Monday, Nov 20, 2006

Could be messy!!!

Times: The deflation threat facing Europe

When I ask businessmen or investors about their biggest economic worry at present, they almost invariably put the housing-related slowdown in the American economy at the top of their lists. More recently, there has also been concern about the unexpected weakness of consumer demand in Japan. Much less widely noticed, but arguably more important, especially for British business, are newly published European statistics that show growth slowing sharply in Germany and coming to a standstill in France.

Posted by tyrellcorporation @ 09:18 AM (2797 views)
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2 Comments

1. talking rot said...

A very learned publication, The Economist, predicted deflation in the medium term [5 or so years] for Europe back in 2002. The article was titled "Dial D for Deflation". The Economist suggested a house price crash in UK in 2004 / 2005. (I believe I even posted one of the articles on this Blog). Neither happened.

Some risks come into being; some risks never come into being. How can we have rising inflation at the factory gate across Europe, rising wages (which are required for inflation), yet face a deflation risk?

Also, for how long have Asian economies been slowing (except Japans)?

By 2007, however, the business and financial world may be facing a very different reality. Let me guess, "2007 will be an interesting year". Just like we said 2005 would be and 2006 would be ....

The underlying tone of this article suggests, especially at the end, that European economies need a consuming spending spree based upon equity drawn from european property. That is unlikely to be successful. What utter rot.

Monday, November 20, 2006 10:15AM Report Comment
 

2. sold 2 rent 1 said...

talking rot,

You said
A very learned publication, The Economist, predicted deflation in the medium term [5 or so years] for Europe back in 2002. The article was titled "Dial D for Deflation". The Economist suggested a house price crash in UK in 2004 / 2005. (I believe I even posted one of the articles on this Blog). Neither happened.

I just read that article:-
Dial D for deflation - Sep 12th 2002
Here is a quote:-

Many central bankers do not seem to grasp that this economic cycle is different from its predecessors. The recession was caused not, as before, by inflation taking off, but by the bursting of an asset-price bubble. American economists blame Japan's deflation on the incompetence of its policymakers. There is some truth in this, but the awkward fact is that post-bubble economies tend to be deflation-prone.

The reason why The Economist was wrong on both of your accounts was that world interest rates plummeted (euro from 3.25% to 2%) and this fuelled a credit-led expansion over the last few years.

Because the US and Europe had spare capacity and the UK had net immigration these low IRs did not produce rocketing inflation.

Your argument of just because a HPC has not happened so it wont - is very poor.
All bubbles overshoot expectations and this is no different.

The only way to keep any bubble inflated is to keep putting more air in.

Central banks will drop their IRs like a stone when their economies stall and deflation looks to be on the horizon. If they are lucky and consumers respond then deflation can be avoided. If they are not and deflation takes hold then it is like being in quicksand.

If inflation takes off then it is bad news for us HPCers as cash will be the worst asset to hold. It is best to have some diversity into gold/oil to spread the risk

Monday, November 20, 2006 02:08PM Report Comment
 

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