David Glasner — Hayek, Deflation and Nihilism

At least Hayek later admitted he was wrong about deflation being useful in breaking rigidities.

Uneasy Money

Hayek, Deflation and Nihilism
David Glasner

Central banks are becoming huge drivers of deflation. Fed adds to this today.

The Fed held interest rates steady today. It was the wrong decision. 

Central banks are increasingly becoming big drivers of deflation. Look at the ECB last week and its announcement that it was now going to buy high yield bonds. That was the day the markets topped out. Stocks and many materials markets turned south and have been heading down since.

The ECB has been driving massive deflation in Europe via its negative interest rate policy and ongoing asset purchases. Now it's buying high yield. That's HIGH YIELD income that would have gone into the economy. And Draghi wonders why deflation has been so hard to counter? For chrissakes, he's the one driving it.

Now we have the Fed and Yellen and her extreme cautiousness. The Yellen Fed is probably the most cautious Fed that I have ever seen. She did one rate hike back in December. That's it. Even so that was a success. It got things going. In fact if you go back and look at what happened after that December 16 hike you will see that gold bottomed and commodity markets all started moving higher. Stocks climbed, etc. Growth started to pick up. 

We've been lucky because so far this fiscal year government spending has been strong. It's up bout $90 billion over last year and last year was the strongest spending in five years. It's been the only thing that has kept us out of recession, but not by much. We're only growing at 0.8%. That's not enough..

We've been lucky with this government spending. However, we continue to face extremely strong headwinds most of those being injected by central banks and their insane deflationary policies. It's like a diseased academic dogma that's taken hold of policy and it's literally killing the global economy. Negative rates, income removal and the belief that all of that is stimulative? Utterly insane.

I have been correctly bullish since last year on the economy, stocks and risk assets. I have not been calling recession for the past three years like others because of the deficit. By the way, the deficit is now $93 billion higher than last year. Where are those people who have been screaming that the deficit is too small? Maybe it is, but at least acknowledge the fact that it's growing again. They don't. Why? Because they don't even know. They're too lazy to even look.

What we're facing now is probably a stall. I'm hoping that's the worst case. Maybe we continue to grow real, real, slow as spending continues to rise, but no acceleration. Not with the central banks fighting this recovery with everything they've got.

Let me finish by talking about gold. I've been bullish on gold since last December. That's when the Fed raised rates for the first time in 9 years. I wrote in this blog, BUY GOLD and gold's been going virtually straight up since that call. 

Last week it was all over the news that George Soros was buying gold and selling stocks. I laughed. Here's a guy who, recently at least, has been talking lots of nonsense. About China credit bubbles and global "uncertainty," and more. Based on this "rationale" it's an amateur move, buying gold. "Uncertainty" is not a reason to buy gold.

With deflation ratcheting up this could be 2014 all over again for gold. In other words, the beginning of a big decline. George better watch out. 

Had the Fed raised rates today I would have been bullish as hell, but that didn't happen and not only didn't it happen, but what came out of that meeting at least for me was a timid and confused Fed. Yellen's frightened and confused as hell. This is probably what a Hillary Rodham Clinton presidency will look like. Immense caution when it comes to the things we really need and bold, irresponsible action on the things we don't need. Like wars.

Great.

Anyway, I'm not saying dump stocks. Not just yet. The spending could pull us through. Barely. But right now it's all we got.

C.P. Chandrasekhar and Jayati Ghosh — And Now, Price Deflation in India and China?

 Obviously other factors must also be at play in the ongoing producer price deflation in both countries. It may be that the features that have operated to cause price deflation in the advanced economies – inadequate effective demand because of suppression of wage incomes and continuing emphasis on fiscal consolidation, with very loose monetary policies no longer working as stimulus – are also operated to at least some degree in these economies. 

Clearly, the lack of “decoupling” of these economies from the advanced economies goes beyond GDP and extends also to the behaviour of producer prices. This can only add to the concerns for policy makers in both countries, especially in India where debt default is already putting major strains on bank balance sheets.

