Jump to content
House Price Crash Forum
interestrateripoff

Bloomberg Explains Why Deflation Is Really Really Bad

Recommended Posts

Why Falling Prices Are Actually a Really Bad Thing

http://www.bloomberg.com/news/2015-01-21/why-falling-prices-is-actually-a-really-bad-thing.html

On the surface, everything getting cheaper sounds like a dream come true. It’s not. The prospect is so terrifying that it’s prompted central bankers around the industrialized world to pour trillions of dollars into their economies to prevent a sustained drop in prices. The European Central Bank is projected to follow suit with an announcement as soon as Thursday.

Here’s why.

1. When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? As a result, consumer spending flails. For most nations, that’s a big chunk of their economy, and any slowdown in consumption threatens growth.

2. Businesses behave pretty much the same way. They postpone buying raw materials, hoping to get a break on costs, and delay investing in that splashy new facility or hiring an extra hand.

3. Additionally, their pricing power -- the ability to charge more -- vanishes. That makes it harder for them to grow profits.

In such an environment, if companies want to grab a bigger market share, they have to slash prices. That makes things worse.

4. Lower profits = less money to go around to workers. Employees don’t get the raises they were expecting, they cut back on spending even more, and the ugly cycle repeats. That’s why they call it a deflationary spiral.

5. The sad thing is, even when prices are falling, the amount you owe doesn’t. Borrowers get crushed under the weight of that debt. In a mild scenario, companies and consumers hold back on other purchases to continue meeting their obligations. When things get really bad, they go bust altogether.

6. Policy makers usually have an antidote to economic slowdowns, but it’s trickier when interest rates are already near zero. That’s exactly the situation with the ECB and much of the industrialized world. That forces officials to turn to unconventional tools.

Policy makers have been raising and lowering interest rates for a long time but quantitative easing -- a Japanese invention from the 2000s -- is a relatively untested tool. Its effectiveness is still controversial among many economic circles.

The critical issue is debt, deflation makes servicing large debts unsustainable. However we still see the myth repeated at number 1 consumers will suddenly stop spending and delay purchases in the hopes that next week it will be cheaper. Where as clearly everyone spends their money as fast as possible in the fear next week it might be more expensive!

Share this post


Link to post
Share on other sites

Why Falling Prices Are Actually a Really Bad Thing

http://www.bloomberg.com/news/2015-01-21/why-falling-prices-is-actually-a-really-bad-thing.html

The critical issue is debt, deflation makes servicing large debts unsustainable. However we still see the myth repeated at number 1 consumers will suddenly stop spending and delay purchases in the hopes that next week it will be cheaper. Where as clearly everyone spends their money as fast as possible in the fear next week it might be more expensive!

Propagandist sh*te.

Share this post


Link to post
Share on other sites

The propagandists have been buttering us up for a dose of high inflation for a few weeks now. I wonder what the official scheduled printing date is?

They are though, every other day I keep hearing from the media how price falls are bad and I don;t even look at the BBC. I would love to know who is paying for these articles across the western media, perhaps is the banks?

I guess they will make things look like they are going pear shaped before announcing the next traunch of bankers bonuses from the printing machine at the BOE.

Share this post


Link to post
Share on other sites

you read my mind.

....and mine, I do agree that there is a certain section of society that do profit greatly from inflation, but an even bigger section that do not....lower prices only mean less demand, but it doesn't mean putting off spending it may mean managing what you have in a better more efficient way such as shopping around, making do and mending instead of borrowing to buy even a 0% cost.....you can't get blood from a stone......anyway spending and borrowing more does not make most people happier only poorer.

Share this post


Link to post
Share on other sites

I think it's going to get a harder for them to push this nonsense once the post-peg Swiss sales figures are in: Soaring Franc Creates Bonanza in Swiss Stores

Edit: in fact at least one of the journos at Bloomberg had already come to the conclusion that Switzerland undermined this theory last summer: Swiss Deflate the Deflation Theory

Edited by Neverwhere

Share this post


Link to post
Share on other sites

A bit from newsletter (Mauldin) about Switzerland, with that currency strength they have effectively seen massive deflation relative to nearly everywhere else in the world - must be hell compared to Zimbabwe, feel so sorry for the Swiss and the terrible plight they must be in.

-------

Of course, the Swiss are paying a huge price for their lack of enlightenment. For example, since the move to floating exchange rates in 1971, the Swiss franc has risen from CHF4.3 to the US dollar to CHF0.85 and appreciated from CHF10.5 to the British pound to CHF1.5. Naturally, such a protracted revaluation has destroyed the Swiss industrial base and greatly benefited British producers [not!]. Since 1971, the bilateral ratio of industrial production has gone from 100 to 175... in favor of Switzerland.

And for most of that time Switzerland ran a current account surplus, a balanced budget, and suffered almost no unemployment, all despite the fact that nobody knows the name of a single Swiss politician or central banker (or perhaps because nobody knows a single Swiss politician or central banker, since they have such limited power? And that all these marvelous results come from that one simple fact: their lack of power.)

The last time I looked, the Swiss population had the highest standard of living in the world – another disastrous long-term consequence of not having properly trained economists of the true faith.

Share this post


Link to post
Share on other sites

On 1. We're on HPC! There will be some that cannot buy but those that can are we not delaying purchases in expectations of a cheaper price in the future ?

