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Page added on February 4, 2015
Central Banks Fear Deflation, But You Should Not
The European Central Bank (ECB) is planning to pump 1.1 trillion euros into the banking system to fend off price deflation and revive economic activity.
The ECB president and his executive board are planning to spend 60 billion euros per month from March 2015 to September 2016.
Most experts hold that the ECB must start acting aggressively against the danger of deflation. The yearly rate of growth of the consumer price index (CPI) fell to minus 0.2 percent in December 2014 from 0.3 percent in November, and 0.8 percent in December 2013.
Many commentators are of the view that the ECB should initiate an aggressive phase of monetary pumping along the lines of the US central bank. Moreover the balance sheet of the ECB has in fact been shrinking. The yearly rate of growth of the ECB balance sheet stood at minus 2.1 percent in January against minus 8.5 percent in December. Note that in January last year the yearly rate of growth stood at minus 24.4 percent.
The Fear: People Might Save Instead of Spend
Why is a declining rate of inflation bad for economic growth? According to the popular way of thinking, declining price inflation sets in motion declining inflation expectations. This, in turn, is likely to cause consumers to postpone their buying at present and that in turn is likely to undermine the pace of economic growth.
But, in fact, in order to maintain their lives and well-being, individuals must buy present goods and services. So from this perspective a fall in prices as such is not going to curtail consumer outlays. Furthermore, a fall in the growth momentum of prices is always good for the economy.
A Fall in Prices Can Mean an Expansion of Real Wealth
For example, an expansion of real wealth for a given stock of money is going to manifest in a decline in prices (remember a price is the amount of money per unit of real stuff), so why should this be regarded as bad for the economy?
After all, what we have here is an expansion of real wealth. A fall in prices implies a rise in the purchasing power of money, and this in turn means that many more individuals can now benefit from the expansion in real wealth.
What If Prices Fall As a Result of a Bust?
Now, if we observe a decline in prices on account of an economic bust, which eliminates various non-productive bubble activities, why is this bad for the economy?
The liquidation of non-productive bubble activities — which is associated with a decline in the growth momentum of prices of various goods previously supported by non-productive activities — is good news for wealth generation.
The liquidation of bubble activities implies that less real wealth is going to be diverted to malinvestments from wealth generators. Consequently, this will enable investors to lift the pace of wealth generation. (With more wealth at their disposal they will be able to generate more wealth.)
So, as one can see, a fall in price momentum is always good news for the economy since it reflects an expansion or a potential expansion in real wealth.
Hence, a policy aimed at reversing a fall in the growth momentum of prices is going to undermine — not strengthen — economic growth.
We hold that the various government measures of economic activity reflect monetary pumping and have nothing to do with true economic growth.
An increase in monetary pumping may set in motion a stronger pace of growth in an economic measure such as gross domestic product. This stronger growth, however, should be regarded as a strengthening in the pace of economic impoverishment.
It is not possible to produce genuine economic growth by means of monetary pumping and an artificial lowering of interest rates. If this could have been done, world poverty would have been erased by now.
34 Comments on "Central Banks Fear Deflation, But You Should Not"
Makati1 on Wed, 4th Feb 2015 7:38 pm
The crash will be painful no matter what you call it. ‘Deflation’ will take down the capitalist system. THAT is a good thing.
Plantagenet on Wed, 4th Feb 2015 7:45 pm
Deflation is good for the average worker, but bad for the corporate bosses.
Inflation is good for corporate bosses, but bad for the average worker.
Which one do you think the banks are working to create?
Speculawyer on Wed, 4th Feb 2015 7:52 pm
Uh . . . everyone should fear deflation to some degree. Where you work sells some product or service, right? What would happen if all your customers decided to stop buying that product/service because they know it will be cheaper next month. And the next month they don’t buy because they know it will be cheaper the month after that. You then enter a death spiral of economic meltdown.
GregT on Wed, 4th Feb 2015 7:54 pm
“Deflation is good for the average worker, but bad for the corporate bosses.”
Geez Plant, could that be the same corporate bosses that employ the average worker? Or the banking and financial systems that are the backbone of our economy, that also employs the workers?