TripleCrisis
And Now, Price Deflation in India and China?
C.P. Chandrasekhar and Jayati Ghosh

Thomas Klitgaard and James Narron — Crisis Chronicles: Gold, Deflation, and the Panic of 1893

In the late 1800s, a surge in silver production made a shift toward a monetary standard based on gold and silver rather than gold alone increasingly attractive to debtors seeking relief through higher prices. The U.S. government made a tentative step in this direction with the Sherman Silver Purchase Act, an 1890 law requiring the Treasury to significantly increase its purchases of silver. Concern about the United States abandoning the gold standard, however, drove up the demand for gold, which drained the Treasury’s holdings and created strains on the financial system’s liquidity. News in April 1893 that the government was running low on gold was followed by the Panic in May and a severe depression involving widespread commercial and bank failures.…

FRBNY — Liberty Street Economics
Crisis Chronicles: Gold, Deflation, and the Panic of 1893

Thomas Klitgaard, vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, and James Narron, First Vice President and Chief Operating Officer of the Federal Reserve Bank of Philadelphia

Heiner Flassbeck — Deflation is a master from Germany – and the ECB is its victim

Savers.

flassbeck economics international
Deflation is a master from Germany – and the ECB is its victim
Heiner Flassbeck

Yves Smith — Eurobanks: The Probable Point of Failure as Systemic Stress Rises

As all major financial markets – stocks, currencies, commodities, and bonds – continue to be highly volatile and risk averse, investors’ mood, and even that of real economy players, is getting nervous and gloomy. Both the masters of the universe at Davos and corporate CEOs have an uncharacteristically subdued outlook for the upcoming year.…

What should trouble commentators and analysts most, and this is implicit in the market upheaval, is that the officialdom, most importantly central bankers, who have developed the bad tendency to assign themselves the role of economic first responders (when they would in cases have been better served to sit on their hands and force governments to step to the plate to do more spending) have no idea what to do now.…

Deflation is the worst possible place to be in an economy with heavy debt levels. Economists have managed to forget the most basic lesson of the Great Depression, and tell themselves the bizarre story that putting money even more on sale will lead people to borrow and spend. Earth to central bankers: they won’t if they are worried about their future. What is needed is more demand, which means more fiscal spending and better incomes for workers, which means more labor bargaining power. Yet orthodox policymakers are deeply allergic to both ideas.…

Naked Capitalism
Eurobanks: The Probable Point of Failure as Systemic Stress Rises
Yves Smith

Ann Pettifor — It is wrong to blame China for the global economy’s woes

In our view the cause of deflationary pressures lies with the ongoing Global Financial Crisis (GFC), which has not as yet been resolved. On the contrary the economic model that fostered the crisis remains intact, with only some tinkering at the margins of the banking system. As a result the GFC continues, rolling around from the core (the Anglo-American economies) to first the Eurozone, and now hitting emerging markets, including China. The GFC, as we now know, was caused by the bursting of excessive and unpayable private debt bubbles: bubbles that were punctured from 2006 onwards by high real rates of interest.

Debtonation
It is wrong to blame China for the global economy’s woes

Ann Pettifor

Larry Elliott — Beware the great 2016 financial crisis, warns leading City pessimist

Albert Edwards, strategist at the bank Société Générale, said the west was about to be hit by a wave of deflation from emerging market economies and that central banks were unaware of the disaster about to hit them. His comments came as analysts at Royal Bank of Scotland urged investors to “sell everything” ahead of an imminent stock market crash.

“Developments in the global economy will push the US back into recession,” Edwards told an investment conference in London. “The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.”…

The Guardian
Beware the great 2016 financial crisis, warns leading City pessimist

Larry Elliott, Economics editor

Marshall Auerback — What US Treasury Yields Might Be Signalling

I’m fundamentally a deflationist at heart on the question as to how this mega moral hazard bubble finally resolves itself. This, in spite of the strong sudden explosive rise in the December US household measure of employment, (which has brought the smoothed household survey job growth up towards the stronger payroll survey job growth and seems to point toward further rate rises being engineered by the Federal Reserve as we move forward in 2016).…

Naked Capitalism
Marshall Auerback: What US Treasury Yields Might Be Signalling
Marshall Auerback, a market analyst and Research Associate at the Levy Institute

Raúl Ilargi Meijer — 2016 Is An Easy Year To Predict

Deflation. The second leg down in the global financial crisis.

The Automatic Earth
2016 Is An Easy Year To Predict

Raúl Ilargi Meijer

Jeff Cox — Consumers shutting down as US economy deflates

The math is pretty simple: A lack of purchasing power for consumers has led to a lack of pricing power for companies.

When it comes to the U.S. economy big-picture outlook, the ramifications are more complicated, and not particularly pleasant….

