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"
It's not a matter of "letting it happen" (it being deflation).
Deflation is actually the natural state of affairs. As a result of increased productivity, prices should drop over time, with more goods available at cheaper prices, to the benefit of everyone!
And in spite of the ridiculous notion that people will hold off on consumer purchases if prices drop, it's actually the other way around. Falling prices and bargains spur sales.
If falling prices stopped sales, there would have been no sales of flat-panel TVs, computers, or any other electronic devices for years.
If the price of healthcare dropped, people would have more money to spend on other things, and spend they would.
It's asset prices, not consumer prices, where people stay away when prices are falling. That makes asset bubbles all the more dangerous.
Consider the irony of this statement by President Obama in his state of the union address.
"Today, our housing market is finally healing from the collapse of 2007.Home prices are rising at the fastest pace in six years, home purchases are up nearly 50 percent, and construction is expanding again. But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected."
Pater Tenebrarum at the Acting Man blog accurately summarized the situation in State of the Union or TOTALGOV as follows:
"We gotta blow a new housing bubble somehow! We're already half-way there apparently. It hasn't occurred to the president that the first sentence highlighted above is the main cause of what he bemoans in the second highlighted sentence."
Indeed! Please consider my December 20, 2013 article All-Cash Home Sales Hit Record 42% of Sales.
It's that flood of "all cash" money that has driven up prices. Obama calls it a success. So does Pritchard. Both want more bank credit issuance to complete the bubble reblowing episode.
Pritchard wants central bankers to "Do Something!" He sounds like a child who broke his toy and expects some miracle to fix it.
The fact of the matter is this: Central banks already have done something. They made matters worse by doing exactly what Pritchard asked for.
However, that does not please Pritchard. He wants central banks to do still more, at the risk of blowing even bigger asset bubbles in the process.
Perfectly Obvious or Obviously Not?
It should be perfectly obvious to Pritchard (and everyone else) that if the Fed could control jobs or get banks to lend, it would have happened long ago.
Lord knows they tried. Three rounds of QE did not spur lending or hiring in the US. LTRO and near-zero interest rates did not spur lending in Europe.
But QE sure did spawn asset bubbles in the US and elsewhere.
Pritchad, Lagarde, Janet Yellen, Ben Bernanke, and others want to ignore massive asset bubbles in equities and bonds. Instead they worry consumer prices are not rising fast enough.
Deflation is a Good Thing!
Many countries desperately need falling prices to have a chance. Government spending in France is a ridiculous 56% of GDP. Does Pritchard want it to hit 100%?
Deflation spurred a welcome revival of Spanish construction companies. In the process, competition lowered costs in France (and that is not just a good thing, but a very needed thing).
For further discussion, please see Deflation Will Return: Europe First, Then US; Global Supply Arbitrage
Asset Bubbles the Biggest Threat to Banking
The only possible context in which deflation can be considered bad is the effect it has on banks and bank lending. Yet, that puts the cart before the horse.
It's not deflation that causes the problem, it's increasing loose monetary standards that create asset bubbles (on which much lending is based) that is the real problem. The bigger the asset bubble, the bigger the ultimate threat to banking!
Yet Pritchard wants to ignore all that. He wants more of the same "do something" actions of central bankers that created the very problems we have now.
Deflation Fighting (Inflation Promotion) Does Five Things
- It increases government debt (as Japan found out)
- It promotes asset bubbles
- It delays the inevitable bust, making matters worse in the mean time
- It creates moral hazards
- It is a major factor in rising income inequality
What the Crisis Taught Us
Lagarde warns "What the crisis has taught us is that we need to be extremely vigilant and expect bubbles from places that we don’t anticipate."
Lagarde warns about the failure to anticipate bubbles. Her warning is very apropos!
Central banks never anticipate bubbles. Lagarde cannot even see the huge bubbles that are about ready to explode in her face.
Meanwhile, Pritchard wants to ignore bubbles in order to prevent deflation, and Obama complains about income inequality when the source of rising income inequality is Fed policies that create asset bubbles.
Lessons Not Learned
It's central bank inflationary policies, proposed by Pritchard, Yellen, Bernanke, and many others, that cause bubbles of increasing amplitude over time.
Ultimately, all bubbles burst, and the bursting of economic bubbles is the very asset-deflation they need to prevent. And the only way to prevent asset bubbles from bursting is to not blow them in the first place.
Clearly the crisis did not teach any of them, anything at all.
Mike "Mish" Shedlock