STAFF NEWS & ANALYSIS
EU Deflation: Real Problem or Eurocrat Exaggeration?
By Staff News & Analysis - December 05, 2014

Draghi says will not allow dissenters to block possible ECB action … European Central Bank (ECB) President Mario Draghi addresses an ECB news conference December 4, 2014, for the first time in the ECB's new 1.3 billion euro headquarters in Frankfurt … The European Central Bank will decide early next year whether to take further action to revive the euro zone's economy, its president said on Thursday, signalling that he would not allow opposition from Germany or anyone else to stop it. – Reuters

Dominant Social Theme: The EU is in crisis and Brussels has to assume more power.

Free-Market Analysis: This is predictable. EU officials are now stating they are going to do what they want to do whether or not the EU agreements allow it.

We've mentioned it numerous times because onetime EU top man Romano Prodi is on record as suggesting that this would happen sooner or later.

In fact, Prodi has indicated that it was well known that the euro would precipitate a crisis that would then generate solutions that went beyond what was allowable. We last mentioned this here:

EU's Prodi Admits Leaders Knew Euro Would Cause Ruin but Hoped Political Union Would Follow

Draghi is obviously following the script. Here's more:

In his clearest language yet, Mario Draghi underlined the central bank's commitment to supporting the ailing economy of the 18-country bloc, and argued the case for printing fresh money to buy assets such as state bonds.

But his remarks, which came within minutes of a meeting where he clashed with German officials over his ambitions, set him on a possible collision course with the euro zone's biggest and single most important country.

Painting a gloomy picture of the euro bloc's prospects, Draghi announced that the ECB expected economic output to be lower in the coming years than it had predicted three months ago, while a slump in the price of oil would further weaken inflation.

Very low inflation is seen as a trigger for ECB action such as printing fresh money to buy government bonds, a step known as quantitative easing (QE) which Germany opposes.

"QE has been shown to be effective in the United States and UK," Draghi told journalists at a press conference, saying that he would not 'tolerate' the prospect of price stability, the ECB's central goal, drifting off course.

Perhaps most significantly, however, Draghi made clear that he would face down the considerable political opposition to further radical action.

… "Do we need to have unanimity to proceed on QE or can we have a majority? I think we don't need unanimity," he said, delivering a strong message to Germany.

Draghi's newfound resolve to force the issue may have to do with ECB forecasts that see growth of just one percent next year, down from over 1.5 percent previously predicted. Additionally, "Inflation is seen at just 0.7 percent in 2015, down from a September forecast of 1.1 percent and way below the target of just under 2 percent."

This alarmism is justified if one believes the EU numbers. But, of course, as the title of this article indicates, we wonder if they are really accurate. Draghi and his brethren actually have lots of reasons to exaggerate.

Of course, the Keynesian perspective is that falling prices will retard consumer spending as consumers will withhold activity while waiting for prices to get cheaper still. The price of oil is seen as a harbinger of renewed price deflation.

And here comes Stanley Fischer, the U.S. Federal Reserve's vice chairman … "Stanley Fischer … said money-printing would help Europe as it had the United States," according to the article.

Being the part of the contrarian media, let us disagree with some of this based in part on Austrian, free-market economics. It was Murray Rothbard himself who promoted mild deflation as a way for people, especially older people, to save money.

In a free economy, absent central banks, deflation would exist as a matter of course because technology would make living costs consistently less expensive. It is regulation and central bank monopoly money printing that create more expensive, thus debasing the currency – and savings.

Why do central bankers love price inflation and fear disinflation and deflation? Because at heart central banking is a statist enterprise. Governments in the modern era constantly spend more than they have and need price inflation – currency debasement – to reduce the size of overall debts.

War may be the health of the state but central bank money printing provides its blood supply. No inflation and states can't spend and borrow nearly so much. Thus, deflation diminishes the power of the state.

Deflation also reduces consumer activity. This would be fine in a less consumerist environment but is not at all good in the kind of hyper-consumerist Western environments of the 20th and 21st century.

But let's follow up with Rothbard who believed generally that Western societies were not likely to have active, aggressive deflation while central banks were constantly engaged in money printing.

In fact, central banks have printed something like US$50 trillion since the 2008 economic crisis. The world is awash in money, dollars especially. Ben Bernanke is said to have printed something like US16 trillion in a weekend at the depth of the crisis.

How is disinflation or deflation possible? The common answer is that the money has been printed but banks are not lending and consumers are not spending. Hard to push on a string, etc.

