Nov 282014
 
 November 28, 2014  Posted by at 8:58 pm Finance Tagged with: , , , , , , , , , , ,
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NPC Thanksgiving turkeys for the President Nov 26 1929

Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said only yesterday in The Price Of Oil Exposes The True State Of The Economy, point out how bad the global economy is doing. QE has been able to inflate stock prices way beyond anything remotely looking fundamental, but energy prices have now deflated instead of stocks. Something had to give at some point. Turns out, central banks weren’t able to inflate oil prices on top of everything else. Stocks and bonds are much easier to artificially inflate than commodities are.

The Fed and ECB and BOJ and PBoC may of course yet try to invest in oil, they’re easily crazy enough to try, but it will be too late even if they did. In that sense, one might argue that OPEC – or rather Saudi Arabia – has gifted us QE4, but the blessings of the ‘low oil price stimulus’ will of necessity be both mixed and short-lived. Because while the lower prices may free some money for consumers, not nearly all of the freed up ‘spending space’ will end up actually being spent. So in the end that’s a net loss as far as spending goes.

The ‘OPEC Q4′ may also keep some companies from going belly up for a while longer due to falling energy costs, but the flipside is many other companies will go bust because of the lower prices, first among them energy industry firms. Moreover, as we’re already seeing, those firms’ market values are certain to plummet. And, see yesterday’s essay linked above, many of eth really large investors, banks, equity funds et al are heavily invested in oil and gas and all that comes with it. And they are about to take some major hits as well. OPEC may have gifted us QE4, but it gave us another present at the same time: deflation in overdrive.

You can’t force people to spend, not if you’re a government, not if you’re a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That’s the perfect picture of Japan right there. There’s no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you can’t force people to spend, you can’t create growth either, so that myth is thrown out with the same bathwater in one fell swoop.

Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices.

It’s like a parasite can live in your body for a long time before you show symptoms of being sick, but it’s very much there the whole time. A lower gas price may sound nice, but if you don’t understand why prices fall, you risk something like that monster from Alien popping up and out.

I had started writing this when I saw a few nicely fitting articles. First, at MarketWatch, they love the notion of the stimulus effects. They even think a ‘consumer-spending explosion’ is upon us. They’re not going to like what they see. That is, not when all the numbers have gone through their third revision in 6 months or so.

OPEC Has Ushered In QE4

Welcome to the new era of QE4. As if on cue, OPEC stepped in just as monetary policy (at least the Fed’s) has dried up. Central bankers have nothing on the oil cartel that did just what everyone expected, but has still managed to crush oil prices. Protest away about the 1% getting richer and how prior QE hasn’t trickled down to those who really need it, but an oil cartel is coming to the rescue of America and others in the world right now.

It’s hard to imagine a “more wide-reaching and effective stimulus measure than to lower the cost of gas at the pump for everyone globally,” says Alpari U.K.’s Joshua Mahoney. “For this reason, we are effectively entering the era of QE4, with motorists able to allocate more of their money towards luxury items, while firms are now able to lower costs of production thus impacting the bottom line and raising profits.”

The impact of that could be “bigger than anything that has come before,” says Mahoney, who expects that theory to be tested and proved, via sales on Black Friday and the holiday season overall. In short, a consumer-spending explosion as we race to the malls on a full tank of cheap gas. Tossing in his own two cents in the wake of that OPEC decision, legendary investor Jim Rogers says it’s a “fundamental positive for anybody who uses oil, who uses energy.” Just not great if you’re from Canada, Russia or Australia, he says. Or if you’re the ECB, fretting about price deflation. Or until it starts crushing shale producers.

Bloomberg, talking about Europe, has a less cheery tone.

Eurozone Inflation Slows as Draghi Tees Up QE Debate

Eurozone inflation slowed in November to match a five-year low, prodding the European Central Bank toward expanding its unprecedented stimulus program. Consumer prices rose 0.3% from a year earlier, the EU statistics office said today. Unemployment held at 11.5% in October [..] While the slowdown is partly related to a drop in oil prices, President Mario Draghi, who may unveil more pessimistic forecasts after a meeting of policy makers on Dec. 4, says he wants to raise inflation “as fast as possible.” [..]

“The only crumb of comfort for the ECB – and it is not much – is that November’s renewed drop in inflation was entirely due to an increased year-on-year drop in energy prices,” said Howard Archer at IHS. The data are “worrying news” for the central bank, he said. Data yesterday showed Spanish consumer prices dropped 0.5% this month from a year ago, matching the fastest rate of deflation since 2009. In Germany, Europe’s largest economy, inflation slowed to the weakest since February 2010. [..]

Bundesbank President Jens Weidmann, a long-running opponent to buying government bonds, today highlighted the positive consequence of low oil prices. “There’s a stimulant effect coming from the energy prices – it’s like a mini stimulus package,” he said in Berlin.

Sure, there’s a stimulant effect. But that’s not the only effect. While I’m happy to see Weidmann apparently willing to fight Draghi and his pixies over ECB QE programs, I would think he understands what the other effect is. And if he does, he should be far more worried than he lets on.

