Economists and economic writers bemoan deflation. Meanwhile, consumers love it. Who doesn’t like better prices?
One side is wrong. Here’s a hint: It’s not the consumers who are wrong. Economically illiterate economists and authors are wrong.
Financial Times writer Nicholas Megaw moans Swiss Deflation Worsens Again.
Another month, another disappointing set of inflation statistics from Switzerland, as the country’s deflation problem refuses to budge despite its record low interest rates.
Consumer prices fell 0.2 per cent in November, compared to a 0.1 per cent rise in October, according to the Federal Statistical Office.
On an annual basis, the consumer price index declined by 0.3 per cent, worse than the 0.2 per cent fall predicted by economists.
The Swiss National Bank lowered its main interest rate to -0.75 per cent in an attempt to fight the appreciation of the Swiss franc last year, but the strong currency has continued to drive down the cost of imports, keeping the country in deflationary territory for the 25th straight month.
Swiss Unemployment Rate
Let’s explore this economic travesty starting with a look at Switzerland’s soaring unemployment rate.
Mercy! People have jobs and prices are falling. What could possibly be worse?
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
It’s asset bubble deflation that is damaging.
And in central banks’ seriously misguided attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse.
When those bubble burst, and they will, it will trigger debt deflation, which is what central banks ought to fear.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Meanwhile economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Mike “Mish” Shedlock
Yep. Agree. The creation of “funny money” by central banks and loan originators that is then directed into all kinds of assets, including those that could hardly be termed assets under the usual definition, has created and asset bubble. While the real economy suffers because wages are not rising fast enough to even maintain the current standard of living for most Americans.
“While the real economy suffers because wages are not rising fast enough to even maintain the current standard of living for most Americans.”
Stock market (aka “the rich”) reveling in Trumphoria … has that translated to spending for the masses?
…
DECEMBER 2, 2016
Most Retailers Miss November Sales Estimates
The holiday season is off to a slow start. The Thomson Reuters Same Store Sales Index registered a preliminary 0.8% gain for November, matching its final SSS estimate. That’s well below the 3% gain considered a sign of a health retail sector.
http://lipperalpha.financial.thomsonreuters.com/2016/12/most-retailers-miss-november-sales-estimates/
“It’s asset bubble deflation that is damaging.”
Yeah, well … The Titantic set sail long ago …
“And in central banks’ seriously misguided attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse.
When those bubble burst, and they will, it will trigger debt deflation, which is what central banks ought to fear.”
….
Do you prefer “Preach It!”? ……. or “+10000000000000000”?
Hi Mish,
a) Do not trust official Swiss unemployment rates. They are in reality much higher. The numbers do only show the unemployed individuals who have applied for getting unemployment benefits. After a maximum of 400 days, these individuals disappear from the statistics, as they do no longer get unemployment benefits. So, the real and true number is maybe more than double the official number.
c) Do not forget that the Swiss franc is a (small) safe haven currency. So it is highly overvalued (particularly vs. the Euro) which contributes to deflation, as the Swiss import a lot of the goods they consume (including all oil). The strong CHF does not really help Swiss exports on the other hand…
Best regards,
Thomas
Unemployment rates in Switzerland likely no more screwed up there than here or in the EU.
But yes, all currencies are messed up because of central bank interventions
Thanks
Thanks, Mish. Most helpful. I had been misguided by the propaganda all these years.
The Swiss are so fortunate. CPI deflation is such a blessing for shoppers. I hope we get better prices here too.
Mish, this link is broken – unless it is just my system: Deflation Bonanza! (And the Fool’s Mission to Stop It)
Thanks
will fix
Thanks
fixed
Keynes discussed deflation in the instance where highly leveraged business owners had to dump their inventory due to a systemic lack of demand. During the depression, due to widespread unemployment, prices fell below production costs. Businesses subsequently failed, increasing unemployment. Keynes, to my knowledge, never disparaged deflation due to routine productivity increases. Of course, Keynes would never have looked to central banks to solve the problem. So I think Mish and Keynes are on the same page here.
To be strict about it, Asset bubble deflation is a positive as well. It is the asset bubble itself, that is damaging. Being corrected is always ultimately healthier than remaining in the wrong. No matter how a junky may happen to feel about it, right when the only real solution to his problem is implemented.
What is damaging, is manipulated prices on anything. The corrections that inevitably must come once the means to sustain the manipulations have all been exhausted, is always a good thing. Of course, the corrections will never be able to right all the wrongs done by the manipulation, but at least they help out by slowing them in the future, and perhaps also by reversing some of the worst excesses.
