the feds sole mandate? Keep asset prices inflated to keep the States out of bankruptcy.... market crash, California, illiinois, NY, NJ and PA, go under quickly. No the check is to the EU and China. Will be interesting to see if the EU survives it. Fed wont print until all others have or the market goes down 10-20%....
We will never resolve this situation as long as we look to those who created it for a solution. It is time to rethink the whole system. To me the only way out of this mess is to decentralize. The elite have been moving us toward an ever increasing unity. This is not working for anyone but them. Their power and wealth have increased while our social structures have declined. With ever increasing reliance on the state it grows in power until it consumes us. We have come to look at governments as parents who know what is best for us. We allow them to make trade agreements that kill our economy and bail out banks who have broken laws.
Government should be viewed as a way for people to achieve certain basic rights, clean water, clean air, basic rule of law. Government should not govern to save people from their own choices or to promote products (Monsanto) in trade treaties. Government should not be bought by those with the most money. No 1000 page tax code with every loop hole under the sun for campaign financiers. Laws on the books need to be understood by those that are held to them. Complex legislation written by corporations' lobbyists should be banned. Tillman Act, Glass Steagall Act should both be reinstated.
The problem with the economy is lawless banks and lawless politicians. A return to the gold standard is inevitable. Gold is discovered at a rate about equal to population growth-2.5%. Having currency tied to gold and other precious metal resources will ensure capital is treated as precious as well. Unrestrained fiat currency leads to misallocated capital.
Finally there should be no restraints on regions affiliations. It is a shame Scottish voters were hoodwinked out of their soviergnty. Crimea should have not been an episode- they were willing to leave. If Texas wants to secede or any other group of states want to leave the union it should happen. Same for the EU. If people are willing to do the planning and prepared to implement their departure it should be a non issue. The only people who benefit by keeping people tied up into large blocks are those at the top. Decentralize, live within your means, and leave your neighbors alone unless they ask for help. No long term agreements- every situation deserves its own solution.
Where is this deflation? Seriously, has no one gone grocery shopping lately? The black friday deals were not spectacular, etc. Any one see the fuel surcharges on shipping going away? No this will not be deflation. This is Bi-Stagflation (TM Pending), price of everything you need going up, value of everything you own, going down, and wages falling...... This is the final end of the middle class, what was left of it. The FSA's ranks over the next two years will swell to more than 60%
Fire up the Honda Generator and run the entire grid on gasoline.
The End.
I know, right? Where are prices actually, you know, falling?
A year ago, using my company's FEDEX account, I sent a small package of business documents to Japan for ~$22. Now I can send the same amount of docs for $18.52. I send 10-12 packages/month so it's not a lucky one-off discount I'm speaking of.
OMG when we go from spending beyond our means back to spending within our means, that's unbelievably bad!!
"Deflation was baked into the cake from the moment that large scale debt deleveraging became inevitable, and you can take any moment between the Reagan administration, which first started raising debt levels, to 2008 for that."
Deflation was baked into the cake in 1933, when the current inflation/deflation cycle began. The gold window was closed in 1971 due to debt leveraging, which was well before Reagan took office.
The peak in interest rates was about 1980, after which they deflated. Reagan took office as the cycle phase inverted, which eventually lead to a debt bubble, as the FED dropped the rate toward zero. The up phase of the cycle had to come before the down phase of the cycle, in order to set up the down phase. The horse comes before the cart.
This has been an 80 year process, not a 40 year process.
Deflation/inflation are not good or bad things. They are part of economic and credit cycles. The problem is that they are not happening naturally. Which is the real problem. The central planners are losing control. It is going to hurt very badly, but in the end we might get a sound monetary system back. People will see what real value is and stop using promissory notes as a medium of exchange. If the economy was a free market we would not fear these terms. They would both be necessary and naturally occurring events that keep balance in place. But that's just an opinion from a neophyte.
Very nice... Keynes would be proud.
No, yo, deflation is about price. So is inflation, by definition. People not spending is about misallocated capital that produces what buyers either reject, do not need, or cannot afford to buy. The price system registers misallocation as deflation as producers discount to "stimulate" demand. Or people may spend less because they indebted beyond their means, taxed ferociously, or regulated onerously--which would be us.
No, deflation does not eat society. Inflation, deflation, are how reality registers its verdicts against our stupid policies or decisions. It's bad policy or stupid decisions that eat societies.