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The Nagging Fear That Qe Itself May Be Causing Deflation

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"We deployed all sorts of unconventional monetary policy measures ahead of other major central banks. Japan has been living in a world of zero interest rates for almost all of the past 15 years. The Bank of Japan hugely expanded its balance sheet, purchased non-traditional assets and adopted forward guidance on future policy," he said recently.

... Just in case anyone is wondering where the UK is headed.

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The way we are going, the whole world will end up with zero interest rates

Yes, I can see that. In the UK I think we'll get a tiny increase in base rates during the next 18 months. But it will bring so many squeals from indebted households that any further increases will be stopped dead, and in time the economic cycle will roll on to the next recession, and then there will be no place to go except 0%.

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That's not what the article says at all.

the US or UK for that matter (or ECB if/to the extent that they do something) aren't QEing for the benefit of other countries, but to raise asset prices/lower yields/devalue their own currency.

The issue is the global protectionist response. In other words it's governments that are problem, not QE per se.

The 'solution' has always been to rebalance supply and demand - and that requires the surplus countries to play their part.

The issue is that these govts. and the G20 have completely failed in their responsibilities preferring central banks to 'do something' instead.

CBs can only provide a temporary bandaid, which is what they've done/are doing. It's up to the wastrils in govt. to pull their fingers out rather than exporting unemployment. This has been urgent for the last 5 years. It's now becoming super urgent.

QE is a red herring and a useful scapegoat.

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What's this, AEP? QE doesn't work, after all.

Who knew? :lol::lol::lol:

You did; although I'd have preferred a hard crash, instead of policies for the asset-rich and policy makers to pretend to be dumbfounded for years.

QE and deflation might not have played out in casino-UK for a number of reasons, but in my view prone to a hard deflationary shock. Although I want that, I'm not looking forward to the excuse-givers (for all the buyers/bomad-ers/btlers, beginning when prices begin to soften.) House prices are mad-insane-crazy here.

Bernanke's Worst Nightmare: Rising Real Interest Rates
By Vince Foster May 28, 2013
What seems to be lost in the monetary debate is that this persistent drop in inflation defies the primary purpose of quantitative easing, which is designed to lower real interest rates. In fact, with nominal yields rising in the face of falling inflation and thus raising real interest rates, the US economy is now closer to a deflationary death spiral than at any time during the Fed's unprecedented policy designed to prevent just such an outcome.
To give you an idea of how serious this development could get, you have to look no further than comments straight from the horse's mouth. (Emphasis mine.)
Deflation is in almost all cases a side effect of a collapse of aggregate demand -- a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers...
When the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be… In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn....
Even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value.
-- Ben Bernanke: "Deflation: Making Sure 'It' Doesn't Happen Here," November 21, 2002
Is this not what is happening?
...Though he wouldn’t admit it, Bernanke met his match in 2011. The consumer balked at attempts to stimulate aggregate demand via inflationary policy of negative real interest rates, and ever since, has been raising real interest rates by reducing inflation through lower aggregate demand. This is perhaps the most unappreciated yet significant market development since the financial crisis.
Rising real interest rates is Bernanke’s worst nightmare. Everything he has worked for in academia and implemented in monetary practice is imploding before his very eyes. Contrary to his assertion in 2002, aggregate demand in the real economy has in fact met the limit of monetary policy, rendering QE’s impact ineffective and obsolete.
Edited by Venger

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Part of the reason is a glut of factories flooding the world with goods, bearing down on global prices.

So now productivity is a bad thing? I find the use of language here quite interesting- we have 'glut' -not abundance take note- but a 'glut'. And we have 'flooding'- and when is flooding ever a good thing? Rarely if ever. Then we have 'bearing down' well that's clearly a bad thing too- who wants to have anything 'bearing down' on them-I certainly don't.

So what does this all mean? After all we are told that the great virtue of Capitalism is it's fecundity- it delivers the things we all need better than any other system- that's it's USP, right?

But there seems to be a problem- instead of being a cause of celebration this productivity is coming to be viewed as a threat- but a threat to what or who exactly?

Not to me- I like cheap stuff- the more the better- I fear no 'flood' of the things I want to buy- bring it on!

Oddly what seems to be threatened by this 'glut' is the very system that claims to exist in order to bring this state of affairs into being.

In other words the very system that claims to exist in order to create abundance seems to be threatened by that very abundance!! How can this be?

Perhaps Moses can provide an answer- He never did get to the promised land of course- but suppose he had-what then? Who would Moses have been in the land of plenty?

He would have been irrelevant- after all who would have needed a prophet or an oracle of scarcity in a world of abundance?

