'Confusion will be my Epitaph (as I walk this crack'd and broken path)' - King Crimson

Is this total nonsense or is it total nonsense?


Update.


For completeness Verse 2:

Between the iron gates of fate
The seeds of time were sown
And watered by the deeds of those
Who know and who are known.
Knowledge is a deadly friend
If no one sets the rules.
The fate of all mankind I see
Is in the hands of fools.

Quite.

Economic Myths: Deflation leads to a downward spiral

From e.g. Moneyweek:

Ben Brettell, senior economist at Hargreaves Lansdown... adds: “If deflation becomes entrenched and consumers begin to expect prices to fall, it can be dangerous. Spending decisions will be deferred in expectation of lower future prices and economic stagnation could result.

What a load of drivel.

Most of the stuff you buy because you need or want it now, today, this week, this month. You can't just go without food to eat or petrol for your car for a year, even if you are 100% sure that the price of food or petrol will be significantly lower in one year's time.

Consumer electronics is the perfect counter-illustration to this, people have been merrily buying new stuff every year, even though by now most people assume that what comes out next year will be bigger, better, cheaper etc.*

Further, the sort of price deflation they are talking about is minimal, a percent or two a year. If you are planning to buy a new car for £20,000-ish sometime in the next year or two, is that £500 potential saving from deferring your purchase really going to make much of a difference? Methinks not.

This effect can only happen if...

a) You are thinking of buying a speculative asset, such as land. Your total land consumption doesn't change (you are renting instead of owning in the interim) and land rents are not an addition to the economy, they are a transfer.

b) the benefit you'd get from having something for a year is less than the amount by which you expect the price to fall. And I struggle to think of an example for that, it can only apply to completely non-essential things, like a high-powered telescope for star-gazing or something which you'd only use once or twice a year.

UPDATE: now I think about it, this myth is quite similar to the myth that the government can boost the economy by pushing down interest rates. It's the same fallacy in a different guise, and of course has to be perpetuated as an excuse to prop up 'asset' values (i.e. capitalised rent and monopoly income).

* This is not actually true any more, I reckon we have passed the point of peak technology in many respects. Nowadays even Apple can't resist adding on extra bits and extra pieces, none of which really work properly.

Mobile 'phones reached perfection about nine years ago with the Nokia 1110. Everything since then was bullshit, and given how small UK housing is, there's no need for a TV bigger than 40". But most people still believe it.

Economic Myths: Deflation

The Daily Mail compares and contrasts inflation and deflation (in the everyday meanings that nominal prices are either going up or going down, let's not get too technical):

The fear has been that with Britain's colossal debts, the authorities would collude to create inflation, which would steadily erode away the borrowing problem.

With more than £1 trillion of government debt and nearly £1.5 trillion owed by consumers, Britain is ranked just behind Japan on the world league table of debtors. But inflation is no longer doing the heavy-lifting on our debt problem.

Strange that he first uses the word "fear" suggesting that inflation is A Bad Thing, when he actually means "hope": he then explains why inflation is - from the point of view of the Home-Owner-Ists - A Very Good Thing indeed, because it reduces their "debt problem" (nearly all that £1.5 trillion owed by consumers is in fact mortgages secured on land and buildings). The borrower's gain is the saver's loss, so that's just the usual transfer of wealth to land owners and banks.

At the start of the financial crisis, deflation was regarded as the bigger danger. Once it takes hold, it can be difficult to reverse as consumers put off buying goods on the hope of buying them cheaper further down the line, especially economy-boosting, big-ticket goods like cars.

More menacingly, it also means those debts - and more than £1 trillion in mortgages, effectively grows relative to wages and other prices. Japan's experience is a parable for central bankers. The country had a property boom that peaked in 1989 and turned to banking collapse, followed by two decades of on-off falling share prices and property values.

The second paragraph is quite correct: nominal price and wage deflation is what the Homeys fear most. It's the first paragraph which irks.

As Drewster at HPC says: That's a bare-faced lie. Nobody who needs a new car waits 12 months for a measly 2.5% fall in prices. Just look at flat panel TVs or computers - they get cheaper every year, yet if anything we buy more of them!

