Skip to comments.One Bad Idea Leads to Another, and Another, and Another...
Posted on 02/25/2014 2:59:00 PM PST by Kaslin
Telegraph writer Ambrose Evans-Pritchard is back at it. In arguably his worst article ever, Pritchard complains France is Looking Straight Down the Barrel of a Deflation Shock.
Pritchard bemoans the horrors of falling prices and says "There is a technical solution to this. It is called QE. The European Central Bank can lift the entire EMU system off the reefs by launching a monetary blitz to meet its own M3 growth target of 4.5pc."
Pritchard ignores the fact that equity prices are back in bubble land. He ignores the fact that QE did not bring inflation to Japan. He ignores the fact that consumers desperately need falling prices. He ignores the fact that falling consumer prices do not stop consumers from buying anything.
Pritchard complains "French President François Hollande must now pay the price for kowtowing to the contraction polices of the eurozone."
Pritchard knows full well France is bound by eurozone policies. The only way France cannot "kowtow to the contraction polices of the eurozone" is if France leaves the eurozone. But Pritchard never mentions that. Instead he whines about falling prices.
One Centrally Bad Idea
Pritchard clings to the centrally bad idea that falling consumer prices will cause consumers to perpetually delay purchases.
In the real world, people have to eat. They have to buy gasoline for their cars. They have to buy clothes when they wear out. They have to heat their homes.
Those are relatively inelastic demands.
But there is also no evidence consumers will hold off for long on discretionary spending either. Every Christmas, shoppers line up for bargains. People continue to upgrade TVs, computers, monitors as they wear out, or simply because prices are lower and quality is up since they last bought.
In other words, people buy when bargains are many and stop buying when bargains are few.
Pritchard's solution is the same as that of many charlatans before him: Force prices up.
The Fed succeeded. As a result, people now bitch and moan about "living wages". Of course "living wages" are a moving target. Force prices higher and the more it takes to keep up with them.
People want $15 an hour for standing behind a cash register and handing you a sack of the worst food money can buy. It's ridiculous.
Hardly anyone ever points out the fact that wages have not kept up with inflation precisely because the Fed has done exactly what Pritchard wants.
People do not blame the Fed, nor do they blame economic illiterates like Pritchard. Instead they blame allegedly evil corporations like McDonalds and Walmart.
Actually, the world needs more Walmarts. I hope Walmart enters the health-care business in a big way. Costs would come down overnight. It would also be great if Walmart could directly compete with banks on financial services.
Costs Rising Faster than Wages
The problem is not that wages are too low, but rather costs rise faster than wages. Why does that happen? Because of the very central bank polices espoused by Monetarists like Pritchard.
Pritchard and others will note that falling home prices will slow bank lending and consumer credit. That is correct. OK, but what's the real problem?
The real problem is monetary inflation artificially jacked up the prices of assets (homes, cars, equities) upon which unsustainable loans were made. Rather than admitting that simple and obvious fact, Monetarists propose the solution is still more monetary printing which will do nothing but create even bigger asset bubbles.
None of these inflation charlatans discuss what happens if wages do not keep up. Nor do they discuss the incentives businesses have to outsource jobs or automate because of high wages.
Amazingly, many people in academic wonderland are not satisfied with 2% annual inflation. They want 4% inflation or higher. For example, Laurence Ball at John Hopkins University claims to make a Case for Four Percent Inflation.
Ball is "grateful for suggestions from Olivier Blanchard, Daniel Leigh, Gregory Mankiw, and Richard Miller. This paper is prepared for the Central Bank Review, published by the Central Bank of the Republic of Turkey."
His paper was written in April 2013.
How is the Turkish Lira doing since that paper came out? Let's take a look.
Hmm. Once inflation steps in it seems difficult to turn it off.
Ball cited Gregory Mankiw, an economic professor at Harvard, who had an even more inane idea of drawing a number out of the hat every year and making currency ending in that digit worthless.
The effect would be 10% price inflation and lord only knows what asset price inflation would occur were Makniw to get his way.
Mankiw claims expiring currency would be a benefit. I responded Time For Mankiw To Resign
These charlatans sit in their academic ivory towers void of common sense and real world economics.
Of course economically asinine proposals from those in academic wonderland is expected behavior by corollary number four.
For the sake of completeness, here is a complete recap.
Law of Bad Ideas: Bad ideas don't go away until they have been tried and failed multiple times, and generally not even then.
Corollary One: Left alone, bad ideas get worse over time.
Corollary Two: The overwhelming desire to implement bad ideas leads to compromises guaranteed to make things worse.
Corollary Three: Those in positions of political power not only have the worst ideas, they also have the means to see those ideas are implemented.
Corollary Four: The worse the idea, the more likely it is to be embraced by academia and political opportunists.
Corollary Five: No politically acceptable idea is so bad it cannot be made worse.
Corollary Six: Bad ideas lead to more bad ideas to fix problems caused by previous bad ideas.
Although there is strong evidence that consumers will hold off making asset purchases (homes, stocks, bonds), when asset prices fall, there is not a shred of evidence of a meaningful reduction in consumer purchases due to falling consumer prices.
The irony is that QE tends to foster asset bubbles that ultimately crash, not a price rise in general goods.
Central banks in general, and the Fed in particular, are excellent examples of those in power, hell bent on implementing various bad ideas.
