World Bank Warns Of Deflation Spiral

[interestrateripoff]

http://www.telegraph.co.uk/finance/finance...ion-spiral.html

Justin Lin, the bank’s chief economist, said factories running idle around world threaten to trap economies in a vicious cycle, risking further spasms of financial stress, requiring yet more rescue packages.

"Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted," he told an audience in Cape Town.

Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and as low as 50pc in some developing countries, mostly touching lows not seen in modern times.

The traditional cure for countries caught in slumps is to claw their way back to health through devaluation, but this cannot be done today because the crisis is global. "No country can count on currency depreciation and exports as a way out of recession. Unless we deal with excess capacity, it will wreak havoc on all countries. There is urgent need for global, co-ordinated fiscal stimulus," he said.

Investments should be focused on infrastructure in poor countries that are bearing the brunt of the crisis. The downturn is already likely to trap over 50m more people in extreme poverty this year.

Mr Lin said some $30 trillion has been wiped off global stock markets and a further $4 trillion off US house prices, creating powerful deflationary headwinds. While emergency measures have eased the financial crisis, they have not stopped it turning into a deeper "real economy" crisis entailing mass lay-offs.

The comments came as the Bank of Japan agreed to extend its quantitative easing (QE) policies – mostly the purchase of corporate debt – and warned that business investment is "declining sharply". Headline inflation has dropped to minus 1.1pc.

Michael Taylor at Lombard Street Research said Japan has been too timid, repeating the error of its Lost Decade when it failed to carry out QE on a sufficient scale.

"Japan is already back in deflation, and it is here to stay. This year the economy will shrink by around 7pc, dramatically increasing the output gap and intensifying deflationary pressures. Cash earnings are down 3pc in the last year,"

The Bank of Japan downgraded its growth forecast, predicting that the economy will contract 3.4pc in the fiscal year to next March. This follows a catastrophic fall in output at a 14.2pc an annual rate in the first quarter, the worst ever recorded.

While industrial output has bounced over the summer, there are concerns that it may have been flattered by an "inventory rebound" as companies rebuild stocks.

Eurostat confirmed on Wednesday that the eurozone has slipped into deflation. Prices fell 0.1pc in June.

But what about the recovery?

The entire global is teetering on the brink, debt deflation is looming we appear to be a long way off recovery unless debt really is wealth.

[Wait & See]

Sold out most of my stock portfolio yesterday taking a decent profit. Still hold a few long termers, but for the most part, everyone now seems to be, again, hording cash.

[aa3]

Looks like the official economists are finally starting to see what I was talking about a year ago. ALL major countries must do massive, massive stimulus. Japan and others have been far too timid as they said in the article.

The huge capacity gap shows we don't have to worry about inflation anytime soon. If the policy makers are smart they will do massive stimulus until the capacity factor reaches historic high percentages.. then we have to worry about inflation. But right now that is a long, long way off. Also realize with powerful demand growth, capacity can be added very quickly nowadays.

Of course the ultimate solution I support is all the major nations doing QE, funding national dividends. If Japan was willing to QE in $1.5 trillion worth, or ~30% of its economy.. and spread it to its people, it would be lifted out of depression.

Otoh one of the big things holding nations back is such stimulus to average people would change the nature of their class societies, so there is much resistance all throughout society of this plan.

[Realistbear]

http://uk.biz.yahoo.com/16072009/323/frenc...t-negative.html

Thursday July 16, 08:19 AM

French inflation goes 0.5-pct negative

PARIS (AFP) - French consumer prices over 12 months fell by 0.5 percent in June, official data has shown, marking a deflationary step for the second month running

The warning is too little too late. The toothpastes is being sucked back into the tube by the negative forces of Brown's financial black hole.

[aa3]

This is the level of QE stimulus I now recommend: EU: $5 trillion worth, US, $4.5 trillion worth, Japan $1.5 trillion, Canada $200 billion, Australia $150 billion, China $1.5 trillion worth(which it has mainly done), UK $550 billion.

It has to be broadly spread to the populus in each nation. The total of my recommendation: $13.4 trillion.

[dr ray]

The more I read the more convinced I become that no one knows what they are talking about.

Look at this comment from the article:

Unless we deal with excess capacity, it will wreak havoc on all countries. There is urgent need for global, co-ordinated fiscal stimulus," he said.