Don’t get me wrong, Makati is correct in his comment above. Taking down the system IS a good thing. It is the only hope for future human survival, but once again you aren’t looking at the big picture. Everything is not as simple as you believe it to be.
Davy on Wed, 4th Feb 2015 8:19 pm
It is a chicken soup of inflationary trends in a deflationary debt soaked global financial system. Since we are in effect in a duel world of real and digital it depends on where you roost. If you are a ground deweller you are afraid to call the plumber to fix a toilet. Thoughts of college for the kids brings tears to the eyes. That steak at your Valentine’s dinner is ruined because thoughts of how nasty the check will be.
If you roost up high then you worry about a bubble that just can’t seem to stay inflated. You make several attempts and the effort always fails. The real economy just can’t shift gears. What is worse is all the damage that is being done by enrichment of the wealthy at the expense of the many. You know it is a moral hazard but it is the only game you know.
Folks deflation leads to hyperinflation when confidence is lost. Confidence never survives severe deflation. Confidence is not compatible with bankruptcy and unemployment on steroids that my friends is where a deflated Ponzi Scheme ends up.
The time frame is the issue. This may not play out for a few years. The system has changed it is not a free market with normal price discovery. It is a hybrid market in a hybrid economy. It is real and digital and rich and poor. This is an economy of extremes and definitely unhealthy. That is why there are planter’s oil gluts. Destroyed demand coupled with malinvestment driven oil production.
In the mean time BAU is burning but the fires are small and scattered. There is nothing except maybe water that is more dangerous if left to its own devices. An economy without fundamentals is an economy on fire. We are going to see lots of smoke soon.
GregT on Wed, 4th Feb 2015 9:35 pm
Very good post Davy.
thingy on Thu, 5th Feb 2015 2:06 am
deflation isnt good for the average worker, it costs jobs.
mises.org, loons….
Steve O on Thu, 5th Feb 2015 8:08 am
Deflation should be good for the average person. But the reality is that the average person has a huge debt load that they will have to make payments on with dollars that were harder to earn. Remember, deflationary periods typically come with deflated incomes too.
If you’re one of the few, the proud, the debt free, then deflation is a great thing, your saved dollars go a lot farther.
paulo1 on Thu, 5th Feb 2015 8:13 am
Deflation is just fine if you saved and have no debts. I realize and accept the complexities in the system, however, it is an elixir for those that live simply and within one’s means…until others crash it down.
The simple truth: we have too much crap for sale and too many folks chasing their tails trying to buy that crap. In Canada, Target just closed. The Canadian version was a shitty store. No reason to buy/shop there. No reason for it to exist. I walked in a couple of times and saw skimpy shelves that never had what I was looking for, and employees trying to look useful with no one to help. Good riddance.
re Thingy comment: “deflation isnt good for the average worker, it costs jobs.”
True, you just can’t be an average worker can you? I suppose over time we will have more Govt stipends to keep the population quiet. Maybe there will be free I-phones, game consoles, tvs, and drugs. When you think about it, the economy we push to be so all important really provides a great deal of unnecessary stuff for a lot of bored people. Maybe it’s time to accept it is unrealistic.
Davy on Thu, 5th Feb 2015 8:36 am
Steve/Paulo, having debt in a deflationary economic environment is not bad if you have a proper fixed income return to a fixed debt cost. For example if you have a guaranteed fixed rate of return on a secure asset there to cover a similar or lower rate fixed debt service then it does not matter what happens inflation or deflation if that income and debt has a worth that will not change per a changing economy.
If for example you have a house that is home and you have an income from a secure investment to support that then forget about the good or bad of the opportunity cost of that debt and income. Just live and let the two do what they were intended to do. Many times people want to price the debt or investment and they sell one or pay off the other only to find they disrupted a secure relationship. If it works don’t mess with it. Leave a sleeping dog sleep.
It is like I advise on gold from a prep perspective. Buy it and don’t price it. It has a value and usefulness to you in and of itself. You should not treat it as an investment. It is a prep tool for collapse and a thing of beauty.
