Skip to comments.What the Crisis Taught Us: More Bubbles! We Need Bigger Bubbles!
Posted on 02/01/2014 3:44:38 PM PST by Kaslin
The Monetarists are out in full force warning about pending deflation.
First it was Christine Lagarde with her message about the deflation ogre (see Christine Lagarde Warns of Lord Voldemort, Hopes to Put Deflation Ogre in a Bottle).
Next on the list, deflation fighter extraordinaire, Telegraph writer Ambrose Evans-Pritchard, picked up on Lagard's commentary and screamed at the top of his lungs "More Bubbles! We need bigger and bigger bubbles to combat the threat of deflation!"
Of course Pritchard did not state it precisely that way, but it is indeed exactly what he called for, in equally loud, unmistakable tones.
World Risks Deflationary Shocks
I invite you to read World risks deflationary shock as BRICS puncture credit bubbles by Ambrose Evans-Pritchard.
It is a remarkable state of affairs that the G2 monetary superpowers - the US and China - should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.
Tightening? What Tightening?
Pritchard calls a decrease in asset purchases by the Fed from $85 billion a month to $65 billion a month "tightening". The claim is preposterous.
It's very much like telling an obese child you can only have three pieces of cake after dinner, not four.
Correctly viewed, tapering asset purchases is a reduction in stimulus, not tightening.
Actual Tightening in Emerging Markets
Pritchard discussed Turkey, South Africa, India, Brazil, Indonesia, and every other country that actually did tighten recently, but he never addressed the reason they had to: inflation was completely out of control in those countries, with obvious asset bubbles in many of them. Tightening should have started long ago.
Spotlight on Europe
Eurostat data show that Italy, Spain, Holland, Portugal, Greece, Estonia, Slovenia, Slovakia, Latvia, as well as euro-pegged Denmark, Hungary, Bulgaria and Lithuania have all been in outright deflation since May, once tax rises are stripped out. Underlying prices have been dropping in Poland and the Czech Republic since July, and France since August.
Spotlight on Japan
No reputable deflation fighter could possibly leave Japan out of the mix, and there too, Pritchard did not disappoint.
Those who think deflation is harmless should listen to the Bank of Japan's Haruhiko Kuroda, who has lived through 15 years of falling prices. Corporate profits dried up. Investment in technology atrophied. Innovation fizzled out. "It created a very negative mindset in Japan," he said.
Japan had the highest real interest rates in the rich world, leading to a compound interest spiral as the debt burden rose on a base of shrinking nominal GDP.
Cure Worse Than the Disease
The ridiculousness of that last statement should be obvious. Japan has a debt burden because of its deflation fighting actions for three decades.
Before Japan embarked on its deflation-fighting mission, it had no debt at all. Now it has the largest debt-to-GDP ratio in the industrial world.
The cure "deflation fighting" was certainly worse than the disease, yet Pritchard wants central banks to "do more".
Pritchard Wonders "Why?"
Any such outcome in Europe would send Club Med debt trajectories through the roof. It would doom all hope of halting Europe's economic decline or reducing mass unemployment before the democracies of the afflicted countries go into seizure. So why are they letting it happen?
Silly Question of the Day
Here's the silly question of the day: Why are they letting it happen?
Here's a better question: Why did Argentina, Turkey, South Africa, India, Brazil, Indonesia, and every other country that tightened recently wait so long to tighten?
Price inflation was running rampant in every one of those countries. The stock market bubbles in India and Turkey are massive. The housing bubble in India is massive.
But central bankers cannot see bubbles. Pritchard mentions bubbles but chooses to ignore them. Arguably, that's even sillier than not seeing them at all.
Falling Prices a Bad Thing?
Pritchard's only concern is with falling prices, as if falling prices are a bad thing.
Ask anyone in Japan, the US, Europe, or India if they would like to see falling prices. The only people who don't want falling prices are central bankers, economic illiterates, and Wall Street types and banks dependent on ever-growing asset bubbles (because of bad loans made on speculative-priced assets).
Demise of Japan Coming Up
For all the pissing and moaning about Japan, until the revival of GM, Japan's auto and technology sales did quite fine. Technology did not stop.
It's the foolish Abenomics deflation-fighting policies of prime minister Abe (which Pritchard supports) that's gong to be the demise of Japan.
Reflections on "Letting it Happen"
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Great! The title has me thinking about Bubblegum Crisis now.
[ Great! The title has me thinking about Bubblegum Crisis now. ]
Well they keep going and they will replace us all with boomers because it will be too expensive to pay minimum wage...
>>[ Great! The title has me thinking about Bubblegum Crisis now. ]
Man, now I really understand how old I am.
cowbell, needs more cowbell