FROM Putin’s hordes massing over the eastern borders of Ukraine to the army of homegrown Islamic State fanatics threatening a murderous return from the Middle East, Europe has a lot be frightened of right now.
Yet there’s another nightmare haunting Europe’s economic policy makers: a monster called deflation that’s already clawing at the continent’s financial fundaments.
“We are meeting here at the time when Europe is facing a great threat,” Polish Finance Minister Mateusz Szczurek warned in a recent speech.
“We are on the verge of deflation,” he told a September 4 conference in Brussels. “As Europeans we should never forget that it was depression and deflation ... that brought to power the totalitarian regime that devastated our continent through the world war and unspeakable atrocities 75 years ago.”
At first glance deflation doesn’t sound so bad.
Prices go down, what’s not to like?
Yet the cold economic reality means that when prices fall people stop spending, hoping things will get even cheaper. In response, businesses cut production and lay off workers. That means even less demand, and prices drop further.
By then, your economy’s in a vicious downward spiral.
Making things worse, those falling prices bring declining wages and worsening debt burdens.
Anybody who doubts how bad it could get should look back to the last time the United States caught a serious dose of deflation, from 1929-33. They called that the Great Depression.
Japan has languished in a deflationary cycle pretty much since the late 1990s, its once-booming economy reduced to “lost decades” of stagnation. The country now lays claim to the world’s highest debt — over 1 quadrillion yen ($9 trillion) — more than twice the size of its total economic output.
Europe is now teetering on the edge.
Seventy-four per cent of global investors expressed fears the euro zone was slipping into deflation, according to a recent Bloomberg poll.
Yet the cold economic reality means that when prices fall people stop spending, hoping things will get even cheaper. In response, businesses cut production and lay off workers. That means even less demand, and prices drop further.
Considering that the majority of private spending is on non discretionary items, people can't wait until next week when the item may be cheaper.
Also, people are prepared to pay a premium to buy non discretionary things today. They will use credit to buy a car or Iphone or to pay for a holiday. If they saved for it instead, it would be cheaper.
So the idea that deflation stops people from spending is bunkum. It is the other way around. When people can't afford to buy things anymore, they fall in price.
Deflation is a symptom of depression and not the cause.
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
Considering that the majority of private spending is on non discretionary items, people can't wait until next week when the item may be cheaper.
Also, people are prepared to pay a premium to buy non discretionary things today. They will use credit to buy a car or Iphone or to pay for a holiday. If they saved for it instead, it would be cheaper.
So the idea that deflation stops people from spending is bunkum. It is the other way around. When people can't afford to buy things anymore, they fall in price.
Deflation is a symptom of depression and not the cause.
Disagree Jimbo. Although, it does have to have a trigger.
Deflation is a death spiral driven by self fulfilling prophecies.
Once you get into it, very hard to get out.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Disagree Jimbo. Although, it does have to have a trigger.
Deflation is a death spiral driven by self fulfilling prophecies.
Once you get into it, very hard to get out.
Deflation is caused either by people not spending or oversupply. This forces prices down.
People not spending is usually due to increased unemployment or reduced pay.
Deflation in the Eurozone will not cause a depression because the Eurozone is already in a depression. The depression will cause the deflation.
I agree that once the spiral is entered it is hard to get out of, but the spiral doesn't begin with deflation.
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
It is the other way around. When people can't afford to buy things anymore, they fall in price.
Deflation is a symptom of depression and not the cause.
Quote:
Considering that the majority of private spending is on non discretionary items, people can't wait until next week when the item may be cheaper.
I disagree. Most spending for an average earner is discretionary. Obviously the less one earns the more they spend on non discretionary items - but aren't we talking about the aggregate/average?
These days people think things are non discretionary when they are discretionary.
Quote:
They will use credit to buy a car or Iphone or to pay for a holiday. If they saved for it instead, it would be cheaper.
Only when it's going to be the same, or higher price tomorrow.
Quote:
So the idea that deflation stops people from spending is bunkum.
Deflation delays people spending on big ticket discretionary items. I have to buy my groceries no matter what, but not so for replacing my car, couch, fridge, washing machine and i phone. All of these items I could use a bit longer if I thought they were going to be cheaper in the future.
Deflation delays people spending on big ticket discretionary items. I have to buy my groceries no matter what, but not so for replacing my car, couch, fridge, washing machine and i phone. All of these items I could use a bit longer if I thought they were going to be cheaper in the future.
When are most new Iphones sold?
The most are sold within the first six months of release. They get cheaper after a while because people anticipate a newer release coming out at some point and are not prepared to pay the same price. Same with cars, TV's etc. etc.
Any item bought on credit will cost more than it will in a years time. Inflation running at 3% does not make people rush out and buy things now to save 3% inflation. Chances are their wages will be higher next year anyway. I am not going to put off buying a new $1000 fridge for a year just to (maybe) save $30.
People buy now on credit, because they want the item now. They pay a premium to have the item now.
This habit changes when consumers become stressed perhaps through job loss or uncertainty in the future. They will reign in spending and not use credit.
Deflation is a symptom and not a cause.
Europe is approaching deflation because it has high unemployment. It has high unemployment because it has an over supply of labour. It has an oversupply of labour because many of its jobs have now been outsourced to cheaper labour countries (China, India etc.).
Europe is approaching deflation as a symptom of a floundering economy. If Europe enters into deflation next week, will the last 5 years of crisis be blamed on deflation?
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
I agree. Where the hell did they get 1 quadrillion yen from? And where was it before it was lent to the government?
Why are they not bankrupt? Why are interest rates not 100%? Where are the bond vigilantes?
So many questions.
What you don't know. When it comes to actual printing of money the Japanese must be one of the lowest in the world. Most of the mainstream floating currency nation print around 7% more net cash pa. Japan has gone much lower than this, last time I looked they only printing about 3% more pa. So there is relatively little devaluation domestically of the Japanese currency. They did print like the clappers post ww2 until about 1980. Now they are the reverse.
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