CNBC NetNet
Consumers shutting down as US economy deflates
Jeff Cox

Ambrose Evans-Pritchard — Deflation supercycle is over as world runs out of workers

The demographic 'sweet spot' is vanishing. We are on the cusp of a complete reversal, spelling the end of corporate hegemony

When Charles Goodhart speaks it is important. He is one of the few people at the top of the chain that actually understands monetary economics and is MMT-friendly. So you'll probably want to read this, even if you don't pay attention to AE-P.

This is going to shift the conversation if it gets traction. Goodheart saying it and AE-P featuring itguarantee it will.

The world is in flux. The great leveling is already here in this view.

The Telegraph

Deflation supercycle is over as world runs out of workers

Ambrose Evans-Pritchard

Adam Haigh and Jason Clenfield — Deflation Ice Age Looms After Yuan Move, Albert Edwards Says

China’s currency devaluation took Albert Edwards a step closer to realizing his doomsday prediction: deflation spreading from Asia to the U.S. and Europe and sending economies crashing. 

Tumbling emerging-market currencies will now accelerate their declines, curbing import costs in developed nations and triggering a broad drop in prices that will undermine economic growth, according to Edwards, the top-ranked global strategist at Societe Generale SA.

According to Edwards, "this is the start of something big, something ugly.” While I would agree that t this is a big move, it is hardly the start. Deflationary pressure began building at the time of the 2007 financial emergency that morphed into a full-blown financial and economic crisis that threatened the global economy and was narrowly avoided. However, there has been no significant recovery, or anaemic one at best.

The bursting of the commodity bubble that Randy Wray and others like Jeremy Grantham predicted some time ago has taken hold with a vengeance, especially with oil still testing the bottom. Bell-weather copper is crashing, too.

The neoliberal and neoclassical preference for austerity as economic policy is creating severe drag on the economies of many developed nations, in particular the Eurozone. Political instability is also rising in the developing world.

Japan and then the Eurozone adopted QE for a variety of reasons but one effect, certainly anticipated was a weakening of the yen and the euro. Both Japan and the Eurozone typically strive to run a mercantilist policy emphasizing net exports and fiscal surpluses.

Concurrently, the USD has been rising as a safe haven, with the US not only the largest economy and most powerful nation politically, but also recovering better than most, not to mention the Fed beginning to raise the interest rate soon.

As a result, China also saw its currency rising, the renminbi being pegged to the USD. China has also been running a mercantilist policy as a new exporter and began to see its exports shrinking with yuan getting relatively more expensive.

Thus, China recent action has been defensive and should have been expected, although it seems to have caught markets by surprise.

Nevertheless, the size and influence of China as a global exporter reducing the cost of its exports by currency devaluation is going to have a further deflationary effect. 

The global economy is experiencing a huge demand deficiency problem, which is especially dangerous where there is also elevated private debt or there is a balance of payments issue in USD with dollars becoming more expensive relatively.

The deflationary pressure is now being noticed. If it took China's move to call attention to it, that's a good thing. Without acknowledging the challenge, the situation is likely to "ugly," as Edwards writes.

It's long overdue to address the demand deficiency and debt overhang with fiscal remedies instead of relying on monetary policy that has shown itself to be ineffective. It's also time to confront the erroneous assumption that neoliberalism is the only alternative. As Margaret Thatcher put it, "There is no alternative." 

There is an alternative, and Keynes set it forth in the midst of the Great Depression. It's past time to listen to him again.

However, we have come a long way since Keynes was writing and advising governments. Post Keynesianism and MMT have articulated those insights and taken them further. There is no time to lose in addressing real challenges with effective solutions that have been shown to work historically instead of imaginary issues with speculative cures that don't have a good track record empirically. We need to do this before things get ugly.

Bloomberg Business
Deflation Ice Age Looms After Yuan Move, Albert Edwards Says
Adam Haigh and Jason Clenfield

Dirk Ehnts — Lapavitsas on Grexit

I have recently reviewed the book by Flassbeck and Lapavitsas, who is a member of Syriza, for the International Journal of Pluralism and Economics Education. The book review, which can be downloaded for free, was very interesting because it merged political economy with economics. The authors argued that Greece does not hold any ace while Europe would be able to cut access to liquidity to both government and banks. Hence a credible threat of Grexit would be needed. I thought and I still think, after the last”bail-out” of Greece, that this analysis is basically correct. The problem with the euro zone is that it is deflationary. Whenever a crisis comes up, spending is cut. This can only lead to less demand during times of crisis, which is bad. Economists have learned that lesson in the Great Depression, when Germany’s unemployed voted a man to power who promised bread and jobs in 1933. It is sad that German politicians of today do not seem to understand that money buys goods and that there is something like a monetary circuit which is very important. Instead, they believe in morality and think that Germany is a victim.

econoblog 101
Lapavitsas on Grexit
Dirk Ehnts | Berlin School for Economics and Law

Philip Arestis and Malcolm Sawyer — What if the Euro Area is Led to Serious Deflation?