So when the high priests of capitalism tell us that we must fear the monster of deflation might it be that it is their understanding of their own ultimate irrelevance that forms the basis of this anxiety? They, like Moses, are creatures of the realm of scarcity, so what place is there for them in a world where scarcity is 'threatened' by the over prolific outputs of a hyper productive technology?

It would appear that to the people who run capitalism the worst thing that can happen would be for capitalism to succeed in delivering the abundance it has always promised to deliver- they are, after all, experts in scarcity- so from their point of view lack of scarcity really is a bad thing- it would put them all out of work. :lol:

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In other words the very system that claims to exist in order to create abundance seems to be threatened by that very abundance!! How can this be?

Sigh.

Because many of those factories were built to serve fake demand created by central banks throwing freshly-printed money at the economy, and, since that demand was entirely fake, they now have no customers and are eager to produce anything else that might keep them afloat.

Which part of this is proving hard to understand?

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That's not what the article says at all.

the US or UK for that matter (or ECB if/to the extent that they do something) aren't QEing for the benefit of other countries, but to raise asset prices/lower yields/devalue their own currency.

The issue is the global protectionist response. In other words it's governments that are problem, not QE per se.

The 'solution' has always been to rebalance supply and demand - and that requires the surplus countries to play their part.

The issue is that these govts. and the G20 have completely failed in their responsibilities preferring central banks to 'do something' instead.

CBs can only provide a temporary bandaid, which is what they've done/are doing. It's up to the wastrils in govt. to pull their fingers out rather than exporting unemployment. This has been urgent for the last 5 years. It's now becoming super urgent.

QE is a red herring and a useful scapegoat.

He's not settled in his view - this is his solution:

What they should have done is to target M3 money growth of 5pc, or nominal GDP of 5pc, and let interest rates find their own level. Indeed, rates should naturally rise as recovery takes hold. Trying to force them down come what may is a formula for trouble. The BIS is absolutely right about that.

Maybe the theories are fated to cancel each other. Pity people have to suffer for no overall gain, ie. one man's inflation will balance the other's deflation - some good people get crushed, some pricks make out like bandits.

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The evidence in Britain and America is that QE has had a potent effect, preventing double-dip recessions as fiscal austerity began to bite, in stark contrast to Europe. The story is not over, nor have the Fed and the Bank of England extricated themselves. The contraction of US GDP in the first quarter is a warning sign.

This is complete rubbish.

The evidence from the UK is ambiguous at best, and in the US completely the opposite of what AEP says. The appearance of recession in the US official figures relates more to the limits of fiddling statistics than anything else.

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All QE does is put money in the wrong places....bumping up the price of assets, no good to the majority who have little or no access to what is rising...all they can do is pull down what is required to live the consumerbles...can't buy can't borrow won't buy, only buy if offered for less.

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He's not settled in his view

True. Didn't he bang on about QE making the UK into Zimbabwe?

It's important to remember that journalists have white space to fill every day after a hard night down the pub. The ones that can run out 300 words in 15 minutes tend to be the ones that do well.....

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I don't get the argument that AEP is presenting. However I am spending less money on consumption and spending more money on assets that are going up in value ( shares ) With QE also pushing up shares then I see this a sensible thing to do. So yes QE could be deflationary.

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from the article

'If Europe is at risk of deflation, the proper response is a monetary barrage of such force that nobody can be in any possible doubt about the outcome.'

A few weeks ago he only seemed to be accepting an argument QE may cause worsening inequality. Quick... protect the asset winners even more who've only seen decades of hpi, and bomaded up, and BTLd.

There are two sides to the lending equation anyway - and - aggregate demand in the real economy has in fact met the limit of monetary policy, rendering QE’s impact ineffective and obsolete. Pushing money to favoured VI just makes things worse.

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Waiting since the 2008 crash and still no deflation. Asset prices pretty much back to where they were around the peak and all the basics of life are a lot more expensive now, than then.

It's almost as if you can avert deflation by simply printing money and dumping it into the markets. Whoever would have thought such a thing was possible?

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Shop prices fall 1.4% to record thirteenth month of deflation
4 June, 2014 | By Tiffany Holland
Shop prices deflated 1.4% year-on-year, the same rate as recorded in April, making May the thirteenth consecutive month of deflation.
May’s British Retail Consortium (BRC) Nielson Shop Price Index said that prices have been kept low as food retailers compete in the price war and non-food retailers keep value-for-money at the forefront.
Food inflation was unchanged at 0.7% from April, the lowest ever recorded.
Non-food recorded 2.8% deflation in May from 2.7% deflation in April. The category has reported deflation for the fourteenth consecutive month.
BRC director general Helen Dickinson said: “Food inflation remaining at its lowest level since our records began is great news for hard-pressed households as the summer approaches, and confirms that retailers are responding to current conditions by matching attractive offers with those products most in demand at this time of the year.”

in full (pay-subscription site): http://www.retail-week.com/sectors/general-merchandise/shop-prices-fall-14-to-record-thirteenth-month-of-deflation/5060826.article

Here's a little bit, but pennies and pounds cut from some clothes and stuff not too relevant to me - even if I'm not adding anything to the gardening/diy spend anyway. I still hold asset prices will follow.