Draghi no doubt feels frustrated that the ECB cannot do more. He claims that he must assume new powers because of a deflationary crisis. This seems a bit ginned up to us. We're more likely to perceive what the EU is suffering from as a kind of mild stagflation than outright deflation.

Put aside the oil price collapse – created by Saudi purposeful passivity – and we wonder where the deflation is lurking. In the price of gold relative to the dollar? Gold is likely another manipulated commodity, in our view – its collapse is also a kind of fait accompli.

Are food prices continually going down in the EU? Prices of cars and homes? Or is deflation another meme, a narrative of eurocrats who want to seize more power and are using any justification they can invent to get it …

Money printing would certainly help European stock markets and the money always flows to the most wealthy first. Tycoons and multinationals would be the beneficiaries along with governments who would benefit from euro debasement.

So here is our question … Is deflation really such an EU threat or are there reasons for eurocrats to "talk up the book" to seize more power and gain the ability to debase the currency even more energetically?

After Thoughts

Not everything is as it seems. And we generally don't trust technocrats. They usually seem to say the opposite of what they believe. So why trust them on deflation? It seems to us that skepticism is in order.

Posted in STAFF NEWS & ANALYSIS
  • Guy Christopher

    World leaders (term used loosely for conversational purposes) seeking inflation as the answer to their ills and ails need only to get out of the way of the nominal gold price. Yet, they fear setting that genie free. It would seem for them the cure is deadlier than the disease.

    I’m not a cheap fellow. Far from it. However, I am a frugal man, which I see as a practical matter, whereas being stingy is an emotional matter. I’ve learned, and taught, the lessons of thrift, and I truly enjoy battling everyday the forces of stupid spending, and I enjoy the value of labor turned into savings. Perhaps that’s one of the great lessons learned from my parents, who told me at age 10 to save my allowance if I really wanted a new bicycle. I skipped past the allowance and mowed yards for 50 cents (per yard, not per hour) to save 64 bucks for a new JC Higgins bike from Sears. Tips from bagging groceries (where did that entry level industry go?) at age 15 and 16 helped pay for my 300 dollar used ’55 Chevy at age 17. Willing to bet no world leader (that term again) can understand how those strategies might save their bacons.

    I have friends whose lives were ruined by overspending, just as if they were hopeless gamblers, putting that grocery money in the slots and pulling that lever. The hidden danger of keeping up with the Joneses is that the Joneses are miserably bankrupted. That sounds more like something world leaders can relate to.

    • Marcopolo

      Guy,
      Excellent points and ethics. Having children and teaching those concepts with the MSM and 24×7 bombardment is shoveling sand against the tide these days. We’re holding our own, but it is hard work, and if you’re having to be a two wage earner family nigh on impossible. Being a “Jones” has become the goal and it’s preached constantly.
      Tell your child that that going to a movie still costs a nickel, but given the currency unit in use, it now takes $10 of them for a ticket. Dad has grown another head….
      You set the gold genie free and bread is $10 a loaf and a movie ticket is $100. That what I’d call “He-man inflation,” and Americans own ~300 million firearms. Don’t think that a “world leader” sees that as a positive outcome. Even worse than telling Germans that they’re now going to be ruled from Brussels…

    • Praetor

      The day money fiat was no longer backed by anything of stored value, is the day thrift, and savings were thrown out the window. Its the day the populous became slaves to debt, and we were no longer considered human, but viewed only as consumers of the useless junk produced, and, our only purpose on this earth is support the machine that produces, that useless junk. Every one should view this consumer/debt system, from the view of the Chinese worker who must live in high rise prison, and, that the authorities have to install nets around the building to keep their slave workers from leaping to their death, seeing it as their only way out!! Someone tell me, this consumer/debt system is worthy of our support. Someone tell me the money fiat system, backed by something with a stored value (GOLD), is not worthy of our support!!! Someone tell me that thrift and savings is a useless concept and will not produce greater prosperity for all. Absolutely, correct Guy.

  • Bruce C

    There may be a conflation of the two most common meanings of “deflation” here.

    The DB is taking deflation to mean a steady lowering of prices, but some would say “price deflation” is only a symptom of “true” deflation, which is the lack or steady lowering of demand and economic activity.

    I believe Draghi, et al is referring to the later, and in that case he seems to be right, but that is not a monetary problem.

    • Draghi is probably talking about prices as well as monetary deflation. In our article we were referring to both but admittedly didn’t make the distinction clear. For Draghi it is the impact of deflation – the strengthening of the euro that makes debt more expensive and borrowers more troubled – is the problem. He wants to debase euro-debts and price deflation will stand in the way of that ambition.

