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The Deflationary Spiral Bogey


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There is no deflation. You just have to know where to look, and at the moment the place to look for its effects is in sovereign bond prices.

They are in a 300 year bubble.

Previously, and still to a large extent , it was to be seen in the property market.

The deflationists are actually apologists for money counterfeiting by printing press.

You must walk about with your eyes shut! There's deflation almost everywhere except the core economy. Retailing, property, car loans, hotel prices etc. Bond prices are going the same way. Six months ago the yield on the 10yr gilt was 1,5%, this week it's flirted with 2.2%. Even the energy/commodity spikes are disinflationary - every pound spent on essentials is one taken away from discretionary income. The only thing that's keeping the economy upright is sovereign debt production of an unprecedented size and duration.

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The problem with deflation, then, is that it feeds on itself, destroying the economy along the way. It is the macro equivalent of a roach motel: perilously easy to enter but impossible to leave. The problem, you see, is that deflation reduces consumption, which reduces production, eventually shutting down all economic activity.

The problem with such examples is that they always seem to assume a never ending scenario. They never consider that deflation might run its course then bottom out and then the economy start to grow again from a lower base even with a small amount of inflation.

But no it's got to be continuous ruinous inflation and in the main it seems just to support VI asset prices but ruin most everyone else.

As for "roach motels" there isn't a bigger or worse roach motel than inflation.

Edited by billybong
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If I earn £100 and the cost of goods went down by £50, and the gov said, we can't have this, and they printed £50, then the cost of goods would rise to £100. But my wages would also rise to £150.

So how does printing money help vs deflation?

Just wondering.....

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Deflation is a 'bubble in money'.

Permanent deflation is a permanent bubble in money.

The Austrians would like to see asset bubbles replaced by money bubbles. Or perhaps the more moderate ones would like to see an asset bubble followed by a money bubble followed by an asset bubble etc etc, in a kind of 'eye for an eye, tooth for a tooth' sense.

So the Austrians are calling for bubbles, just in a different asset class. This is their essential hypocrisy.

The thing that prevents our economy being structurally able to tolerate deflation is the zero lower bound on interest rates, not politics.

That's not correct, Austrians see large expansions of credit and thus money as unhealthy in the first place (in terms of the distortion of prices it causes and thus the misdirection of productive effort).

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To add a bit of anecdotal to your empirical discussion, popped into a Cornish Bakery with daughter who was a bit peckish after her ballet class. The very same vegetable pasties that were just increased in price few weeks ago from £2.90 (or so) to £3.50 are now quite literally half-size! They would be too small even for a 5yo. (First they offered a bottled drink for 20p with it, now drinks are (over)priced back to £1.20)

So we settled to chips from Burger King kiosk at the station, and same story - large (!) chips are now half-size from what they used to be just two weeks ago. It's now smaller than the plastic cup from water dispense.

Eat this, deflation monster!

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To add a bit of anecdotal to your empirical discussion, popped into a Cornish Bakery with daughter who was a bit peckish after her ballet class. The very same vegetable pasties that were just increased in price few weeks ago from £2.90 (or so) to £3.50 are now quite literally half-size! They would be too small even for a 5yo. (First they offered a bottled drink for 20p with it, now drinks are (over)priced back to £1.20)

So we settled to chips from Burger King kiosk at the station, and same story - large (!) chips are now half-size from what they used to be just two weeks ago. It's now smaller than the plastic cup from water dispense.

Eat this, deflation monster!

Creeping deflation is manifesting itself here by the suppliers putting the prices up, or cutting the packaged quantity, and many people seeing it as inflation.

Fact is you went elsewhere to find more for your money, and you won't be the only ones, affecting that bakery eventually... just as the story I've just read in the local paper saying the dry cleaners that opened 18 months ago (their first branch outside London) with its royal warrant and specialist care is closing, having failed to make a go of it. People will go somewhere cheaper, or use less. Still deflation.

Look at Walmart the other day, wondering where all the customers and their money are. Fewer people buying things, which is a clear sign of deflation having its grip on the economy.

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Its not really that simple though, is it.

If it was, Zimbabwe would have been the richest country in the world a few years back.

The facts of Zimbabwe are that taking the land from the productive white farmers and giving it to the indigenous population who had no idea how to farm it productively is what destroyed the Zimbabwean economy. Money printing was not the cause of their inflation but a symptom.

Edited by sleepwello'nights
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Creeping deflation is manifesting itself here by the suppliers putting the prices up, or cutting the packaged quantity, and many people seeing it as inflation.

Fact is you went elsewhere to find more for your money, and you won't be the only ones, affecting that bakery eventually... just as the story I've just read in the local paper saying the dry cleaners that opened 18 months ago (their first branch outside London) with its royal warrant and specialist care is closing, having failed to make a go of it. People will go somewhere cheaper, or use less. Still deflation.