Share this post


Link to post
Share on other sites

On 1. We're on HPC! There will be some that cannot buy but those that can are we not delaying purchases in expectations of a cheaper price in the future ?

and that affects the economy how?

Houses are not production once they have been built...the house itself will need maintenance regardless of the price of repairs, so the contribution is still there, regradless of deflation.

What is missing from this picture?...ah yes, DEBT taken on, sold, changed by the transaction.

Share this post


Link to post
Share on other sites

On 1. We're on HPC! There will be some that cannot buy but those that can are we not delaying purchases in expectations of a cheaper price in the future ?

That would be delaying purchases in the face of inflation, not deflation. It's actually the opposite of the deflation-destroys-demand argument as the onset of deflation in house prices would make HPCers more likely to purchases houses, not less likely.

Edit: clarity

Edited by Neverwhere

Share this post


Link to post
Share on other sites

It's a shame no-one will be able to read the article because they're all waiting to upgrade their Amstrad word processors because PC prices keep going down.

Quite,

I ran out of milk a few days ago, but thought I would wait until the end of the month to make a cuppa because milk might have gone down 10p

Share this post


Link to post
Share on other sites

....and mine, I do agree that there is a certain section of society that do profit greatly from inflation, but an even bigger section that do not....lower prices only mean less demand, but it doesn't mean putting off spending it may mean managing what you have in a better more efficient way such as shopping around, making do and mending instead of borrowing to buy even a 0% cost.....you can't get blood from a stone......anyway spending and borrowing more does not make most people happier only poorer.

Absolutely.What they fail to mention is that inflation keeps the bonuses humming in the banking sector.Fractional reserve lending needs price inflation to sustain the illusion of solvency,especially so when the system is leveraged to the gills.

Having said that,only Zim style inflation can save RBS from the knackers yard-again.

Share this post


Link to post
Share on other sites

Quite,

I ran out of milk a few days ago, but thought I would wait until the end of the month to make a cuppa because milk might have gone down 10p

I always remember Mish Shedlock putting it beautifully when he said something to the effect of

'In deflationary times,grass will still grow,people will still dig up oil...' etc etc.

I get tired of being told that 'we'll'(the Royal 'We' being used here) be toast if we can't get inflation in the system.What the banking classes mean is that 'they'll' be toast.

Like that moment when you're out as a kid and one of your mates runs up chins someone and then comes back and says

'what are we gonna do now?'

Share this post


Link to post
Share on other sites

Quite,

I ran out of milk a few days ago, but thought I would wait until the end of the month to make a cuppa because milk might have gone down 10p

Actually 'news' is subject to more agressive deflation than anything else so you'd think a journalist would get it. Why pay 50p for a newspaper today when you can pick it up for nothing tomorrow?

Share this post


Link to post
Share on other sites

It's a shame no-one will be able to read the article because they're all waiting to upgrade their Amstrad word processors because PC prices keep going down.

And waiting for the price of energy to come down further before they use the leccy.

Share this post


Link to post
Share on other sites

Actually 'news' is subject to more agressive deflation than anything else so you'd think a journalist would get it. Why pay 50p for a newspaper today when you can pick it up for nothing tomorrow?

ah, the famed Knowledge Economy.

Share this post


Link to post
Share on other sites

Actually 'news' is subject to more agressive deflation than anything else so you'd think a journalist would get it. Why pay 50p for a newspaper today when you can pick it up for nothing tomorrow?

Well you can pick up today's news for nothing these days the Metro. If tabloids don't float your boat the Telegraph is free online. Only the FT and Times playing awkward.

Share this post


Link to post
Share on other sites

Deflation is bad news for those in debt and those who create debt. We have deflation to thank for our rising livings standards over the centuries.

Share this post


Link to post
Share on other sites

Propagandist sh*te.

So youre not deferring a house purchase on the expectation of falling prices?

Share this post


Link to post
Share on other sites

So youre not deferring a house purchase on the expectation of falling prices?

and that affects the economy how?

Indeed, falling prices will encourage you to look elsewhere to make that saving by buying that product that is cheaper than the one your current landlord is charging...

Does anyone, ever, having a choice of identical products, warranty, service, smile on the salesmans face, ready to take, simply choose to pay more for the sheer enjoyment of it?

Edited by Bloo Loo

Share this post


Link to post
Share on other sites

Deflation is bad news for those in debt and those who create debt. We have deflation to thank for our rising livings standards over the centuries.

Deflation runs a higher risk of blowing the lid on the bank/central bank fiat money scam. People really do think they are being loaned something.that the banks have in some way had to go out and earn, when effectively in zirp times and QE they have not at all - it is evem more of a commission hunting scam than it ever was.

Share this post


Link to post
Share on other sites

Quite,

I ran out of milk a few days ago, but thought I would wait until the end of the month to make a cuppa because milk might have gone down 10p

and yet milk suppliers are losing money, not investing, going out of business due to expectation of lower prices.

In greece deflation has cost 30% of the economy, unemployment soared, investment cratered, poverty risen dramatically, social coesion collapsed.

Why do you argue thats a positive thing when it is easily avoidable?

Share this post


Link to post
Share on other sites

.In greece deflation has cost 30% of the economy, unemployment soared, investment cratered, poverty risen dramatically, social coesion collapsed.

No, years of financial mismanagement, a reluctance to leave the Euro and financial crimes too numerous to detail here have caused the majority of the problems.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   215 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.