      • Bruce C

        Basically agree. But I don’t think the distinction is between “price” deflation and “monetary” deflation. I think it is deflated/depressed economic activity that is occurring because of the “price” inflation. The higher prices that you cite, and I agree with, creates the lower demand as well as lowering the “real” cost of debt, which is presumably what Draghi and gang want. Therefore, they are using depressed demand as an excuse to increase prices even more.

        Or, in other words, Draghi’s alleged desire to devalue the euro to reduce the “real” cost of debt is at odds with the accompanying price increases that affect “the masses”, which results in less “demand” and economic activity because fixed incomes can only buy less when prices increase. Hence the conundrum.

  • You make a very good point – not everything is as it seems! The CBs “say” they have X amount of gold, are we to buy this without a believable audit? They “say” they want 2% inflation but according to Antal Fekete their monetary policy (zero interest rate) is extremely deflationary. If they have the Gold, do an audit!! If they want inflation, raise interest rates!! And we all know what that would bring. The PTB ignore the constitution here, and the ignore bylaws of the EU over there. It seems likely the current lawlessness is only a prelude to what will come. It is nothing less than prudent to ignore what the CBs SAY and figure out for ourselves what they are actually DOING. What they are doing and have been doing since 2007 (way before actually) is blowing bubbles (inflation) and then intentionally popping them. In 2007 the bubble was housing and equities, now it is mainly equities. When they pop this bubble (intentionally, and at a time of their own choosing) there will be hell to pay and endless problems that “demand” to be solved by MORE big gov, MORE CB “fine tuning” and the like. As long as we get off the merry-go-round before the corral is shut we can protect our wealth and our families.

    The way to get off of their merry-go-round is to exit the digital domain of banks, brokerages, etc.

    • Marcopolo

      Gregg,
      Tis the season….silver and gold, silver and gold…..
      You’ll never figure out what they’re doing because they don’t have a “tell.” It’s a game with no rules. You can look back to 2007 and prior because all you have is a rear view mirror. But what they pop and when at best is a SWAG, because out the windshield is just thick fog.

  • Philip

    http://www.professorfekete.com/articles/AEFCounterProdMonetaryPolFed.pdf
    http://www.professorfekete.com/articles/AEFHowFedBankruptedInsInd.pdf

    Here are Professor Fekete”s two latest articles on this subject. It is not often that he goes over 4 months between articles. Once again he makes his statements on deflation and Real Bills. The importance in RB for the world has taken a long time for many people, especially economists to understand. As he points out if we are to make a recovery with minimal violence this is the best choice perhaps Hobsen’s. Antal is now in his eighties and has still not received the high praise he deserves. Philip

    • We stand with Mises and Rothbard on this issue. It is very difficult to have monetary deflation within the context of monopoly central banking and aggressive money printing.

      • I would respectfully disagree about deflation. We certainly had a deflationary panic in 2008, one which was used to extort billions (trillions?) from US citizens. I maintain the 2008 deflation was planned by the PTB and triggered in a way and at a time of their choosing. Prof. Fekete makes very clear in his two most recent articles on popular economics that zero interest rates or extremely low interest rates are very deflationary! If so then once again we have a hidden deflationary policy obscured by money printing and talk about inflation targets of 2%. We had EXTREME monetary deflation during the great depression which was triggered by our beloved Federal Reserve so that the shadow hand behind them could steal all the nations gold. “First by inflation, then by deflation, tha banks and the corporations around them will deprive the people of their property until they wake up homeless on the continent their Fathers conquered”. It seems we are in the final stages of Thomas Jeffersons prediction since we already have a record number of homeless children (along with record stock market highs). Why believe what the CBs say? Believe instead in the analysis of Prof. Fekete!

        • This is an ancient and perplexing argument. Rothbard’s book on the Great Depression concluded that what you call deflation was the product of enormous monetary INFLATION. This was in contrast to Friedman who concluded that the Fed created the crash of 1929 by mishandling monetary policy.

          We observed the 2008 crash closely and later wrote an article stating that Rothbard’s analysis was the correct one. Yes, there was certainly deflation or at least disinflation and outright price deflation in certain sectors once the 2008 crisis was underway. But this phenomenon has to be viewed within the context of the preceding monetary INFLATION. Without the tremendous money printing of the 1920s there would not have been a Crash of 1929.

          It was also Rothbard’s contention, which is seemingly Gary North’s perspective as well, that it is very difficult to have sustained and evolving deflation in a central bank money-printing environment, absent a significant crash. And even then, the deflation (or disinflation) is a result of what has come before.