Forget the BAU mentality and embrace the bumpy descent reality. Preparations for descent place traditional BAU thinking into a subset. BAU thinking is a subset of the higher descent thinking because you still need BAU to transition out of BAU. Since this is the case BAU thinking cannot be rejected or thrown out with the bathwater.
Pops on Thu, 5th Feb 2015 9:28 am
“After all, what we have here is an expansion of real wealth. ”
No. Deflation is the loss of real wealth – the value of actual things – and the increase in the relative value of money.
All well and good if you have more money than things, otherwise not so much.
ghung on Thu, 5th Feb 2015 9:36 am
Deflalation is, ultimately, the realization that the number of claims on energy in the system have exceeded the actual amount of energy flowing through the system (see Greer’s latest, above). There are a lot of dollars (or whatever) in the system that have no future in terms of doing real work. Contraction, in various forms, must occur. Pretending that a certain amount of oil is worth an increasing amount of money doesn’t increase the amount of work that oil can do. It can only work until markets figure that out. $60 dollars worth of fuel didn’t take me any farther than $40 does. Duh….
It’s called price discovery. Pretending that something is worth more than it actually is, in terms of its ability to do work, doesn’t make it so. People eventually make other arrangements.
BC on Thu, 5th Feb 2015 11:10 am
ghung, right.
Currently, US annual net flows to the financial sector equal, or periodically exceed, total annual GDP output.
Also, imputed compounding interest to total credit market debt outstanding to average term now exceeds 100% of GDP effectively in perpetuity.
IOW, all US labor product, profits, and gov’t receipts are pledged to the financial sector, including the top 0.001-0.1% to 1% who own a disproportionate share of assets and claims to flows therefrom.
Also, speaking of oil denominated in (debt-)”money”, if one adjusts US oil production for the growth of M2, the value of US oil production adjusted for the growth of money supply is at the same level as it was 45-50 years ago. If one were to adjust it further for the imputed compounding interest costs of the debt-money supply hereafter, the value is at the level of the 1930s.
No surprise then why US real wages have not grown in a half-century.
Finally, health care, education, financial services, and gov’t are now a prohibitive net cost to the private economy and by extension to the objectives of civil society.
We can’t afford the necessary growth of supply of embedded net energy per capita to support the bloated non-productive sector and the debt service to the outstanding debt-money obligations, let alone permit growing real GDP per capita hereafter.
marmico on Thu, 5th Feb 2015 11:18 am
No surprise then why US real wages have not grown in a half-century.
That’s a function of your deflator (“debt money”), isn’t it?
Ya, a smartphone is a claim on petroleum. Bull shit!
ghung on Thu, 5th Feb 2015 11:29 am
Marm: “Ya, a smartphone is a claim on petroleum. Bull shit!”
It certainly was, as it was being produced. And future smartphones are claims on a declining resource, claims you choose to not acknowledge. Nevertheless, when you buy Apple stock, you are staking a claim on future production requiring petroleum. If that production declines or doesn’t occur, those claims go POOF!
Davy on Thu, 5th Feb 2015 11:33 am
Marm, a free lunch is wonderful but generally not reality. Reality is telling us non productive liabilities can no longer be generated though out the broader economy without consequences. The extend and pretend account is maxed out. Are you telling me debt is not an issues of serious concern?
marmico on Thu, 5th Feb 2015 11:46 am
Fifty years ago Jobs was having wet dreams about smartphones. Fifty years hence, you can’t imagine who is having a wet dream about what. But be sure to crawl under your covers tonight with your photovoltaics to keep the lights on to study the mantra for your next attendance at the Church of Peak Oil Apocalypse.
POOF!
GregT on Thu, 5th Feb 2015 11:53 am
“Ya, a smartphone is a claim on petroleum. Bull shit!”
