Bi-Flation

[daedalus]

So now we see what the outcome will be for the Eurozone (and probably for the UK in the future)...

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Biflation

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What is biflation?

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Biflation is when money supply is broadly flat, but this is achieved by:

i) inflation in prices of labour and goods (i.e. goods and services)

ii) deflation in value of real estate and financial assets (and anything else typically bought on borrowed money)

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Why will biflation happen?

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Eurozone banks are, more or less, bust, and Eurozone countries have essentially run out of money to prop them up. So the Eurozone banks will have to reduce lending dramatically, so that there is much less money available to borrow for buying real estate and financial assets. This will lead to house price declines, real estate declines and stock market losses, which in turn will lead to further bank losses, perpetuating the cycle.

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The "state", ECB, EU, etc. will address the problem of sovereign credit weakness resulting from this, and the (misplaced in my view) fear of deflation, but reducing interest rates, and printing money to lend to governments. This will provide governments with more cash to buy goods and services and to pay to employees, and hence the employees will have more cash also for goods and services, which will drive up the cost of goods and services in Euro terms...

BUT...

The Euro will continue to weaken heavily against other currencies on the back of these weaknesses in interest rates, sovereign debt risk, bank failure risk etc. so that the cost on purchasing goods and services from outside the Eurozone in other currencies will increase (in Euro terms).

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So we have:

i. Inflation in import prices for goods and services

ii. Some inflation in internal good and services

iii. Deflation in real estate and financial assets

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This is a nightmare combination for savers. Typical savings investments lose value at exactly the same time prices for day-to-day purchases increase. If I was in the Eurozone I'd be heavily into the shiny yellow stuff right now. Or the Swiss France.

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What about the UK and sterling?

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I don't know. In time, we could be infected by the same biflationary crisis as Europe is now experiencing, but the timing is down to when the bond market gets really spooked about UK sovereign credit risk, and right now, the Eurozone is stage centre for that. I think that we still have Spain, Italy, Portugal and France to go before the UK becomes the centre of attention.

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But perhaps, just, perhaps, once biflation has swept the Eurozone and left carnage in its wake, then it will be be turn of the UK, Japan and the US? Or perhaps mild but sustains, biflation will creep up on us and gradually nibble away and savings and wealth in a non-crisis way? But a second wave of house price declines would surely form part of that, and a double dip in UK house prices would surely be a rout rather than a gradual drop.

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Don't ask me where is a safe place for your money.

Property prices will probably fall.

Day-to-day goods and services prices will probably increase.

Bank accounts will pay minimal interest and expose you to bank failure risk.

Government bonds will drop in value.

Maybe it is best to just spend it!

[matroskin]

So now we see what the outcome will be for the Eurozone (and probably for the UK in the future)...

.

Biflation

.

What is biflation?

.

Biflation is when money supply is broadly flat, but this is achieved by:

i) inflation in prices of labour and goods (i.e. goods and services)

ii) deflation in value of real estate and financial assets (and anything else typically bought on borrowed money)

Not going to happen without mass bailouts, "prevailing wage" laws and with uncontrolled immigration & widespread outsourcing

Why will biflation happen?

.

Eurozone banks are, more or less, bust, and Eurozone countries have essentially run out of money to prop them up. So the Eurozone banks will have to reduce lending dramatically, so that there is much less money available to borrow for buying real estate and financial assets. This will lead to house price declines, real estate declines and stock market losses, which in turn will lead to further bank losses, perpetuating the cycle.

No lending = no growth => mass unemployment (barring bailouts+public works programme+"prevailing wage" laws)

[Bloo Loo]

Not going to happen without mass bailouts, "prevailing wage" laws and with uncontrolled immigration & widespread outsourcing

No lending = no growth => mass unemployment (barring bailouts+public works programme+"prevailing wage" laws)

banks arent lending to business...they are lending to each other....I mean, thats the SAFE thing to do......whats that?, Greece? Spain? Portugal? they lent to THEM?? ah, thats SAFE.

[Constable]

'just can't see significant wage increases happening with the amount of unemployment and competetion for jobs that there is going to be in future.

imported goods will get ever more expensive, agreed.

index-linked savings and trading commodities/miners on the dips is my plan.

[daedalus]

'just can't see significant wage increases happening with the amount of unemployment and competetion for jobs that there is going to be in future.

imported goods will get ever more expensive, agreed.

index-linked savings and trading commodities/miners on the dips is my plan.

Nominal wage increases are quite possible. It's just that they will be eaten by inflation in goods and services.

The public sector unions will strike and scream for wage increases, and in the end the government will succumb to "help fight deflation".

[Constable]

Nominal wage increases are quite possible. It's just that they will be eaten by inflation in goods and services.

The public sector unions will strike and scream for wage increases, and in the end the government will succumb to "help fight deflation".

quite possible, and would have been a done deal under Labour, but hopefully the new govt will have some economic sense and a few principles...

[matroskin]

Nominal wage increases are quite possible. It's just that they will be eaten by inflation in goods and services.

The public sector unions will strike and scream for wage increases, and in the end the government will succumb to "help fight deflation".

"strike and scream" and a bit of petrol bombing did not help (yet) Greek public sector.

It won't help here either. Hellenic Army has conscripts, British Army not. On 1st signs of serious unrest, Army will be deployed on streets a la Belfast 1970-80s.

[Bloo Loo]

Nominal wage increases are quite possible. It's just that they will be eaten by inflation in goods and services.

The public sector unions will strike and scream for wage increases, and in the end the government will succumb to "help fight deflation".

all they need is the money.

[huw]

"strike and scream" and a bit of petrol bombing did not help (yet) Greek public sector.

It won't help here either. Hellenic Army has conscripts, British Army not. On 1st signs of serious unrest, Army will be deployed on streets a la Belfast 1970-80s.

A more important difference: Britain has control of its monetary policy; Greece does not.

Soldiers deployed to keep order among ordinary citizens on mainland streets would by politically catastrophic IMO, I'm not sure that a government would be able to continue much beyond having done that (though I accept that it depends on the political structures and sentiments of the time, which might be quite different from today's).