          In the case of Europe, the crash of 2009 is long gone. Prices have been reinflated by a tremendous rush of money printing. The debased currency by definition must be inflated – though we aware that Dr. Fekete has additional thoughts on the matter.

          And of course the EU itself continues to shriek about price deflation at every opportunity. We’re skeptical … hence, the article.

          • Bruce C

            It’s lack of demand and economic activity, not prices that are deflated.

            Central banks can’t change that unless they want to give “helicopter money” to the masses directly.

          • Marcopolo

            DB,
            I’d offer a different point of view. The crash of 29 was the delayed crash of enormous economic growth the US experienced supplying the warring nations from 1914 and compounded by our entry in 1918. With the armistice, demand dried up and we had the quick downturn in 21, but not the full wringing out of the excess capacity created, and then compounded by introduction of a slew of new technology in the 20’s. The new CB then tried to keep the party going and capitalism disappeared, and credit appeared in a big way. Money was still backed by PM’s, so I don’t think QE could be a concept they grasped/if they did they couldn’t pull it off. Even FDR had to take away the gold and devalue the currency and that didn’t help. So I share the point of view that the “deflation” was a result of a crash, and what did come before, but it came from 1914.
            And as been surmised, we came out the other side not directly because of WW2, but the huge amount of savings created during that time, while taking millions of consumers/potential workers and making them all dress alike.
            As Keynes noted, inflation is theft only one in a million people would recognize. Today, it’s more like one in a billion+.

          • yes – monetary science is a very deep art and perhaps a black one. As you know I feel the hidden hand know exactly what they are doing but that is just my personal opinion. I am also FAR from being an expert or even having basic competency in monetary science or “economics” but I have found, for me, that Fekete makes the most sense although it is a struggle to comprehend this stuff. Prof Fekete likes to position himself as the successor but also the improver on Rothbard, Hayek, Adam Smith and all the rest and I have no way to know if this is the case but to me, his analysis of ZIRP makes a tremendous amount of sense and I have to believe the hidden hand knows the same thing Fekete does and is implementing ZIRP deliberately and with destructive intentions. It has sure been a huge surprise and shock to many (including me) to see trillions created and (so far) no real inflation except in equities and maybe food. When CBs tell us they are “battling deflation” I am thinking “au contraire” they are deliberately causing it!! Orwellian doublespeak at its best, from The Ministry of Truth : )

        • Bruce C

          Why do you think the PTB allowed some 16,000 tonnes of gold to flow from the US to the rest of the world by the time “the gold window” was closed?

    • Bruce C

      I think what is important to understand in Fekete’s first article is that he referring to a transient state in which interest rates are falling, not the steady state of low interest rates.

      In the second article it’s important to understand that he is explaining things from an insurance company’s perspective. Specifically, the financial consequences of falling interest rates for life insurance policies. Life insurance policies are long term contracts in which premiums are calculated based upon the term of the policy, the age, etc. of the insured, the potential payout of the policy upon the insured’s death, and the forecast interest rate environment at the time the policy is underwritten. It is the last factor that Fakete addresses. Basically, he is saying that if interest rates are assumed to be X% per year then statistically speaking a certain cash flow of premiums will provide enough capital accumulation to service the policy agreement. However, once the policy is in force, the premiums can not be chnaged/increased and so a lower or falling interest rate environment decreases the capital accumulation that the premiums were based upon and will diminish the expected business profits. That is to say, are deflationary.

      To be clear, what this means is that as monthly premiums are received they are immediately invested in bonds. Now, if the interest rate environment is stable or predictable then everything is accounted for. However, if interest rates suddenly and unexpectedly drop then the cost of the bonds purchased by the premium flows are higher and their yields are lower. That is what creates a shortfall. The bonds are costing more and yielding less than expected when the premium rates were calculated. Therefore, less profit is made, less capital accumulates, and in extreme cases can bankrupt the entire enterprise. Therefore, falling interest rates are not a boon for the insurance industry.

      Interestingly, this also explains why insurance premiums would and do rise in a falling interest rate environment, because higher premiums are required to make up for the lack of capital that can be earned from the bond market. Insurance premiums are one of the main things that have increased in price since the advent of ZIRP, and now you understand why.

  • Joelg

    “…is deflation another meme, a narrative of eurocrats who want to seize more power and are using any justification they can invent to get it …”

    You hit the nail on the head, DB. It is the only explanation that fits all the gibberish and lies being fobbed off as facts. Draghi-speak is what George Orwell refers to as “Political Language.”