Thats right marm, contrary to popular belief, cellphones are actually manufactured by lost tribes in the Amazon with nothing more than sticks and stones and animal carcasses. They are floated down the river where they are collected by Santa’s little elves, and are distributed via sleigh utilizing magic reindeer power. When you talk to someone via your organic cellular device, it is actually tapping into the ether, using the powers of positive thinking.
ghung on Thu, 5th Feb 2015 11:54 am
In other words, Marm, you can’t offer a coherent response. Try using a smartphone for long without making any claims on petroleum. Producing, purchasing and using a smartphone IS a claim on oil production; no way you can spin that away.
marmico on Thu, 5th Feb 2015 12:00 pm
Marm, a free lunch is wonderful but generally not reality
TANSTAAFL. What’s your point?
Driverless UBER/Lyft vehicles in 10 years where some urban persons have no capital costs (the obverse is depreciation) in exchange for higher operating costs (the “fare”) for personal transport.
Debt (Credit) is not a particular issue for American households or nonfinancial business. Why do you ask?
GregT on Thu, 5th Feb 2015 12:06 pm
“TANSTAAFL.”
“Driverless UBER/Lyft vehicles in 10 years where some urban persons have no capital costs (the obverse is depreciation) in exchange for higher operating costs (the “fare”) for personal transport.”
In other words, Marm, you can’t offer a coherent response.
marmico on Thu, 5th Feb 2015 12:55 pm
Try using a smartphone for long without making any claims on petroleum.
Crawl under your covers. Smartphones have reduced the claim on petroleum.
New wet dreams will reduce it further.
MSN Fanboy on Thu, 5th Feb 2015 1:05 pm
What are you talking about Marmico?
GregT on Thu, 5th Feb 2015 1:09 pm
“Smartphones have reduced the claim on petroleum.”
Another amazingly incoherent response. Whether they have reduced the claim on petroleum or not, isn’t the point.
They still make claims on petroleum.
And marm, it is you that has crawled under the covers. You are ignoring reality. All of the comforting covers in the world, will not make reality go away.
marmico on Thu, 5th Feb 2015 1:27 pm
What are you talking about Marmico?
Petroleum intensity. Have another wet dream!
ghung on Thu, 5th Feb 2015 3:11 pm
Marmico’s claim that smartphones aren’t claims on petroleum was wrong. Smartphones wouldn’t exist without petroleum, and would be useless without petroleum.
Marm’s claim that smartphones “reduce the claim on petroleum” use is wrong. Petroleum use has increased since smartphones came into use. Whether or not there’s a cause and effect there doesn’t matter. Claims haven’t been reduced.
I didn’t even have to come out from under the covers to figure this out.
30 years ago Catton had marmico figured out; knew he was wrong before he was, what? Out of diapers? What’s next, marm? Fusion-powered baby poop disintegrators that reduce petroleum consumption?
GregT on Thu, 5th Feb 2015 3:15 pm
from marms “reduced the claim” on petroleum link above:
The Smartphone Has Effectively Replaced All The Technology Offered In This 1991 Radio Shack Ad
Sure, it was simpler time in 1991, muses Steve Cichon on TrendingBuffalo.com. But technology was a lot more complicated: Back then you’d have to shell out $3,054.82 for the 15 items on this ad from the Feb. 16, 1991 edition of The Buffalo News.
As Cichon points out, out of the 15 items for sale, here’s the sum total of what his iPhone has rendered obsolete: (and my comments)
All weather personal stereo, $11.88. ( I personally own 2, one in the RV and one on the boat)
AM/FM clock radio, $13.88. ( I have 3, one in each bedroom)
In-Ear Stereo Phones, $7.88. ( I can find 6 sets in the house, I know there are more somewhere)
Microthin calculator, ( 4)
Tandy 1000 TL/3, $1599. ( 1 iMac, 1 Mac Mini, 1MacBook pro, 1 Macbook Air, 1 Windows based PC, 1 Laptop, and 2 iPads)
VHS Camcorder, $799. ( 1 Sony digital camcorder)
Mobile Cellular Telephone, $199. ( 3 iPhones, 1 myself, 1 wife, 1 son)
Mobile CB, $49.95. ( SSB CB in RV, 2 sets of FMRS Radios for skiing, fishing, camping)
20-Memory Speed-Dial phone, $29.95. (4 cordless home phones with memory speed dial)
Deluxe Portable CD Player, $159.95. (Bose Soundlink)
10-Channel Desktop Scanner, $99.55. (handheld and base units for listening to local air traffic, belong to aviation community)
Easiest-to-Use Phone Answerer, $49.95. (we all use telephone provider, including home phone)
Handheld Cassette Tape Recorder, $29.95. (never had a use for one)
Davy on Thu, 5th Feb 2015 3:23 pm
Marm, could you be a product of a wet dream? That may be a scientific first. That may put you on Opra’s show no, in your case Charlie Rose
marmico on Thu, 5th Feb 2015 4:45 pm
Marm, could you be a product of a wet dream?
