Debt, Propaganda And Now Deflation

image

Dorothea Lange Negro woman who has never been out of Mississippi July 1936

Courtesy of Raul Ilargi Meijer @ The Automatic Earth blog:

Looks I have to return to the deflation topic. I’m a bit hesitant about it, because the discussion always gets distorted by varying definitions and a whole bunch of semi-religious issues. The Automatic Earth has for many years said that an immense bout of deflation is inevitable because of global debt levels, and it’s all only gotten a lot worse since we first said that. Our governments and central banks have ‘fought’ deflation with more debt, and that was always the stupidest idea in human history. Or at least, most of us were stupid for believing it would work, or was even intended to.

Just so we don’t get into yet more confusion, i probably need to explain that the debt deflation we’re talking about here is not some subdivision like consumer inflation or price inflation or cookie inflation, those are just hollow and meaningless terms. Debt deflation is deflation caused by too much debt, and the deleveraging it must and will lead to. Deflation does not equal falling prices, those are merely an effect of it.

The reason this matters is that when you equate inflation and deflation with rising or falling prices, you’re not going to be able to know when you actually have deflation. Because prices can rise for all sorts of reasons. Inflation/deflation is the money/credit supply in an economy multiplied by the speed at which money is spent in that economy, the velocity of money.

It should be obvious that prices for some items can still rise, certainly initially, when deflation sets in. Producers that see less sales can try to raise prices for their remaining buyers. Basic necessities will always be needed. Governments can raise taxes. Rising/falling prices tell us only part of the story, and with a considerable time delay.

Ergo: rising/falling prices are a lagging factor, and if you look at them only, you will have missed the point where deflation has set in. What follows, obviously, is that you can’t measure deflation by looking at consumer prices (CPI) or production prices (PPI) numbers. You’d be way behind the curve. CPI and PPI tell you something, but they don’t tell what causes falling or rising prices. And that is a valuable thing to know. Continue reading

Christine Lagarde Is Clueless: 70 Words Of Pure Keynesian Claptrap

Courtesy of David Stockmans Contra Corner:

The world’s official economic institutions are run by people who believe in monetary fairy tales. The 70 words of wisdom below from IMF head Christine Lagarde are par for the course. She asserts that a new jabberwocky expression called “low-flation” is the main obstacle to higher economic growth in Europe and the DM areas generally and that it can be cured by more central bank money printing.

The first obstacle is… the emerging risk of what I call “low-flation,” particularly in the Euro Area. A potentially prolonged period of low inflation can suppress demand and output—and suppress growth and jobs. More monetary easing, including through unconventional measures, is needed in the Euro Area to raise the prospects of achieving the ECB’s price stability objective. The Bank of Japan also should persist with its quantitative easing policy.

Now there is not a shred of credible evidence that prolonged low CPI inflation causes workers to produce less, businesses to invest less or entrepreneurs to invent less. Since these are the fundamental ingredients of economic growth on the free market, the question recurs as to why Keynesian Kool-Aid drinkers like Lagarde (and the huge staff of IMF economists she lip-syncs) apparently believe that eroding the value of savings by say only 1% per year vs. 2% will “suppress demand and output”.

Obviously, even they can’t believe that falling prices alone cause “demand” to falter. After all, the price of flat-screen TVs, iPads and iPhones have plunged during the past several years, but demand has soared. During the past 27 months, for example, Apple’s revenues have surged from $29 billion to $58 billion per quarter. Continue reading

Bank of England Announces 7% Unemployment-Linked “Forward Guidance” But Credibility Questioned

Unconventional monetary policy is here to stay and similar to the Federal Reserve, the BoE is linking monetary policy to it’s unemployment levels. Quantitative Easing does not work, especially when we have so much debt but linking it to employment allows the financial terrorism games to continue as the employment numbers provided are anything but exact. By increasing the balance sheet of the BoE by £375 billion per year, we are putting that debt onto our children and their children. This is anything but sensible or financially prudent, how will we unwind this debt? The answer is, we won’t. This is a kick the can down the road approach, it will fail but at least we know who to blame. Courtesy of Zerohedge:

Moments ago the Bank of England’s Mark Carney, very much as expected and warned previously, announced for the first time as part of the BOE quarterly Inflation Report press conference (the full August inflation report can be found here) the official linkage of monetary policy outlook to unemployment and pledged to expand stimulus if needed as he tried to quell investor bets on higher interest rates. Specifically as part of the BOE’s forward guidance, Carney linked interest rates to a 7% unemployment threshold while forecasting that unemployment would be higher than 7% until at least Q3 2016, or in other words, no threat of an end of extraordinary monetary policy any time soon.

However, while the market enjoyed the announcement initially and sent cable 100 pips lower to 1.52, the initial dovish mood was quickly reversed after the market observed that Carney’s statement carried with it three “knock out clauses” which made the forward guidance far less explicit and put doubts into the market about the credibility of this latest monetary experiment as a result unwinding an initial 100 pip drop in cable and sending it over 200 pips higher from the lows.

Specifically:

  • the policy stance will depend on economic conditions, and will also be determined by the BOE’s inflation target which remains at 2%
  • the BOE’s guidance won’t hold if the CPI is seen 0.5% over 2% in the next 18-24 months the guidance won’t hold if the BOE’s council sees a financial stability threat
  • Carney refrained from overlooking the BOE’s inflation mandate and reiterated the bank’s commitment to price stability
  • Carney said that a prolonged period of low rates has stability risks, and added that the UK economy will undoubtedly face shocks in the future which further detracted from the credibility of forward guidance
  • Finally, the BOE forward guidance is not a change in the bank’s reaction function Carney clarified.

The combination of all these “credibility-questioning” clauses promptly unwound the initial currency weakness, and promptly sent the GBPUSD soaring over 200 pips in the opposite direction as some saw Carney’s remarks as far less of a “commitment” than previously expected.

image

Are inflation figures in the UK representative?

Inflation is defined as the rate at which the general level of prices for goods and services, increases over time. For example, if the inflation rate is 3%, then a £1’s worth of midget gems will cost £1.03 next year.

The CPI or Customer Price Index is the official measure of inflation of consumer prices of the United Kingdom. It can also be referred to as the Harmonised Index of Consumer Prices (HICP). The CPI calculates the average price increase as a percentage for a basket of 600 different goods and services. Around the middle of each month it collects information on prices of these commodities from 120,000 different retailing outlets.

Now bare with me, although it all sounds quite boring it gets interesting if you look at history. The basket of goods that they use to calculate CPI, or what was the RPI or RPIX changes over time and goods are added or removed. This can be done if goods are no longer relevant but it can also be done to replace items that are rising in price. They are then replaced for alternate and cheaper goods. This then impacts on the inflation figure keeping it lower than what it is. I’m not saying it happens on all products but from a political stand point, keeping inflation low is a priority.

Consider the below chart, the inflation figure is derived from the BLS (Bureau of Labour Statistics). How inflation is calculated was changed in the early 80’s and again in the 90’s with the change to the RPIX. The blue chart is how inflation is calculated now and the grey chart is how inflation would be calculated with pre 82 measurements. 9% inflation sounds about right.

image

Is the inflation figure reported properly? In my opinion, no it isn’t. The costs of many essential purchases have risen much more steeply than what is reported. In the last 5 years, vehicle tax and insurance has gone up 88%, petrol 56%, electricity and gas 46%, bus and rail fares 32%, food 30% and water 24%. These are not discretionary items but costs you have to pay to just survive. These rises cannot be ignored and need to be represented in actual inflation figures, civil servants need to be doing a better job and held to account, rather than worrying about opinion polls.

I can see the direct impact of inflation in my life, instead of finding crisp notes in my pocket I’m just jingling change these days. Though one thing to consider, it is not a wedge of notes that makes me happy, but its my friends and family that make me richer than any paper billionaire.