They are dealing with excess capacity by keeping it going with fiscal stimulus - look at the car manufacturers who should have been allowed to fail and reduce capacity. The line above is a contradiction

While I tend towards the Von Mises school in this I was amused to read an article predicting massive inflation due to QE and bailouts with an ordinary egg costing hundreds of dollars before long.

The article was spoilt by an ad for a Von Mises book for $17 now $14

Edited July 16, 2009 by dr ray

[mdman]

Looks like the official economists are finally starting to see what I was talking about a year ago. ALL major countries must do massive, massive stimulus. Japan and others have been far too timid as they said in the article.

The huge capacity gap shows we don't have to worry about inflation anytime soon. If the policy makers are smart they will do massive stimulus until the capacity factor reaches historic high percentages.. then we have to worry about inflation. But right now that is a long, long way off. Also realize with powerful demand growth, capacity can be added very quickly nowadays.

Of course the ultimate solution I support is all the major nations doing QE, funding national dividends. If Japan was willing to QE in $1.5 trillion worth, or ~30% of its economy.. and spread it to its people, it would be lifted out of depression.

Otoh one of the big things holding nations back is such stimulus to average people would change the nature of their class societies, so there is much resistance all throughout society of this plan.

What a great plan. 'cos when you print money, you're creating new wealth and capital. Genius

[aa3]

The more I read the more convinced I become that no one knows what they are talking about.

Look at this comment from the article:

They are dealing with excess capacity by keeping it going with fiscal stimulus - look at the car manufacturers who should have been allowed to fail and reduce capacity. The line above is a contradiction

While I tend towards the Von Mises school in this I was amused to read an article predicting massive inflation due to QE and bailouts with an ordinary egg costing hundreds of dollars before long.

The article was spoilt by an ad for a Von Mises book for $17 now $14

[Realistbear]

With the vast majority of pensions being eroded or collapsing altogether there is little prospect of rising prices for the next generation or so. The wealth that is spent by the 60+ year olds will simply not be there.

http://business.timesonline.co.uk/tol/busi...icle6715521.ece

American Express, the global financial services company, has effectively cut the pay of its 6,000 UK staff by stopping payments to its stakeholder pension scheme.

It is the largest company to take such action and pensions experts fear that the decision could trigger a series of copycat announcements.

Prices will simply have to fall in line with the ability of people to pay. That is why house prices have another 30% or so to fall.

[azogar]

this is (and always has been) a currency crisis

watch the US take the lead over the next few months as the dollar re-approaches last summers lows, followed by another bout of equity market sell-offs, forcing everyone back to the pseudo safe-haven of the dollar.

Rinse and repeat until this horse is flogged to death, whilst food and oil slowly rise.

look at oil again, hit's 70$pb, then the threat of deflation causes a sell-off and goes below $60pb only to hit an invisible floor and start slowly rising again.

when everyone screams inflation, be scared of deflation and vice-versa.

This is a currency crisis on a worldwide scale and you have a ringside seat

[Realistbear]

With the vast majority of pensions being eroded or collapsing altogether there is little prospect of rising prices for the next generation or so. The wealth that is spent by the 60+ year olds will simply not be there.

http://business.timesonline.co.uk/tol/busi...icle6715521.ece

American Express, the global financial services company, has effectively cut the pay of its 6,000 UK staff by stopping payments to its stakeholder pension scheme.

It is the largest company to take such action and pensions experts fear that the decision could trigger a series of copycat announcements.

Prices will simply have to fall in line with the ability of people to pay. That is why house prices have another 30% or so to fall.

______________________

HPC.co is very slow and "sticky" today--too many people logged onto the website? They need to buy some "super-servers."

[Wait & See]

With the vast majority of pensions being eroded or collapsing altogether there is little prospect of rising prices for the next generation or so. The wealth that is spent by the 60+ year olds will simply not be there.

http://business.timesonline.co.uk/tol/busi...icle6715521.ece

American Express, the global financial services company, has effectively cut the pay of its 6,000 UK staff by stopping payments to its stakeholder pension scheme.

It is the largest company to take such action and pensions experts fear that the decision could trigger a series of copycat announcements.

Prices will simply have to fall in line with the ability of people to pay. That is why house prices have another 30% or so to fall.