Could be Davy-boy. The thought of my immaculate conception coming from a tithing high priest of the Church of Latter Day Peak Oil Apocalypse Saints is quite entertaining. 🙂
James Tipper on Thu, 5th Feb 2015 5:35 pm
Speculawyer says, “Uh . . . everyone should fear deflation to some degree. Where you work sells some product or service, right? What would happen if all your customers decided to stop buying that product/service because they know it will be cheaper next month. And the next month they don’t buy because they know it will be cheaper the month after that. You then enter a death spiral of economic meltdown.”
What would happen if all customers stopped buying because they think it will be cheaper next month? In what world? I mean is the opposite true, do people rack up tons in debt buying shit because they think inflation will be worse later? Perhaps. But really it’s because they are piss poor money managers who always tend to live above their means.
The idea people won’t buy the things they want or need because of deflation is absurd. If I need a new phone, I’m not going to wait on the off-chance it’ll be 2% cheaper next month, I don’t care. I want it now. It’s not like you’ll consume less essential goods, you need food, water, shelter, and yes oil. Are people stockpiling shit tons of oil to offset when it will be expensive? Not really. Except for a few oil companies perhaps.
The “oh so feared” deflationary death spiral is a myth created by Keynesians. It’s not like any person making less than $250,000 million a year is going, “Oh God, I’m paying less for the things I want and need, the horror.” Such bullcrap. But now I know what every Keynesian from here to the UK is thinking, “But if prices fall, won’t my wages fall with it?” The better question is who cares?
Keynesians push so aggressively for inflationary policy they forget that inflation is rising much faster than wages. It’s been that way for decades but the government CPI says otherwise. Guess what? The government CPI is bullshit too and underestimates inflation figure by my accounts 2-4% annually, screwing over millions. Why? Makes the country look better, easier to deal with debt, and because they want it. Similarly if prices fall, wages won’t fall immediately, just as prices rise, wages don’t rise immediately. Understand now?
Davy on Thu, 5th Feb 2015 6:38 pm
Jimmy, deflation and excessive debt don’t mix. That is our global predicament on the macro side of the equation. We are in a debt trap of no exit with our primary energy source suffering negative POD ETP symptoms. This is the end game of BAU. The only question is time frame and what will be the reboot arrangement post collapse.
James Tipper on Thu, 5th Feb 2015 7:06 pm
Davy, That is partially true but it is part of what I’m saying that the excessive gov’t debt is one of the main driver for them wanting inflation. Of course I’m not a conspiracy-minded person but obviously there’s a connection between debt and limited energy resources. Look at Japan, twice as much debt per gdp ratio, why? Because they have huge social spending and extremely limited energy resources.
The rearrangement is obviously anyone’s game but I think that a huge spike in oil prices(either down to like 10 bucks or back up to 150 dollars) while implode the system for the last time. Just my thoughts.
Ralph on Fri, 6th Feb 2015 7:41 am
I have lost my job.
I have no debt.
I have savings (cash) and property (from which I derive income as rent).
I have a garden, and I am learning to grow food.
I have a family to feed and heat and clothe and educate and entertain.
I have a pension plan but it is joke. I have a property ( see above) which is why I can laugh at it.
I am saying goodbye to (being dependent on) the digital world.
I am decreasing complexity. I am reducing energy consumption. I reuse and recycle the detritus of my neighbours. I look forward to deflation.
I have time for myself for the first time in decades.
I am happy.
Davy on Fri, 6th Feb 2015 9:01 am
Awesome story Ralph. Good luck