The economies of the euro area monetary union are close to deflation. In May 2015, the annual rate of inflation averaged 0.3% across the euro area, after six months during which the rate of inflation had been zero or below. The question then arises as to whether the deflation has been internally or externally generated, whether it becomes self-perpetuating, and what the consequences would be.

Triple Crisis
What if the Euro Area is Led to Serious Deflation?

Philip Arestis and Malcolm Sawyer

Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann — The costs of deflations: a historical perspective

Asset value deflation rather than goods price deflation is the problem that leads to debt deflation.

The costs of deflations: a historical perspective 24 pages
by Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann


BIS Quarterly Review, March 2015

Adair Turner — Have We Become Too Flexible?

Oh, well.

Project Syndicate
Have We Become Too Flexible?

Adair Turner | former chairman of the United Kingdom's Financial Services Authority and former member of the UK's Financial Policy Committee, is a senior fellow at the Institute for New Economic Thinking and at the Center for Financial Studies in Frankfurt

Wanker of the day.

The ECB’s New Macroeconomic Realism
Jeffrey D. Sachs | Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University, is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals.

Bill Mitchell — Fiscal austerity drives continuing pessimism as oil prices fall

The UK Guardian article (January 20, 2015) – Davos 2015: sliding oil price makes chief executives less upbeat than last year – reported that the top-end-of-town are in “a less bullish mood than a year ago” and that “the boost from lower oil prices is being outweighed by a host of negative factors”. The increasing pessimism is being reflected in the growth downgrades by the IMF in its most recent forecasts. A significant proportion of the financial commentators and business interests are now putting their hopes on the ECB to save the world with quantitative easing (QE). That, in itself, is a testament to how lacking in comprehension the majority of people are about monetary economics. QE will not save the Eurozone. But I was interested in this pessimism in the context of falling oil prices given that with costs falling significantly for oil-using sectors (transport, plastics etc) and disposable income rising for consumers (less petrol costs), the falling oil prices should be a stimulating factor. I recall in the 1970s when the two OPEC oil price hikes were the cause of stagflation. So why should the opposite dynamic cause ‘stag-deflation’ (a word I just invented)? There is a common element – fiscal austerity – which explains both situations.…

Bill Mitchell – billy blog
Fiscal austerity drives continuing pessimism as oil prices fall

Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

William K. Black — EU Deflation Arrives and the Troika Continues to Fiddle While the EU Burns

Good post by Bill Black on EZ deflation in which is excoriates the usual. I would just add that price level is not an observable but rather an estimate, and estimating is a slippery affair. Central banks try to err on the high side rather than fall into the deflation trap. When a currency zone officially falls into deflation, the government has drastically missed the mark and failed to use its available tools properly. As Bill notes, deflation doesn't just happen. It happens over time through a period of disinflation. This has been obvious in the EZ, especially through its effects on the periphery. Moreover, sanctions on Russia have further reduced demand for European produced goods and services, which is a double whammy on top of ill-advsed austerity. This is dangerous not only socio-economically, but also politically. Instability is increasing.

New Economic Perspectives
EU Deflation Arrives and the Troika Continues to Fiddle While the EU Burns
William K. Black | Associate Professor of Economics and Law, UMKC

Mike Bird — Deflation grips the EZ

The eurozone's fiscal compact prods states to run a budget deficit of no more than 3% of their GDP. This means that even with deflation, most countries are still trying to cut their deficits, compounding the problem. Germany, which has now balanced its budget, could stimulate and still be within the rules, but the government doesn't seem to be interested. 

So the eurozone has effectively outlawed Keynesian responses. Even monetarist responses, which rely on the central bank, are much slower and seemingly less effective in Europe. The European Central Bank has been behind the curve in pretty much every decision it's made in the last seven years.

Business Insider
Deflation is here

Europe's Worst-Case Economic Scenario Has Arrived And There May Be No Way Out
Mike Bird