Hello Bug, meet Feature.
Hugo said:
After growing by leaps and bounds since 1971, world credit is now in contraction. The best indicator is the reversal in growth of International Reserves since Aug. 1, 2014. (Data from Bloomberg)
When a trend of more than 40 years’ reverses, it’s time to take notice.
In my opinion, International Reserves, now contracting since Aug.1 2014, will continue to contract, and that means a world-wide credit squeeze is now beginning and will cause a great deal of financial pain around the world before it ends.
I think this is the big picture over-all, which investors will be wise to take into account.
All Financial Assets – Bonds, stocks, mortgages, debt obligations of all sorts and even
all money in existence today – are Liabilities of their counter-parties, which are in danger of losing much of their value, if not being wiped out in the credit contraction now going on.
Gold and silver are Assets with no counter-party risk, if held in physical form.
Hugo:
Interesting point on International Reserves: as I understand it, when the reserves are in decline, domestic currency is drained in the process causing tighter monetary conditions?
What occurred to me is that the Eurodollar funding market is currently experiencing a lot of tightness and prospects for a continuation in the $ rally are pretty strong. However, I was wondering whether the reduction in international reserves at the same time (not all $, I realise) is actually taking some of the pressure off the Eurodollar squeeze?
Anyone else please chime in … both international reserves and the Eurodollar market are two of the most important macro components for risk assets in the medium future IMHO.
In the Netherlands the average interest rate on a saving account is 0,3%. No, I’m not kidding. The real core inflation in this country is about 2%. Although “Frankfurt” stubbornly fixed the inflation on 0,5% in order to print 2,4 trillion euro toilet paper for the stock market and elite. Those PhDs at the ECB are entirely mad. Dutch governmental tax rules from the 1990’s require every saver to pay 1,2% interest over his saving accounts. It consists of 30% capital tax times 4% income tax. That’s the 1,2%. I’m not kidding. Or better said, the old rule from the 90’s will be maintained by neoliberal Rutte’s government to rob savers in a Z/NIRP situation. It will take 4 years to change this rule in law, they claim. I’m not kidding. You’re better off to put 50 euro notes under your matress, but you never know with PhD Mario Draghi. He might print new notes or abolish them like the 100/200 notes. Like those foolish academics in India did. I’m not kidding.
I just wonder who will stop those central banksters and governmental PhD’s empoverishing normal people in the Main Street saving money for their family and pension. When will this mad situation stop. Lenders are being paid to take a loan, savers are being robbed when the save money. When can we stop this mad situation. Mish do you know?
My theory is the goal is is to default on Gov’t debt via the back door of inflation. Of course not every monetary system can do its t the same time.
Allowing equal amounts of deflation and inflation within a reasonable range is the definition of maintaining price stability.
Targeting either violates price stability.
It is that simple.
“massive wealth inequality fueled by soaring stock prices”
Quite an exaggeration. Which is probably why it is never quantified, as it would evaporate. Half the stocks are held by pension funds. If stock prices are really soaring, some pension funds should have soaring returns (if not 8%, at least 4%). Any problem with that logic?
Another unanswered question: What’s so beneficial about wealth equality? Is not “wealth equality” up there with “2% inflation” as a meaningless, albeit more nebulous, slogan/target?
If indeed “massive wealth inequality is fueled by soaring stock prices”: Then
a good stock market crash like 1929-1933 would be the obvious remedy to restore wealth equality. Perhaps the FED will take heed, though I suspect the FED does not see a stock market bubble at the moment for obvious reasons. Don’t know if the statistics exist on this point, but wealth equality should have been at an all-time modern high circa 1932 when the DOW bottomed at about 32 points. History (Hoover out, FDR landslide) indicates that few were happy with their new-found wealth equality in 1932. Don’t remember too many people happy with the increased national wealth equality of 2008/9 either. Nor in Eastern Europe or the USSR, but perhaps some Cubans…
Please think before responding with drivel
CEO Pay as I have mentioned before is based on performance
CEOs also get stock option which adds to their pay
And of course rising asset prices in general leads to higher CEO pay in general.
Then when the crash comes, the Fed bails out the banks and never lays a hand on Bank CEOs or anyone else
Now, what is it about that that you could not figure out own your own.
And Yes I have mentioned all of that before so it means you cannot read or think
Not quite MSM op-ed material, but better than Sarkozy. Roundabout and evasive enough to work in a political debate, but no match for Draghi. I suggest you illustrate each line with one illustration. Maybe Scott Adams, the Dilbert guy, could help you. Better money in comic strips than blogs. Though Dogbert has us all beat.