  • Webforager

    Deflation/inflation = more justification for what I think is most intriguing about this story. The people behind the Euro are resorting to brute force to get what they want. Draghi will push ahead regardless of political controversy. The European Union and the Euro only have one of two outcomes, abolition or a centralized political union…a new constitution, perhaps. Clearly, the path is greater centralization politically. Of course, how will the European Crowd react? The EU is THE powder keg.

    • If Draghi does try to force his way past the German electorate, he may regret it. The Internet era is proving troublesome for Euro elites.

      • Bruce C

        I hope you’re right.

        • Marcopolo

          Bruce, I would offer DB is correct. I would add mixing the Internet era with German DNA is not something Draghi can push past. You don’t come through what they’ve come through over the last 100 years and come out the economic engine they are and get fooled. Not when truth is mouse click away.

          • Good!

          • Bruce C

            I don’t understand your reply. My hope is that Draghi doesn’t even try, and if he does that he will regret it. What did you think I was saying?

          • Marcopolo

            Bruce,
            Apologies for not making a clear point. Your point was you “hoped” DB was correct in their assertion that forcing their way past the German electorate/people, combined with the Internet era (which has been a core tenet of the DB since I can remember) that Draghi would regret it, and EU elites are having their goals thwarted due to the Internet.
            The point I was making, was to point out that DB’s assessment of the situation was correct in my view. “Hoping” DB was correct, implied to me that you were positing that DB’s assertion may not come to pass.
            I was positing that DB’s assertion is absolutely spot on. “If” Draghi tries to force Germany, the blow-back would have Draghi hiding out back in Rome.
            The EU elites, who “planned” that First, the single currency Euro was the (sneaky) prerequisite for creating a single political entity “EU” and a centralization of political power in Brussels governing all of Europe (the elites would control Brussels; easier than trying to control 18 nation states), has been thwarted by exchange and access to truth behind the scheme because of the Internet.
            Point in fact, Draghi pushing the elite agenda has already created division among the CB of the EU, and likely will hasten tearing apart the EU zone and Elite agenda. This would not be possible if information was not available outside the MSM via the Internet.
            I was also pointing out you aren’t going to blow past the Germans. A country that was devastated by two world wars and emerged as the economic powerhouse of Europe, the culture of Germans/Germany will not go quietly into the night.

  • Pater Tenebrarum

    The euro area’s true money supply has increased by 55% since 2008, from EUR 3.75 trillion to EUR 5.8 trillion. Some “deflation”. Ask anyone if their cost of living has gone down, and they will answer in the negative. The prices of things necessary to survive, from food to energy to rent to healthcare have all spiraled higher and continue to do so.

    • Yes, Draghi is shouting about price inflation and no one in the mainstream media in either Europe or the US is reporting anything except what Draghi and the Eurocrats are singing in chorus. Deflation, deflation, deflation (price deflation). Thanks for the numerical inputs which further confirm our contention that what is coming out of Europe is yet another big lie. Rothbard was right. price deflation (let alone monetary deflation) is not really feasible in an environment of monopoly fiat money printing.

      And while we’re at it, we’ll point out that Gary North questions the whole idea of real deflation. As we recall it, he claims that in a sense dollars cannot disappear and must find their way back to banks. Such dollars may be parked in bank coffers but they still exist. So much for monetary “deflation.” (Though this line of logic may be less persuasive as it involves non-bank credit such as credit cards, coupons, etc.)