But then I stumbled upon a long special report by Gavin Jones for Reuters on Italy, and he does provide intelligent info on that other effect of plunging oil prices. Deflation. As I said, it eats societies alive. I cut two-thirds of the article, but there’s still plenty left to catch the heart of the topic. For anyone who doesn’t understand what deflation really is, or how it works, I think that is an excellent crash course.

Why Italy’s Stay-Home Shoppers Terrify The Eurozone

Italy is stuck in a rut of diminishing expectations. Numbed by years of wage freezes, and skeptical the government can improve their economic fortunes, Italians are hoarding what money they have and cutting back on basic purchases, from detergent to windows. Weak demand has led companies to lower prices in the hope of luring people back into shops. This summer, consumer prices in Italy fell on a year-on-year basis for the first time in a half-century ..

Falling prices eat into company profits and lead to pay cuts and job losses, further depressing demand. The result: Italy is being sucked into a deflationary spiral similar to the one that has afflicted Japan’s economy for much of the past two decades. That is the nightmare scenario that policymakers, led by European Central Bank chief Mario Draghi, are desperate to avoid.

The euro zone’s third-biggest economy is not alone. Deflation – or continuously falling consumer prices – is considered a risk for the whole currency bloc, and particularly countries on its southern rim. Prices have fallen for 20 months in Greece and five in Spain, for example. Both countries are suffering through deep cuts in salaries and state welfare. Yet Italy, a large economy with a huge public debt, is the country causing most worry. [..]

Like Japan, Italy has one of the world’s oldest and most rapidly aging populations – the kind of people who don’t spend. “It is young people who spend more and take risks,” says Sergio De Nardis, at thinktank Nomisma. In recent years, young people have been the hardest hit by layoffs, he says. Many have left the country to seek work elsewhere. People tend to spend more when they see a bright future. Italian confidence has steadily eroded over the past two decades … In Italy, as in Japan, the lack of economic growth has become chronic.

Underpinning economists’ worries is Italy’s biggest handicap: a huge national debt equal to 132% of national output and still growing. Rising prices make it easier for high-debt countries like Italy to pay the fixed interest rates on their bonds. And debt is usually measured as a proportion of national output, so when output grows, debt shrinks. Because output is measured in money, rising prices – inflation – boost output even if economic activity is stagnant, as in Italy. But if activity is stagnant and prices don’t rise, then the debt-to-output ratio will increase. [..]

Sebastiano Salzone, a diminutive 33-year-old from the poor southern region of Calabria, left with his wife five years ago to run the historic Cafe Fiume on Via Salaria, a traditionally busy shopping street near the center of Rome. Salzone was excited by the challenge. But after four years of grinding recession, his business is struggling to survive. “When I took over they warned me demand was weak and advised me not to raise prices. But now, I’m being forced to cut them,” he says. [..] Despite the lower prices, sales have dropped 40%, or 500 euros a day, in the last three years. [..]

For hard-pressed individuals, low and falling prices can seem a godsend; but low prices lead to business closures, lower wages and job cuts – a lethal spiral. Since Italy entered recession in 2008 it has lost 15% of its manufacturing capacity and more than 80,000 shops and businesses. Those that remain are slashing prices in a battle to survive.

Home fixtures maker Benedetto Iaquone says people are now only changing their windows when they fall apart. To hold onto his €500,000-a-year business, Iaquone says he is cutting prices. By doing so, he is helping fuel the chain of deflation from consumers to other companies.

In Italy’s largest supermarket chains, up to 40% of products are now sold below their recommended retail price, according to sector officials. “There is a constant erosion of our margins,” says Vege chief Santambrogio.

What Italy would look like after a decade of Japan-style deflation is grim to imagine. It is already among the world’s most sluggish economies, with youth unemployment at 43%. As a member of a currency bloc, Rome’s options are limited [..] Italy’s budget has to follow European Union rules.

Lasting deflation would force more companies out of business, reduce already stagnant wages and raise unemployment further [..] The inevitable rise in its public debt could eventually lead to a default and a forced exit from the euro.

Many in southern Europe say the EU should abandon its strict fiscal rules and invest heavily to create jobs. They also say Germany, the region’s strongest economy, should do more to push up its own wages and prices. Mediterranean countries need to price their products lower than Germany to make up for the fact that their goods – particularly engineered products such as cars – are less attractive. But with German inflation at a mere 0.5%, maintaining a decent price difference with Germany is forcing southern European countries into outright deflation.

Italy’s policymakers are trying to stop the drop. Prime Minister Matteo Renzi cut income tax in May by up to €80 a month for the country’s low earners. But so far the emergency measures have had little effect – partly because Italians don’t really believe in them. A survey by the Euromedia agency showed that, despite the €80 cut, 63% of Italians actually think taxes will rise in the medium-term. Early evidence suggests most Italians are saving the extra money in their paychecks. If so, it will be reminiscent of similar attempts to boost demand in Japan in the late 1990s. The Japanese hoarded the windfalls offered by the government rather than spending them.

That same process plays out, as we speak, in a lot more countries, both in Europe and in many other parts of the world: South America, Southeast Asia etc.