For further discussion please see Deflation Theory Reality Check.
Also see Bubblicious Questions: What Causes Economic Bubbles? When Do Bubbles Burst? Can the Fed Prevent Bubbles?
In yet another irony in this madness, monetarist polices benefit those with first access to money, namely the banks and the already wealthy. Yet the same academics screaming for higher inflation are typically the same ones screaming about income inequality.
The amount of damage caused by one central thesis "falling prices are a bad thing" is staggering. And to fix problems inherent in that central thesis, countless other bad ideas are sure to follow.
I’m surprised Ambrose would support QE. Deflation is better than QE.
Ambrose Evans-Pritchard learned during the Vince Foster affair some very very bad people were “in charge”...
You cannot fight them.. just try to stay out of their gun sights..
If you do.. you may make a good living off them..
Chris Mattews, on the other hand, is just a moron..
You can reduce the price of goods or the value of the money.
IMHO, “What difference does it make?”
I've read, and read again, every theory about why deflation is worse than inflation. I still don't believe it, but maybe I'm just limited that way.
That phrase “What difference does it make?” should only be used when by US incompetence at least 4 civilians die.
Maybe monetarists have changed but I never thought they supported inflation. Their argument was that in the late 1920s business and economic growth was not matched by an increase in the money supply. Theoretically, you’d like your price index pegged at 100, not 80, not 120. That means no inflation, no deflation, hence money becomes a constant an reliable exchange unit.From 1921 on, business and industry was growing rapidly, but the money supply never kept pace. That is the argument I recall monetarists making.
I believe expanding supply is good in an environment of expanding demand and consolidation is best during contraction. Expanding (monetary) supply during times of reduced demand cheapens the money to prop up demand. The idea is to avoid a stall.
Much like an aircraft, stalls are deadly in that all lift is lost and the theory is that dipping the nose and increasing speed will cause more lift across the airfoil. This is true until the ground comes up to meet you. If you stay up, hopefully, you can recover. If not, the crash is spectacular.
I have never won a Nobel prize.
“You can reduce the price of goods or the value of the money.
IMHO, What difference does it make?”
My answer is that if there is little leverage then it makes no difference. The problem is the world got used to unending growth and leveraged to take advantage of that growth (1% growth leveraged equals 2% growth).
Deflation or no growth will result in massive worldwide defaults on debt and the possible end of the monetary system. (no percent growth leveraged equals disaster due to overcapacity and leverage repudiation).
“Maybe monetarists have changed but I never thought they supported inflation.”
There is no reason to support inflation, deflation or no-flation when there is little or no leverage.
Today, there is so much debt and leverage that assumes growth to be paid off, if the growth does not occur, there will be wholesale debt repudiation that threatens everything.
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Me too. The deflationary spiral is nonsense. I don’t see how it can be sustained. Eventually prices find their correct level and new real growth begins.
The trouble is the FED works for banks and government borrows from banks and banks borrow from government. It’s a vicious cycle in which the taxpayer gets raped.
Listen to this: http://www.econtalk.org/archives/2014/02/calomiris_and_h.html
It will be the best hour you’ve spent learning all month.
“I still don’t believe it, but maybe I’m just limited that way.”
If you are speaking of one individual I think it depends mainly on your position. Those who have a lot of cash and zero or very little debt would benefit from deflation while those with huge debt loads would likely go bankrupt. Prices vary up and down, even interest rates vary up and down but dollar denominated debt is fixed.
As far as the overall effect on the national economy I don’t intend to comment other than to say that INFLATION tends to give people a false sense of wellbeing up to a point. If I just allow myself to drift a little I could imagine myself wealthy but I realize that the money that buys a pound of beefsteak now bought twenty pounds when I was a little boy. My monthly social security check would have bought a new Ford sedan when I was in first grade (no, that is NOT an exaggeration, four months would have bought a new Cadillac Sedan Deville with change left). The nickel candy bar I used to buy then costs a dollar now and it is smaller. The official inflation figures put out by the government are a lie, plain and simple, they are very much UNDERstated.
It is not really possible to make a valid comparison because life is so different now but if you compared the way people lived in 1950 to what it would cost to live the same way now the truth is much worse than the government figures. For instance I grew up on forty acres that cost my parents less than six hundred dollars. The same land now could probably be sold for a hundred thousand or more and it is still in the middle of nowhere with a mile of dirt between it and the nearest two lane blacktop. There used to be several stores within three miles and you almost never needed anything that required a longer drive, now you would have to drive ten miles to buy anything and twenty or more to do any major shopping. My mother grew up there and walked three miles to public school but she got an education that was far better than most recent college graduates have now and the cost was measured in shoe leather. A private school as good as that public school used to be would cost in one year what people in that era earned in five to ten years. I sincerely doubt that a PUBLIC school that good exists anywhere in this country.
As for myself I would like to see a little real deflation if my income stayed the same.
If prices fall, ordinary people have more purchasing power, which reduces the dominance of the elites. Thus, falling prices are a bad thing.
Reducing the value of our money destroys the value of our bank accounts, our paychecks, and the like. Reducing prices enhances those things because with fewer dollars (or whatever other unit of currency), each individual one is worth more.
Yes, it might reduce the paper value of our stock portfolios and precious metal holdings, but it will have other beneficial effects.
Me either, but this sounds reasonable.