      • Marcopolo

        DB,
        I would offer a slightly different point of view. The Western economies (actually all) are all based on debt. All the fiat currency is a representation of that debt, be it paper or digits. Currency disappears when you close out debt, be it credit card, mortgage, etc., as the currency units were created when you put yourself in debt, and were created out of thin air by the banks (fractional reserve banking). When you pay off the debt, the currency units disappear. The bank no longer has an “asset” (your loan).
        Rothbard is 100% correct; price deflation can’t occur in a fiat currency environment as one simply creates more of it. However, that assumes the population has access to the fiat, and in all western (and most others) the population can not secure more fiat, neither through employment nor increasing their debt load.
        Here in the US, the MSM is touting the “economic resurgence” as evidenced by record new auto sales. Most of the ~$1 trillion debt incurred in these purchases are $0 down, and 72 months and nearly all are to way below sub prime borrowers. It is another bubble being inflated that will pop very soon.
        My point of view is what the EU and Western economies are experiencing is the population (and governments) of all countries is too highly leveraged. What is left after the theft of taxes and aside from subsistence goods and services is most are using their currency units to retire debt. Or, those not in a productive capacity, are marginally living with their government’s largess, and the governments can’t come up with a scheme to assume more debt (bonds) to keep the game going. In the US, our “resurgence” is an increasing use of credit to levels as high as the 2008 blow up. This will end soon. It’s nice to be the reserve currency unit.
        Enterprises who provide goods and services are seeing a weakening demand. Not because the population would not like to secure them. Rather they have no currency units to spare, nor can they carry more debt. The enterprises are attempting to lure the purchase by lowering the price and that’s not working; ergo, “deflation.” Draghi needs to absorb the debt of countries and their banks further than thought. Germany, which actually still has productive class, does not want France, Spain, Greece, et. al. running up their tab higher.
        To pull off the Euro currency unit, as you note, required the separate nation states to merge politically before the scheme self destructed. Isn’t going to happen. Deflation is a meme to force a powerful Brussels/EU political unit. Draghi’s in a race, in my view, he can’t win. I’ve been trying to think of how the ruling elite can force this issue and I’m stuck on war….but not convinced.
        Deflation is a meme, as is the continuing misuse of the word money, when speaking of currency units. One of the 5 attributes of “money” is that it is a store of value. Show me one currency unit that has held its value over even the last 5 years (or 5 months!).

  • Pater Tenebrarum

    Deflation is not a danger: http://www.acting-man.com/?p=29083 Helicopter money: why the economic analysis is flawed: http://www.acting-man.com/?p=34472 More on the helicopter money meme (the ultima ratio of central banking socialism): http://www.acting-man.com/?p=34588

  • Danny B

    O Great Bell, the waters have been muddies very badly. The definition of deflation is; A shrinkage in the amount of currency and credit in the system?,,, available? There is no point in making it more complicated by including checkable deposits and “near money”. If you look at Wiemar, Zimbabwe, et al, there was a huge amount of high-denomination paper money infused into the system. With paper currency inflation, the paper can’t very well just disappear.

    I believe that one MUST separate currency from credit. Then, you have to ask, is that credit in the system or, is it just available. The $ 2.7 trillion of excess reserves in the banks are not proportionately inflative. They free up money that the banks can now loan because the banks now have stronger reserves. They did not inflate the available supply of credit by $ 2.7 trillion. Also, the inflative power is directly related to the amount of this freed-up money actually moved into the system.

    In the 2008 crash, residential RE lost $ 15 trillion in value. This was hugely deflative to the economy even though no currency or credit was lost,,, other than HELOCs. The perception of inflation / deflation has a great effect on the economy even if the money and credit supply hasn’t changed. One can’t very nail down inflation / deflation if it depends greatly on the mood of the consumers / investors / savers. Yes, I know,,, velocity.

    Then, to further complicate the picture, much depends on WHO does the borrowing. Contrast; an entrepreneur borrows $ 1 million to expand a productive enterprise,,, GOV borrows $ 1 million to pay for consumption. Remember that for every $ 1 dollar increase in taxes, the economy is diminished by $ 3. We are now in the negative area on the marginal return.
    http://1.bp.blogspot.com/-T1QhBRuE8kA/UdMHXm-BvQI/AAAAAAAAKV4/jzWJsyuLnAU/s620/Diminishing+Productivity+of.png

    Eventually, it turns negative, http://image.slidesharecdn.com/econch05-140414122911-phpapp02/95/econ-ch05-12-638.jpg?cb=1397496588

    All the zillions of new money digits are subject to evaporation because so much leverage is built into the system. Default causes the leverage to go into reverse. This is deflative. There is $14.5 trillion in U.S. consumer debt that is defaulting at the rate of 6.2%. There is $ 100 billion of student loans that are in default.

    All of this is deflationary to the credit system without being particularly deflationary to the currency supply.

    The various factors should be separated.
    Inflation / deflation in;
    Currency
    credit
    assets
    bonds
    commodities

    The FED, ESF, PPT can create inflation in assets, bonds and the availability of credit. They can’t create inflation in the demand for credit. They overcome that with liar-loans. They can’t create lasting inflation in commodities because they kill consumptive power.

    The 2008 crash brought crashing deflation in the demand for credit. The FED tried to offset this crash in demand for low-power bank money with an infusion of high-power base money. Low-power credit money is deflationary because of the interest burden it carries. The FED had to give away the TARP money for free because that was the only way to offset deflation in the demand for credit money.

