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Europe Moves Nearer Japan-Style Deflation Trap With Shock Price Falls

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http://www.telegraph.co.uk/finance/financialcrisis/10418951/Europe-moves-nearer-Japan-style-deflation-trap-with-shock-price-falls.html

All key measures of eurozone inflation fell dramatically in October, stunning the markets and leaving the region dangerously close to a Japan-style deflation trap.

Consumer price inflation (CPI) plunged from 1.1pc to 0.7pc, the lowest since the financial crash in 2008-2009. “This is a massive downward surprise,” said Gizem Kara from BNP Paribas.

A string of debt-crippled states are now sliding into deflation, with Italy buckling over the late summer. The underlying rate is even lower once austerity-linked tax rises are stripped out

The shock data came as EMU-wide unemployment jumped to a record 12.2pc in September, with a further 74,000 people losing their jobs. Youth jobless rates reached 40.2pc in Italy, 57.6pc in Greece and 56.6pc in Spain.

“This is playing out in a very similar way to Japan in the early 1990s,” said Albert Edwards from Societe Generale. “All it needs now is an unexpected recession and Europe will slide into outright deflation. The risk is a trade shock from Asia. That is when the markets will start to panic."

We'd just better hope the recession is expected then!

Still at least the economic experts aren't surprised...

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Good stuff. Perhaps we'll soon see an end to years of inflation threads. Overall it's asset deflation. Can see it everywhere. Deflation creeps around everything as a feedback mechanism as inflation on everyone's lips. Hundreds of billions in QE to plug falling velocity. "Not earning anything in the bank = durr, buy property crazy high price/BTL." HTB2. Gov forced into cuts.

All the homes worth trillions owned outright which the banks will eventually need to get mortgage debt on at lower prices for new buyers. Malinvestment people keeping homes they should have lost in 2008-10, whilst trading up to a larger home and renting previous one out. Landlord forums still excited about future HPI with pending. Low transaction numbers. Growing numbers of younger prudent people blocked by so much trying to protect VIs. Media denial of house prices mega bubble.

UK net mortgage lending, and so on.

ur2o.jpg

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I am still, even after all these years of talking about it, trying to get my head around why prices suddenly start falling across the board? Is it simply a maxed out population who simply stop buying and so firms start reducing prices in desperation to sell?

If so, then wouldn't the UK with all the foreign money flowing into London and the SE, combined with the mad Brits who are happy in taking on more and more debt, simply buck this trend even if the rest of Europe was deep in deflation?

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I am still, even after all these years of talking about it, trying to get my head around why prices suddenly start falling across the board? Is it simply a maxed out population who simply stop buying and so firms start reducing prices in desperation to sell?

If so, then wouldn't the UK with all the foreign money flowing into London and the SE, combined with the mad Brits who are happy in taking on more and more debt, simply buck this trend even if the rest of Europe was deep in deflation?

I keep seeing these charts that show the velocity of money falling off a cliff, and suspect this is the implicated somehow- maybe as money moves more slowly there simply is not enough of it available to keep things going- with the price cuts being a secondary response as retailers chase an ever dwindling supply of cash?

(I may have just repeated what you said in a more fancy way!) :unsure:

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I am still, even after all these years of talking about it, trying to get my head around why prices suddenly start falling across the board?

When is the last time you had an above inflationary pay rise? Enough said.

Was just thinking, if they put up interest rates two things would happen.

1) Savers would spend as they have a better income coming from savings - the velocity of money would increase

2) House prices would collapse and if repossessions were allowed (unlike Ireland) transactions would increase causing the velocity of money to increase.

I think a 2009 style collapse is needed to clear the decks. There will be winners (bankers) and losers (99%).

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Good stuff. Perhaps we'll soon see an end to years of inflation threads. Overall it's asset deflation. Can see it everywhere. Deflation creeps around everything as a feedback mechanism as inflation on everyone's lips. Hundreds of billions in QE to plug falling velocity. "Not earning anything in the bank = durr, buy property crazy high price/BTL." HTB2. Gov forced into cuts.