Hi Mish,
Just a quick comment on the attached piece.
We here in CH often get a “bad rap” for being who we are.
In spite of our sometimes strange sounding schweizerdeutsche dialect, we remain still a very down to earth, hard working, savings oriented public that doesn’t much “toot its own horn” in spite of many good reasons to do so; especially when viewed from the fact that we are geographically middle of EU land.
Specifically, if the EU were a bit more like CH, we would not be in the difficult state we are in today here in Euroland.
Counter-intuitive ?
After all, on the one hand as many pundits, forecasters & financial experts including the Economists Big Mac Index have long argued our Swiss Franc has been significantly overvalued for so many years, I can no longer recall. Certainly at least ten (10) if not twenty (20) years. Just insert a thirty (30) chart&, you get the idea. Or, consider our bond market across the entire one to ten year and more perspective. Suffice it to say, seriously negative across the entire spectrum.
At first blush, from the above mentioned perspective, according to these so called media and financial specialists, Switzerland is “an accident waiting to happen”, which has been reported for at least the past ten (10) years.
Additionally, they further argue, our Central Bank policy has pumped such liquidity into the economic system, we are nothing short of depression without this buffer zone. And, if this was not enough bad policy, w/ too many stocks & Euros in CB’s portfolio, its Armageddon time once either, equity markets blow up or, the Euro falls apart, again goes this convincingly dogmatic, extremely confident analysis of why Swiss economy skates on thin ice towards the precipice of disaster.
A perfect storm? NIRP, ZIRP, a significantly overvalued Swiss Franc.
On the other hand, the facts speak another language which do not assist these pundits in generating hedgehog one line convincing media statements that sell product. First, Switzerland according to the World Economic Forum, continues to remain the MOST COMPETITIVE Country world wide.https://en.m.wikipedia.org/wiki/Global_Competitiveness_Report; https://www.weforum.org/agenda/2016/08/these-are-the-world-s-most-innovative-economies?utm_content=buffer58bd1&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
Second, in spite of our somewhat cautious nature, Switzerland continues to rank the most innovative Country globally. http://www.economist.com/blogs/graphicdetail/2015/09/global-innovation-rankings?fsrc=scn/tw/te/pe/ed/theinnovationgame.
There are various good reasons which require somewhat detailed analysis for the above-mentioned facts. Suffice it to say for this short feedback that Switzerland’s approach to, for example, financial technology is exemplary. Attractive regulatory environment that incentivizes industry growth.http://www.swissinfo.ch/eng/digital-finance_switzerland-lays-out-fintech-friendly-future-plan/42562912 .
Third, the above-mentioned critical facts underscore why the Country has a consistently significantly lower rate of employment attached to a well above average rate of compensation globally. http://www.tradingeconomics.com/switzerland/unemployment-rate; https://www.ubs.com/microsites/prices-earnings/shared/_jcr_content/par/actionbutton.1062824217.file/bGluay9wYXRoPS9jb250ZW50L2RhbS91YnMvbWljcm9zaXRlcy9wcmljaW5nZWFybmluZ3MvdWJzLXByaWNlc2FuZGVhcm5pbmdzLTIwMTUtZW4ucGRm/ubs-pricesandearnings-2015-en.pdf; http://www.payscale.com/research/CH/Country=Switzerland/Salary.
Practically speaking, since life here is generally more expensive than most places on this planet, we have a different mindset. More people rent rather than buy property. The savings rates are higher than most other countries and, when we do decide on purchases, then quality of product are critical so, the price we’re willing to pay is higher. Beds, tables, furniture, food staples and the like all come to mind.
Short form for long term investment decisions. Exceptions being – vacations. We like and deserve our vacations.
None of these facts generate a proper and convincing response difficult question of how Switzerland can be so expensive yet, so competitive. Therein lies a partial answer. The global economy recognizes, in spite of all its critical geopolitical issues, good quality is worth a proper price.
Add to this, our political environment plays laissez-faire to our business environment. The reverse is the case in most developed world economies. A silly example: did you know that in Switzerland we have seven (7) Presidents? Not one. Name one of our Presidents? Most Swiss can at least few but, most non Swiss would scratch their heads. In today’s world, having decentralized form of Government might also prove more helpful as we watch singular political figure heads world wide run headlong into their own political objectives.
Anyway, sorry to make this extended. Just wanted to make this point in response to our Swiss comment.
Best Regards, Bob Gonzales / Sent From iPad
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