    The FED, ESF, PPT can create inflation in the upper loop of the economy but, not in the lower loop. Aware of this, they float a proposal to send free money to everybody in the lower loop. GOV is now creating about $ 3 billion a day but, none of it is doing anything productive. Creating $ 3B a day to maintain our former life style is deflationary in that none of it goes into savings. It is debt created for consumption.
    Productive investment and CAPEX are dead. Credit demand is dead. The general mood is dead because of the poverty statistics. Consumption and employment are dead. All of this is deflationary and will eventually translate from the lower loop to the upper loop.
    Several $ hundred billion was just pulled from oil investments. This is just a start.
    Deflation at the ground level. http://www.theautomaticearth.com/no-no-no-that-is-not-deflation/

    • The article you cite claims that deflation “starts with a drop in spending, caused by lower or no wages, saving or simply the demise of confidence. It doesn’t start with overcapacity. It starts with people losing their jobs.”

      Within an Austrian context this is probably not true. Deflation in the modern era usually begins with ASSET INFLATION … excessive central bank money printing. The monetary and price deflation and disinflation occurs at a later date when the balloon collapses.

      But our argument in this article is simple: Six years down the road from the beginning of the financial crisis, Draghi is shouting about deflation, by which he means mostly price deflation in our view … ie: money is becoming more expensive, posing a threat to the rickety credit system.

      As the article says, we’re skeptical ….

      In a monopoly central bank environment prolonged deflation is difficult to sustain. We believe Draghi is not telling the truth for various reasons and that the mainstream media in going along with Draghi’s promotion are not reporting the reality, which is that Europe is more likey suffering from stagflation than deflation ….

      That’s our “unmuddied” perspective.

  • Danny B

    I had to break it up a bit. I found a good quote on China.

    “She warned that the country could be on the verge of a “Minsky Moment”, when the debt pyramid collapses under its own weight. “The debt snowball is getting bigger and bigger, without contributing to real activity,” she said. The total credit in China’s financial system is estimated to be as high as 221% of GDP and has jumped almost eightfold over the last decade. This means companies will have to pay out $1 trillion in interest payments alone this year. Chinese corporate debt burdens are much higher than those of other economies.”
    http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit-can.html

    “SWIFT is a global banking transactions system connected to more than 10,000 financial institutions in 210 countries. The daily turnover of payments made via SWIFT is around $6 trillion. Russia is the world’s second largest SWIFT customer after the US.”
    http://rt.com/business/211291-swift-banking-russia-vtb/
    That was news to me.

  • I usually do not “pawn off” the ideas I should express in writing here by giving you a link to a website. However, in this case Dr. Fekete expresses what needs to be said in commenting on this article far better than I could express it. In his commentary on “The Counter-Productive Monetary Policy of the Fed”, he makes the point that Fed policy which tries to sow inflation, instead reaps deflation. This same policy is advocated by Mario Draghi of the ECB. (Maybe it was the bigger office in the shiny new ECB building in Frankfurt which gave Draghi a greater sense power….)

    Here is the link to Dr. Fekete’s website, http://www.professorfekete.com . Check for his commentary under Popular Economics.

  • dave jr

    This article stirred a bit of confusion for me. It helped DB, that you admitted to Bruce about being unclear in making distinctions between money supply deflation and price deflation. When talking about inflation you are pretty adamant about meaning money supply, so jumping back and forth was part of my confusion. Also, it would help to define if one is talking about a free market principle, the way things used to, should and actually does work; or the current managed/manipulated/controlled market. The later depends on turning cause and effect upside down in order to apologize for, or to propose more manipulation; like you said, “pushing on a string”. When I was reading, it was difficult in keeping up with your frame of references.
    .
    Please don’t take this as a complaint, rather a friendly critique from my point of view.

    • Well … what we said was we hadn’t been as specific (clear) as we could have been.

      Sometimes when we write of price inflation, we use the word “inflation” – though we should always qualify it if possible, depending on what we mean.

      Draghi uses the word “deflation” and probably means “price deflation” for the most part … which is of course different that disinflation.

      Of course we’re still doing better than the mainstream media that never qualifies these concepts at all ….

      Anyway, our position should be cleari between the article and feedback responses …

      -We’re skeptical that there is deflation or price deflation in the EU.

      -We’re skeptical that monetary or price deflation can persist long term in any modern society using monopoly fiat money.

      -We believe it’s more likely that the EU is facing stagflation at this point than outright deflation or price deflation.

      We could be wrong; but in this thread you’ll find numbers that tend to bear out our contention.