It is conceivable that the cause and effect are the other way round. If people become more and more worried about the economy, they spend less and less each year and this leads to falling prices. This is because there is only a certain speed at which output will contract because manufacturers have high fixed costs and as long as they can at least cover their marginal costs, they will keep churning stuff out until the original capital investment is used up or worn out.

Once output has contracted to the new lower long term level of demand, prices will stop falling, and will then gradually return to their old higher level, because the old fixed costs have been amortised, used up, written off etc and prices now have to be high enough to justify new investment. Or you could say that the price elasticity of output is inelastic in the short term (when demand falls, output falls a bit and prices fall a lot) but elastic in the long term (when demand falls, output falls a lot and prices only fall a bit).

But it is more likely the case that with debts at a level which people simply cannot afford to service, the financial sector is just sucking the life blood out of the economy; people spend any spare cash they have on debt interest and simply don't have any money left over for spending on genuine goods and services.

This is a bit like what the banks do to developing countries, as Geldof once said: "They can't even afford to pay the interest on the interest." Prof Michael Hudson started his working life at a bank, and he says that their modus operandi was to work out how much a dictator could siphon off from his people every year, then they would lend that dictator whatever amount incurred enough interest to soak up that entire surplus.

Implicit in this is the assumption that the dictator just steals the money instead of spending it on infrastructure or education or anything which would grow the economy and enable the country to repay the principal) and that the interest (the entire steal-able surplus of the country) would thus be paid to the bank in perpetuity.

Venezuela

There's another fine article on the BBC explaining how Chavez' socialist experiment is gradually crumbling. His latest antic was to devalue the exchange rate, which of course forced him to clamp down on evil retailers who just cheerfully marked up the prices of imported goods accordingly.

That's not the interesting bit. What is interesting is that

a) "Venezuela already has the highest rate of inflation in Latin America - currently at about 25%... Oscar Meza, director of a Venezuelan economic think tank, Cendas, predicted the move would push annual inflation above 33%", and

b) The grey market exchange rate appears to be about $1 = 6 bolivar, but the official rates for imports of "priorities" is 2.60 and for "non-essentials" is 4.30 (in other words, they are trying to depress the value of their own currency, like PR China), which opens up huge arbitrage opportunities: you just change $1 to 6 Bolivar on the grey market, then exchange that for $1.40 (at the less favourable official rate), then exchange that for 8.4 Bolivar on the grey market and so on.

Clearly, a sound socialist like Chavez wouldn't allow that sort of thing, so there have to be strict exchange controls (so that he and his mates can cash in, of course, separate topic). In fact the very notion of having a fixed or official exchange rate must always entail exchange controls.

To get to the point, when the topic turns to inflation vs deflation, my view has always been that you can only have high or hyper-inflation if you also have exchange controls (Weimar, 1970s Britain, Zimbabwe etc). If the government depresses interest rates and/or tries to borrow and spend its way out of a recession without exchange controls, this has little impact on domestic inflation (Japan in the last ten or fifteen years). Ergo, we are unlikely to see high inflation in the UK for the time being.

While the Venezuelan example doesn't prove or disprove this theory either way, I shall use it as an example anyway and see if anybody calls my bluff.

Yeah, like that's going to happen ...

From The Metro:

Millions of housing association tenants are being asked to forego an expected rent reduction to help avoid a shortfall of new properties.

The National Housing Federation (NHF) has warned that even a small drop in rental income could see thousands fewer new homes being built as services get squeezed. Rent rises for tenants are linked to inflation measured by September's retail price index (RPI). It is expected to fall to minus 1.7% for July and remain around that level for some time to come.

Ruth Davison, NHF campaign director, said the impact of a 2% reduction would cut the number of homes that could be built next year by 4,000 at a time when nearly five million people were waiting for council homes. "This is bad economics and bad politics," she told The Times...

The tiresome inflation-deflation debate

Everybody has their own thoughts on this, most of it waffle, to be honest.

FWIW, I think that Sackerson has just about covered it all in this brief post (with links to more background material!), see especially his reply to mine in the comments.