All the homes worth trillions owned outright which the banks will eventually need to get mortgage debt on at lower prices for new buyers. Malinvestment people keeping homes they should have lost in 2008-10, whilst trading up to a larger home and renting previous one out. Landlord forums still excited about future HPI with pending. Low transaction numbers. Growing numbers of younger prudent people blocked by so much trying to protect VIs. Media denial of house prices mega bubble.

UK net mortgage lending, and so on.

ur2o.jpg

Lets hope so. I know I have been using how cheap single malts were getting as a deflation marker, but clothes now are so cheap it is unreal, Sainsburys the other day were doing fairtrade (so they claim) very decent T-shirts and sweatshirts at 5 or 6 quid each PLUS a 25% discount, so a decent top for about 3.75 or so, crazy. People will say oh but electric/gas/petrol etc. If you live in a city, stop driving, if you are young enough to stand it switch the heaters off. Deflation all the way now I think.

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I am still, even after all these years of talking about it, trying to get my head around why prices suddenly start falling across the board? Is it simply a maxed out population who simply stop buying and so firms start reducing prices in desperation to sell?

If so, then wouldn't the UK with all the foreign money flowing into London and the SE, combined with the mad Brits who are happy in taking on more and more debt, simply buck this trend even if the rest of Europe was deep in deflation?

IMO, to the first part Yes, to the second No, it is the little people who buy all the consumer stuff. Billionaires don`t buy their clothes and shopping at Tesco/Sainsburys as far as I know. Top end clothes/cars/holidays/food is probably doing great, but the companies that supply the masses will cut price or keep their stock on the shelf?

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I am still, even after all these years of talking about it, trying to get my head around why prices suddenly start falling across the board? Is it simply a maxed out population who simply stop buying and so firms start reducing prices in desperation to sell?

If so, then wouldn't the UK with all the foreign money flowing into London and the SE, combined with the mad Brits who are happy in taking on more and more debt, simply buck this trend even if the rest of Europe was deep in deflation?

With all inflation between the early 1970s and 2007/8 being down to an increase of debt levels, then if that debt were to be paid back we would see deflation taking prices back to the levels of the early 1970s. Central banks have to QE to counter this converting some of the debt to equity effectively. Whether we have deflation or not depends if they do enough QE. So far they have only scratched the surface so we can expect high levels of QE for decades to come, or massive deflation.

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Southern Europe has seen a fall in the circulation of money, must make a big difference to the state of play....what do you expect with state austerity cut backs, tourists no longer buying up property at the prices they once were asked to pay, unemployment rising, mainly the young who do most of the discretionary spending......many day to day items have fallen in price, because there is less money about....posh expensive stores and supermarkets being turned into discount stores for people looking for a bargain......how can anyone sell stuff for more when the people won't pay it, they either sell for less or don't sell at all. ;)

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Southern Europe has seen a fall in the circulation of money, must make a big difference to the state of play....what do you expect with state austerity cut backs, tourists no longer buying up property at the prices they once were asked to pay, unemployment rising, mainly the young who do most of the discretionary spending......many day to day items have fallen in price, because there is less money about....posh expensive stores and supermarkets being turned into discount stores for people looking for a bargain......how can anyone sell stuff for more when the people won't pay it, they either sell for less or don't sell at all. ;)

Can confirm what you say I spend a lot of time on the Costa Blanca cant believe prices in comparison to here meals out, Bars, and yes even supermarkets, seem to get cheaper daily with offers on all the time. On another matter people over there are working more than the official figures say and working for yes around 4 euro an hour all cash in hand, its the norm outside the lager companies or the Public sector , for example was taking to a owner of a fruit packing works lately who employs around 20 staff all on non contract all cash in hand said this is how he has always operated, even his buyers pay him cash.

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Not only are salaries not going up but they want you do to more for what you are being paid, which is a form of wage deflation.

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Southern Europe has seen a fall in the circulation of money, must make a big difference to the state of play....what do you expect with state austerity cut backs, tourists no longer buying up property at the prices they once were asked to pay, unemployment rising, mainly the young who do most of the discretionary spending......many day to day items have fallen in price, because there is less money about....posh expensive stores and supermarkets being turned into discount stores for people looking for a bargain......how can anyone sell stuff for more when the people won't pay it, they either sell for less or don't sell at all. ;)

So the UK is the opposite - everything going up in price except wages.

