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.
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