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An astute observation from a Keynesian.

Claudio Borio, the BIS's chief economist, says this refusal to let the business cycle run its course and to purge bad debts is corrosive. The habit of turning on the liquidity spigot at the first hint of trouble leads to "time inconsistency". It steals growth and prosperity from the future, and pulls the interest rate structure far below its (Wicksellian) natural rate. "The risk is that the global economy may be in a deceptively stable disequilibrium," he said.

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Sigh.

Because many of those factories were built to serve fake demand created by central banks throwing freshly-printed money at the economy, and, since that demand was entirely fake, they now have no customers and are eager to produce anything else that might keep them afloat.

Which part of this is proving hard to understand?

You miss the point that I was addressing- the complaint is not the these factories have no customers- the complaint is that they are deflating prices by oversupplying the market. Another word for this is 'abundance'.

So why not address the point I was making which is that we have a system dedicated to the creation of abundance that apparently can only function correctly in conditions of scarcity.

In what sane economic system is having too much of the things people want and need a bad thing? Would you prefer the opposite?

Basically the argument being made is that scarcity is required to make the system work- but that system-and the many injustices it gives rise to- is justified on the basis that it will eliminate scarcity.

So there seems to be a deep contradiction here. We have a system that cannot succeed without collapsing.

After all deflation is not a pathology of free market capitalism, deflation is it's entire raison d'être. To create more and ever cheaper stuff is what free markets are all about-right?

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You miss the point that I was addressing- the complaint is not the these factories have no customers- the complaint is that they are deflating prices by oversupplying the market. Another word for this is 'abundance'.

So why not address the point I was making which is that we have a system dedicated to the creation of abundance that apparently can only function correctly in conditions of scarcity.

In what sane economic system is having too much of the things people want and need a bad thing? Would you prefer the opposite?

Basically the argument being made is that scarcity is required to make the system work- but that system-and the many injustices it gives rise to- is justified on the basis that it will eliminate scarcity.

So there seems to be a deep contradiction here. We have a system that cannot succeed without collapsing.

After all deflation is not a pathology of free market capitalism, deflation is it's entire raison d'être. To create more and ever cheaper stuff is what free markets are all about-right?

So in essence the system is a victim of its own success. The increasing abundance due to increasing productivity will cause the crash to be so much worse.

I think that is the definition of paradoxical.

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Demand and supply, too much capacity, ever decreasing circles.

Obviously the economic system as it stands is not self sustaining... Oops.

The economic system as it stood was self-sustaining (resource limits aside).

Higher tech, higher productivity, reduced pricing, greater affordability, larger markets both in depth and breadth, maintaining some degree of additional demand for human employment in everything from production and design to supply.

If think we are close to a technological event horizon though - one brought forward by intervention and direct manipulation - saving / enriching the banks = screwing the population, dousing them in debt and making them uneconomic. Direct replacement by machines across the board is being brought forward, with the debt millstone still round the populations' neck. Not going to be pretty. High fixed costs and taxes and no income.

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....

In what sane economic system is having too much of the things people want and need a bad thing? ...

It's a bad thing for the manufacturer because it depresses prices and starts a race to the bottom on price. It's a good thing for the buyer provided there is still enough employment if the production goes overseas. This is essentially the problem of the west and western economies. Overseas production is cheap but generates unemployment and lowers wages. Then you have the scenario we are looking at in which there is no revenue generation in the market to pay for the goods. People buy the goods on credit. The credit is secured against an asset. If the value of the asset is growing the amount of credit the consumers can borrow rises together with the asset price. Consumption grows, GDP grows, profits for retailers and hauliers grow. The economy is healthy but at some point the ability to borrow runs out. When you get there (2008) either things go bang or new money (or credit) has to enter the system (QE).

As you rightly say so-called "free markets" are there to provide ever cheaper stuff in ever greater quantities. Deflation in - for example - consumer electronics has been going on for years. The problem is the eventual collapse of the consumer base. This is why the Chinese are desperate to develop their own domestic market. The west has run out of buying ability.

In a balanced system consumption would stop when demand was satisfied. This was the deep seated fear of the world until it discovered marketing - the ability to create demand when none would exist in a rational world. Hence the consumer society where people think shopping is a leisure activity and waste is something to be proud of. This system cannot continue forever because at some point we run out of planet.

From time to time a "reboot" is needed. IMHO we need one now.

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