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There's multiple drivers for a reduction in money supply in EU. There is, and has been a, prolonged de-leveraging of banks, driven by banks having to de-lever due to regulation (ie increased capital) plus a lack of desire for taking on more debt by consumers. Add to that the austerity (real austerity) and there's only one way the money supply can go, and it's not inflationary.

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Similar thing should be happening here really, as our money supply also contracting, due to aforementioned bank and consumer deleveraging (no austerity here)

UK-M4.jpg

I guess the question isn't why are the EU witnessing this, more why aren't we.

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Similar thing should be happening here really, as our money supply also contracting, due to aforementioned bank and consumer deleveraging (no austerity here)

I guess the question isn't why are the EU witnessing this, more why aren't we.

Well the pound losing 25% of its value back in 2008 may have some thing to do with it. If you priced things in this country in dollars or euro you may have a different take on it.

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I imagine the speak has to be of inflation - to encourage buying of consumer items

Yet rising energy prices, some food prices and high housing costs, combined with static and falling wages surely, mean there is less money to spend, and so biflation - if that is the term.

So everywhere I look in consumer goods I see 'sales'.

Stores have 10 - 20% off some area, and I can get an additional reduction if I ask and will buy there and then

Equipment for my work is half last year's prices if you can proceed with cash.

The only people I see paying more - and there are some - are those who expect things to be more expensive as time goes on.

I am saving more than ever.

Edited by LiveinHope

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Not only are salaries not going up but they want you do to more for what you are being paid, which is a form of wage deflation.

And yet we are told by our leaders that the route to prosperity is by increasing our productivity- which sounds fine until you realize that a more productive workforce that does not share in that increased wealth via wage increases is simply reducing it's own scarcity value- which in turn reduces it's bargaining power and leads to lower wages or at best zero wage increases.

If the labor force were to actually engage with the free market worldview then they would realize that their best interests would be served by working less productively, which would increase the demand for their labor and enhance their ability to bargain for higher wages.

Once the link between increased productivity and wage increases is broken productivity increases become a threat to job security- Because the more productive a labor force is, the less labor you need to employ.

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I don't understand. Prices in the supermarket are up. Almonds and Walnuts cost double what they did a couple of years ago, admittedly, that was pretty cheap at the time. Rents are going up, transport costs, energy, the Swimming baths, even the price of laptops seems to be on the increase again (I guess tablets and ereaders are falling now though), clothes in TKMaxx seem to be about twice the price of a couple of years ago. Apparently we have the lowest inflation for years, but what is it that is falling?

Admittedly, a lot of consumer items haven't increased much over decades. My new walking boots probably cost twice what I paid for similar 25 years ago, and I expect clothes and sports equipment haven't increased much at all in that time. TVs are roughly twice the price, but they probably get a "quality improvement reduction" even though I suspect they make a much bigger reduction than reality merits. I still find it hard to believe that prices are falling.

Edited by BigPig

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I am still, even after all these years of talking about it, trying to get my head around why prices suddenly start falling across the board? Is it simply a maxed out population who simply stop buying and so firms start reducing prices in desperation to sell?

If so, then wouldn't the UK with all the foreign money flowing into London and the SE, combined with the mad Brits who are happy in taking on more and more debt, simply buck this trend even if the rest of Europe was deep in deflation?

My guess is that they will do the opposite of what manufacturers do with inflation. Mars Bars will start getting bigger, washing up liquid back as strong as it was in the 1950's. ;)

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Not only are salaries not going up but they want you do to more for what you are being paid, which is a form of wage deflation.

+1

Senior/experienced colleague leaves, but doesn't get replaced. Work and responsibly that Senior/experienced colleague got paid extra for gets trickled down to the more junior staff without the required experience, expertise or extra compensatory pay...

LEAN - Another concept deliberately miss interpreted to suck every last sinew out of the ever decreasing pool of suckers left.

Edited by PopGun

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