      • dave jr

        OK. Deflation = price deflation and disinflation = money supply deflation. While inflation= money supply inflation and price inflation means just that. This will help me out in the future when reading the DB.
        .
        I think it is important because I see the two (money supply and prices) as separate animals with completely different cause and effect scenarios, where the root of economy, the productive sector and competition, are often left out of the equations.
        .
        And yes, the DB is doing better than the MSM, but don’t malign yourselves. Much of the MSM is purposeful disinformation. Or should I say information deflation. 🙂
        .
        Anyway, keep up the good and important work and I’ll try to hang in there.
        .
        Sincerely, your fan.

        • Bruce C

          I can agree with all of that too. However, there is another phenomenon that some people also call “deflation” which is the lack of demand and/or economic activity. In fact those people would say that it is the true source of “price deflation” which is considered a lagging symptom, and may not necessarily occur. That may seem counter intuitive but the extreme counter example is “stagflation”, which is a lack of economic activity amidst price INflation, and was considered impossible before the 1970’s.

          I agree with the DB that Europe may be in stagflation now even though their official inflation rate is less than 1%. In any case, lack of demand – caused by limited incomes and/or maxed out credit or even the conscious choice to withdraw from the official system (human action en masse) by willingly “shrugging”, purposely making less money to not feed “the beast” via payroll taxes, or going under the radar and transacting in cash, etc. – cannot be fixed by adding more liquidity to the system.

          • dave jr

            “However, there is another phenomenon that some people also call “deflation” which is the lack of demand and/or economic activity.”
            .
            In such a case the private sector may might be adding to savings or paying down debt. Is this harmful to an economy or is it just another spinning cog that is harmful when not recognized, ignored or intentionally obfuscated by the monetary wizards so that monetary policy can be spun back into their favor? There are too many variables at play and I for one would appreciate them not being lumped into restrictively, similar terminology; is all I am saying. This, in the interest of disconfusion or confusion deflation, not sure which.

          • I am pretty sure that the counterfeiters depend on keeping the masses confused in order to keep their jobs.

            Aggregate Demand: “In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country.”


            Does anyone understand ‘Aggregate Demand’?

            I demand to go to Mars. Are my demands included in aggregate demand?

          • dave jr

            Good point.
            .
            “It (AD) specifies the amounts of goods and services that will be purchased at all possible price levels.”
            .
            I count at least three variables in that definition, 1) amount of goods and services available. 2) the amount purchased. 3) possible price levels. Therefore, Aggregate Demand can mean anything they want it to mean at anytime they want to mean it. Good trick! And we listen to their blithering word play thinking they must be genius.

          • alaska3636

            That’s good.

            Great example of technobabble.

            I remember acing microeconomics in freshman year; I went three times to that class: the first day, the midterm and the final. I took macroeconomics the following semester with an economist at the Dallas Fed. I had to memorize and regurgitate 16 pages of notes, back and front, to get a “B-“.

            I am not aware of a similar conversation regarding particle physics and quantum mechanics, i.e. that the two are generally incompatible due to differences in scope. My understanding is that physicists are genuinely baffled and seek (in vain?) for a unified theory. In economics, we hear that government budgets are not like individuals ones.

            The whole field of economics (except for one of which I am particularly fond :)) resembles a Rube Goldberg contraption. Nothing about “fiscal and monetary policy” seems intended to make sense; and in a wider perspective, they seem to be various types of justification.

            The monetary authorities were always going to do whatever suited their purposes. There seems to be a streak in human nature to assume the best in people and to justify predictable (from an Austrian viewpoint) consequences of fiat money, deficit spending, mercantilist protectionism (and monopoly) and price fixing in general.

            Skepticism is founded on the free flow of good information.

          • Bruce C

            Your question about “is this harmful” depends upon the kind of monetary system in place. In a “sound” money system not necessarily but in a fractional reserve floating debt-based system like we have now it usually is.

          • dave jr

            I agree. It is one more tidbit of premise that gets drowned in guru conversations that unnecessarily run deep. You know, fed-speak.

  • Danny B

    This is off topic but, I had to post it. “An initiative to save the taxpayer money by merging the catering
    services for the House of Commons and House of Lords was rejected by
    peers because they feared the quality of champagne would suffer as a
    result.”
    “Jack Straw, who was leading the committee, said in astonishment: “Did
    you make that up? Is that true?” to which Jack replied: “Yes, it is
    true.”
    http://i100.independent.co.uk/article/lords-refuse-to-cut-costs-because-champagne-quality-would-suffer–gkRgp-6Cux

    We can’t expect the Lords to drink the same champagne as the commoners.

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