Look at Walmart the other day, wondering where all the customers and their money are. Fewer people buying things, which is a clear sign of deflation having its grip on the economy.

Went into a large warehouse style well known clothing and homeware store yesterday, the type that is often off a busy main road that has other large outlets, a kind of retail park, for the first time....first noticed the car parks almost empty, this is on a late Saturday morning, no rain or snow....inside the huge shop I could count the people inside on one hand.....I asked the young lad with a nice smile if it was usually as quiet as this, he said no he couldn't understand why so quiet.....could it be people are paying their Christmas credit card bills this month. :unsure:

Moved on to the town where thankfully the streets looked a lot busier.....having a free car park I know helps, otherwise I would not have bothered......when a shopping trip now costs £10+ or more on petrol/fares and car parking before you even start, that is before having something to drink and possibly eat, you begin to calculate the total cost before any potential purchases....... ;)

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The facts of Zimbabwe are that taking the land from the productive white farmers and giving it to the indigenous population who had no idea how to farm it productively is what destroyed the Zimbabwean economy. Money printing was not the cause of their inflation but a symptom.

exactly...when money loses its backing by wealth of some kind, it becomes merely what it actually...paper....whereas before it was a note that promised something....if you promise nothing when writing out the note..nothing is what you get back.

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However, came back to re-read it this morning and worryingly, it still makes sense. :P

HAM, I really don't think it does make sense,

Capitalism is a process which reduces scarcity of anything that might be desired to its minimum potential. It reduces arbitrages via competition and allocates inputs to the most efficient producers. It breaks down monopolies and dissipates sources of excessive profit or rent. If iron is scarce it will act to increase the available stocks of iron. If money is scarce it acts to increase the available stocks of money.

Growth is the phenomenon which acts to stop capitalism from succeeding by increasing demand fast than capitaism can create supply. Other factors such as social rent structure may also act against capitalism.

A theory that holds that capitalism needs some outside force to keep money scarce must be wrong, or at best an act of faith. It suggests a fndamentally flawed definition of what capitalism is.

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A theory that holds that capitalism needs some outside force to keep money scarce must be wrong, or at best an act of faith. It suggests a fndamentally flawed definition of what capitalism is.

Capitalism is about efficient allocation of resources.[1][2]

Money serves as a measure of those resources.

Subverting money - whether it be Romans debasing the coin or modern banks printing it - attacks capitalism by re-allocating resources in a counter-efficient manner.

[1] The extent to which capitalism alone can serve us is another debate. We accept reductions in efficiency imposed on us for a range of reasons.

[2] Capitalism is also perfectly consistent with social goals and philanthropy. But only the successful capitalist can do good things on a substantial scale, like Ford's living wage for his workers, or the various Victorian industrialists building houses and other facilities for theirs.

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Capitalism is about efficient allocation of resources.[1][2]

Money serves as a measure of those resources.

Subverting money - whether it be Romans debasing the coin or modern banks printing it - attacks capitalism by re-allocating resources in a counter-efficient manner.

The above outlines what is basically a socio-religious belief.

Which is fine in itself and not at all unusual.

But its not a rational statement about reality, and it is very incomplete. Alternative definitions of capitalism will work just as well and may be equally plausible. The only difference between them could then only be one or both of:

1) the ability to form a falsifiable hypothesis about one statement and then test it,

2) which one is more widely believed.

(2) says nothing about its reality, after all most europeans used to believe in heaven and hell.

I happen to think your definition is wrong with respect to reality.

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The above outlines what is basically a socio-religious belief.

How so?

But its not a rational statement about reality, and it is very incomplete.

Of course it's incomplete. I even identified one incompleteness as a separate subject!

Alternative definitions of capitalism will work just as well and may be equally plausible.

It was never a definition of capitalism. It was merely one facet of capitalism. The one that happens to be relevant to the point I was making.

Let's recap what you posted:

A theory that holds that capitalism needs some outside force to keep money scarce must be wrong, or at best an act of faith. It suggests a fndamentally flawed definition of what capitalism is.

So far as I can tell, that was a strawman. The post up to which you were following hadn't claimed that capitalism needed to keep money scarce (let alone through some outside force), it had merely said that huge-scale subversion of money is an attack on capitalism.

If I can print my own money and use it to outbid you for something we both want, I've subverted your money. Same principle applies if someone else gives me a Liar Loan (or even housing benefit) to outbid you. Likewise if someone subsidises my inefficient production line so that I can undercut your prices in the market, your business is in trouble, and if it's you as taxpayer giving the subsidy, you might well feel aggrieved.

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Capitalism is about efficient allocation of resources.[1][2]

Money serves as a measure of those resources.

Subverting money - whether it be Romans debasing the coin or modern banks printing it - attacks capitalism by re-allocating resources in a counter-efficient manner.