______________________

HPC.co is very slow and "sticky" today--too many people logged onto the website? They need to buy some "super-servers."

Maybe HPC.co.uk are paying down debt.

[Injin]

Looks like the official economists are finally starting to see what I was talking about a year ago. ALL major countries must do massive, massive stimulus. Japan and others have been far too timid as they said in the article.

The huge capacity gap shows we don't have to worry about inflation anytime soon. If the policy makers are smart they will do massive stimulus until the capacity factor reaches historic high percentages.. then we have to worry about inflation. But right now that is a long, long way off. Also realize with powerful demand growth, capacity can be added very quickly nowadays.

Of course the ultimate solution I support is all the major nations doing QE, funding national dividends. If Japan was willing to QE in $1.5 trillion worth, or ~30% of its economy.. and spread it to its people, it would be lifted out of depression.

Otoh one of the big things holding nations back is such stimulus to average people would change the nature of their class societies, so there is much resistance all throughout society of this plan.

Interesting.

Wiould you like to make a moral case for stealing from me and my family as well?

[Timm]

With the vast majority of pensions being eroded or collapsing altogether there is little prospect of rising prices for the next generation or so. The wealth that is spent by the 60+ year olds will simply not be there...

I think the current natural state is deflation, for many reasons. The above is just one reason. The response is and will be inflationary.

The question is what the sum effect of these opposing forces will be. Personally, I don't think they will have the stomach to print enough until enough people discover that deflation means the destruction of money. By people I mean the public. By discover I mean finding that money they thought they had, they don't.

[dr ray]

With the vast majority of pensions being eroded or collapsing altogether there is little prospect of rising prices for the next generation or so. The wealth that is spent by the 60+ year olds will simply not be there.

http://business.timesonline.co.uk/tol/busi...icle6715521.ece

American Express, the global financial services company, has effectively cut the pay of its 6,000 UK staff by stopping payments to its stakeholder pension scheme.

It is the largest company to take such action and pensions experts fear that the decision could trigger a series of copycat announcements.

Prices will simply have to fall in line with the ability of people to pay. That is why house prices have another 30% or so to fall.

Is it not more likely that nominal prices will rise but as people become poorer they will not be able to afford stuff.

In Zimbabwe I bet you could buy a house for a few hundred US $ but there isn't a mad rush of people buyng because for the local population the price is unaffordable.

I think this is our future. We will all live in a £100,000,000 flat or house but won't be able to keep it heated and our savings will be worthless.

[azogar]

meanwhile back at globalcentral HQ...........

PARIS, June 22 (Reuters) - An increase in exports is needed for a sustained recovery in the United States and this may require an adjustment in the value of the U.S. dollar, IMF chief economist Olivier Blanchard said on Monday.

"For the US, it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar," he told a conference.

http://www.iii.co.uk/news/?type=afxnews&am...;action=article

[Realistbear]

meanwhile back at globalcentral HQ...........

PARIS, June 22 (Reuters) - An increase in exports is needed for a sustained recovery in the United States and this may require an adjustment in the value of the U.S. dollar, IMF chief economist Olivier Blanchard said on Monday.

"For the US, it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar," he told a conference.

http://www.iii.co.uk/news/?type=afxnews&am...;action=article

Cheap dollar=even less demand from the US=further deflationary pressure.

[azogar]

Cheap dollar=even less demand from the US=further deflationary pressure.

well you take the blue pill and you get high inflation, you take the red pill and you get mass defaults, lay-offs, bankruptcies and ultimately currency devaluation (i.e US 1930's)

what's in your wallet?

[interestrateripoff]

Good find interestrateripoff but you managed not to highlight the most important point:

"Unless we deal with excess capacity, it will wreak havoc on all countries."

I'd highlighted the other bit about "Significant excess capacity" rather than purely excess capacity.

I agree it's the most important point because the excess capacity is the catch 22. Reduce the excess you have massive job losses. Trying to increase demand via stimulus creates a unsustainable recovery.

Too much is being produced and we need a correction. Unfortunately this means job losses, they system is on the brink.

[aa3]

Good find interestrateripoff but you managed not to highlight the most important point:

"Unless we deal with excess capacity, it will wreak havoc on all countries."

People like to think of this episode as a monetary phenomenon but it's not. The monetary phenomenon is the symptom. Money flows in the international system as it does in any market - according to opinion. When that opinion became the West has borrowed too much and looks like it may default, it led to a run by creditor countries from mortgage backed bonds.

No - the massive extra supply of cheap labour working efficiently has led to massive deflationary pressures which we've not even scratched the surface of. And note, there are 2 parts to that sentence: 'cheap labour' and 'working efficiently'. If a man in China can produce far more than he can consume god help the rest of us.

Very good post.. its part of the reason I am such a committed deflationist. I've read of apartments in outlying Chinese cities.. 1 month's rent: £15. So .50 an hour is pretty good money. A lot of Brits would be very happy if one week's work let them pay the rent. The Chinese are also becoming uber efficient as you mentioned with all their engineers in charge of everything, in addition to such low wages. And the engineers have led the building of mass infrastructure to make the whole system efficient, like electrical power, rail, ports.

How can there not be endless arbitrage in a free market.. until the developed world harmonizes with China? And imo that means massive deflation in western nations especially things like rent.

[Captain Cavey]

Very good post.. its part of the reason I am such a committed deflationist. I've read of apartments in outlying Chinese cities.. 1 month's rent: £15. So .50 an hour is pretty good money. A lot of Brits would be very happy if one week's work let them pay the rent. The Chinese are also becoming uber efficient as you mentioned with all their engineers in charge of everything, in addition to such low wages. And the engineers have led the building of mass infrastructure to make the whole system efficient, like electrical power, rail, ports.

How can there not be endless arbitrage in a free market.. until the developed world harmonizes with China? And imo that means massive deflation in western nations especially things like rent.

Yes – I seem to recall that the vast majority of the Chinese politburo are engineering or scientist graduates – hence the approval and huge investment in infrastructure & power developments.

Somewhat different training & practical experience to our lot I should imagine.

[Doom Lord]

Looks like the official economists are finally starting to see what I was talking about a year ago. ALL major countries must do massive, massive stimulus. Japan and others have been far too timid as they said in the article.

The huge capacity gap shows we don't have to worry about inflation anytime soon. If the policy makers are smart they will do massive stimulus until the capacity factor reaches historic high percentages.. then we have to worry about inflation. But right now that is a long, long way off. Also realize with powerful demand growth, capacity can be added very quickly nowadays.

Of course the ultimate solution I support is all the major nations doing QE, funding national dividends. If Japan was willing to QE in $1.5 trillion worth, or ~30% of its economy.. and spread it to its people, it would be lifted out of depression.

Otoh one of the big things holding nations back is such stimulus to average people would change the nature of their class societies, so there is much resistance all throughout society of this plan.

Interesting. Here is another way of looking at this statement: "Give us our money back you thieving W**K**S.".

[aa3]

Yes – I seem to recall that the vast majority of the Chinese politburo are engineering or scientist graduates – hence the approval and huge investment in infrastructure & power developments.

Somewhat different training & practical experience to our lot I should imagine.

I remember checking once and 7 of their 8 top leaders held engineering degrees.

Its incredible what engineers can do when they get in charge. Just on another thread it said all the mining, energy and water employment in the UK is just 197,000 - and I know these sectors are ran by engineers. Yet with 1% of the workforce they provide us with clean water to taps in our house, energy to our house available all of the time, and oh ya mine a bunch of stuff too.

[Injin]

I remember checking once and 7 of their 8 top leaders held engineering degrees.

Its incredible what engineers can do when they get in charge. Just on another thread it said all the mining, energy and water employment in the UK is just 197,000 - and I know these sectors are ran by engineers. Yet with 1% of the workforce they provide us with clean water to taps in our house, energy to our house available all of the time, and oh ya mine a bunch of stuff too.

Yes.

There is no engineer on earth who can steal from everyone and hand it to incompetents and criminals and have it have a good effect.

[crashologist]

well you take the blue pill and you get high inflation, you take the red pill and you get mass defaults, lay-offs, bankruptcies and ultimately currency devaluation (i.e US 1930's)

what's in your wallet?

Yes this is the dichotomy we face. High inflation will inflate away people's debt. I think we are starting to see this in terms of food price rises but it will be difficult for the BOE to raise interest rates as this will result in, as you say, mass defaults. I think we will see a lot of volatility between different currencies. Perhaps if the UK suffers from high inflation soon it will be 1-1 with the euro and the pound.