[1] The extent to which capitalism alone can serve us is another debate. We accept reductions in efficiency imposed on us for a range of reasons.

[2] Capitalism is also perfectly consistent with social goals and philanthropy. But only the successful capitalist can do good things on a substantial scale, like Ford's living wage for his workers, or the various Victorian industrialists building houses and other facilities for theirs.

Ford didn't just turn up and build his first plant out of his own pocket. Very few of the older or more modern industrialists did. Capitalism, money from many hands (banks, bond markets and shares), got it going. Other market participants seeking returns. Money from many hands. It's fine for the people they back to take a big slice of overall long term rewards, and good when they provide for good causes.

It's why Islamic countries with inflexible restrictions about lending for profit missed out on all of the large-scale industrial revolution. Only the West turned up to trade the modern eras industrial and manufacturing advancements and luxuries in exchange for their immense oil wealth. Without their oil and mineral they'd still be nomadding around as very basic civilisations, with no reason for the West to get involved.

We've reached a market stage where there are fewer projects than need massive capital. Or at least fewer that offer the prospect of big returns over niche smaller investment opportunities, such as some programmers doing the next app, although often likely to lose money backing many of those.

Capitalism is also about not deploying it when market values are over-valued, too much debt holding up prices, or when the market sees values are subject to change from emerging alternatives.

If materials are scarce or overly expensive, capitalism will seek alternative materials. See many wooden super WWII Mosquito fighter bomber avatar over scarcer more expensive metal composites. Where it can't overcome high values, fewer capitalists want to offer money/lending to the market. It's subverted by those who want assets to remain high printing or trying to stimulate. Enemies of capitalism.

Deflation is painful as debts are retired by paying them off, restructuring or default. Those holding assets needing to raise money bring their assets to market, including stocks, bonds, commodities and real estate, causing values to fall. The process ends after the supply of credit falls to a level at which defaults versus new market value conditions are acceptable to the surviving creditors/savers to balance out. Capitalism isn't there to 'serve' those who don't take intelligent measures to look after themselves.

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How so?

Well, resources got allocated before capitalism came along. And modern capitalism only happened along AFTER the green revolution in the 18th century freed up many hands from the fields to build industry. Modern capitalism didn't unlock the surplus needed to create industry, it merely capitalised on it.

One can imagine people one upon a time saying that 'Feudalism is the most efficient means of allocating resources and providng physical security, that blood and tradition is the means of measuring resources, and messing with the provenance of blood and title will damage the prosperity of the nation.

The Romans didn't build their empire with capitalism.

Of course it's incomplete. I even identified one incompleteness as a separate subject!

Well the all you have is faith, until incomplete-ness is resolved. I wonder, do you think capitalism was invented by men, or just happened to them? Is capitalism something new or an evolution of what preceeded it? If the latter, then is the evolution completed?

It was never a definition of capitalism. It was merely one facet of capitalism. The one that happens to be relevant to the point I was making.

No it wasnt that, it was an blatant assertion of right and wrong. Hence my suggestion that it was an essentially religious statement of truth.

So far as I can tell, that was a strawman. The post up to which you were following hadn't claimed that capitalism needed to keep money scarce (let alone through some outside force), it had merely said that huge-scale subversion of money is an attack on capitalism.

HAMs point was I think, that the purpose of capitalism is to allocate scarce resources. My counter-point was that the purpose fo capitalism is to make the scarce non scarce. While they sound similar, they are very different.

If I can print my own money and use it to outbid you for something we both want, I've subverted your money. Same principle applies if someone else gives me a Liar Loan (or even housing benefit) to outbid you. Likewise if someone subsidises my inefficient production line so that I can undercut your prices in the market, your business is in trouble, and if it's you as taxpayer giving the subsidy, you might well feel aggrieved.

What is to stop us from subverting each others money? The 2000 dot com bubble was mainly driven by a huge cascading M+A sequence in which new tech companies with pumped up stocks bought other companies, not using money but using their own stock. The 2000 bubble wasn't driven by low interest rates or money scarcity, it was driven by something else.

Once again, your point above presumes that money is some external thing gifted to us nd maintained by an external agent. Since otherise, if its all internal, there can't be any authority to which one may complain about subversion. What we have seen the last half century is the competition of various institutions from MMFs, tech companies, central banks, commercial banks, ETF providers, forein governments and commodity warehousers to be the liquidity provider of choice.

A battle that is ongoing.

All I am suggesting is that your somewhat parochial view of money is as outmoded as was the feudalism that was replaced by the emergence of the cash economy after the black death. If capitalism is the evolution of human trade and civilisation then long may it continue. If capitalism is a fixed set of rules and moral goals that we should now hark back to, then my accusation of religiosity holds.

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  • 433 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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