Deflation erodes societies, and it guts entire economies like so much fish. Deflation is already a given in Japan, and in most of not all of southern Europe. Where countries might have saved themselves if only they weren’t part of the eurozone.

If Italy had the lira or some other currency, it could devalue it by 20% or so and have a fighting chance. As things stand now, the only option is to keep going down and hope that another country with the same currency Italy has, i.e. Germany, finds some way to boost its own growth. And even if Germany would, at some point in the far future, what part of that would trickle down to Italy? So what’s Renzi’s answer? An €80 a month tax cut for people who paid few taxes to begin with.

Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power. If that is not clear, don’t worry; you’ll see so much of it you own’t be able to miss it.

And don’t think the US is immune. Most of the Black Friday and Christmas sales will be plastic, i.e. more debt, and more debt means less future spending power. Unless you have a smoothly growing economy, but that’s not going to happen when Europe, Japan and soon China will be in deflation.

And yes, oil at $50-60-70 a barrel will accelerate the process. But it won’t be the main underlying cause. Deflation was baked into the cake from the moment that large scale debt deleveraging became inevitable, and you can take any moment between the Reagan administration, which first started raising debt levels, to 2008 for that. And all the combined central bank stimulus measures will mean a whole lot more debt deleveraging on top of what there already was.

We’ll get back to this topic. A lot.

Home Forums OPEC Presents: Q4 and Deflation

This topic contains 7 replies, has 7 voices, and was last updated by  Golden Oxen 1 year, 9 months ago.

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November 28, 2014 at 8:58 pm #16947

Raúl Ilargi Meijer

NPC Thanksgiving turkeys for the President Nov 26 1929 Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said o
[See the full post at: OPEC Presents: Q4 and Deflation]

November 28, 2014 at 10:30 pm #16950

rapier

At it’s core the AE message, Nicole’s message, has been that deflation is inevitable. That means growth, the growth Illargi rails against, has to end if for no other reason that the planet won’t support it which is a pretty good reason.

Which presents a dilemma if one has to choose a side. More inflation/growth or deflation/contraction. If there is a middle way, a way out I’d like to hear what it is.

In every possible short term I think it’s fair to say that for most every living human, growth is preferred. It’s water under the bridge now but at any point the last 50 years or whatever period you choose if we had chosen to reject growth for its own sake the way down would have been less steep but we can’t go back now. Then too at every possible point in the past the same formula applied. Growth was better at every moment along the line.

November 29, 2014 at 1:52 am #16952

TheTrivium4TW

Hi Rapier, I think you misunderstand my stance. I didn’t say that all monetary systems are prima facie fraud. Rather, I said that debt money systems where money is lent into existence are prima facie fraud.
Since the Debt Money Monopoly is running the show, everywhere they control is tied down with debt monetary systems and everywhere they are in control are going to bankrupt to the Debt Money Tyrants and those who most closely serve their interests.

People don’t comprehend the mechanics of why deflation is bad. Denninger is claiming how good “deflation” is because he doesn’t even understand the mechanics. Ilargi is 100% correct when he says that deflation is not just lower prices. He is also part way there when he says it also means lower spending. The REAL CRUX is that is means LOWER DEBT MONEY ISSUANCE INTO SOCIETY!
Here is why: When $20 is lent into society, as all money is save coinage is (which is so small a contributor it can be ignored), more is due at some point in the future due to the attached usury. If the interest rate is 5% per annum, then $21 would be owed in a year’s time. If the interest rate is 30%, then $26 is owed in a year’s time.
Failing any further debt money lending into society, society is on the road to bankruptcy and collateral confiscation with 100% certainty – and there is nothing society can do about it BECAUSE THEY ARE POWERLESS UNDER THESE RULES. The lender is also bankrupt iif even $1 of the $20 they lent into society isn’t returned to the lender in full (for example, it was lost in the couch) because they have the $20 liability on their balance sheet that originated when they created the $20 to lend into society (at interest to society, BUT THE BANK DOESN’T HAVE TO PAY INTEREST ON THEIR LIABILITY… SOME ANIMALS MORE EQUAL THAN OTHERS AND ALL…).
I’ve said this before and I’ll say it again, this example reveals the FOUNDATIONAL REASON THE DEBT MONEY MONOPOLISTS MUST TARGET INFLATION AND WHY STEADY STATE CAN’T EXIST BECAUSE IT LEADS TO AN INSOLVENCY COLLAPSE OF SOCIETY! They KNOW they have to create more debt money to make the previous debts payable OR MUCH OF SOCIETY GOES BANKRUPTS – INCLUDING THEIR CORPORATE FRONTS.
The latter problem was solved during the previous crisis. Their corporate fronts now CAN’T GO BANKRUPT BY DEFINITION. Too Big To Fail and Jail. That just means everyone else goes bankrupt more quickly when the exponential debt curve caves in AS IT MUST.
The operating system is a Trojan Horse malware system.
If you still don’t “get it,” try this example. Set up a game of Monopoly – the board game. Assign a person to be the banker. The only rule change you have to make is that the banker lends money into society at interest – say 5%. Every time any player passes go, THEY MUST PAY THE BANKER 5% OF THE MONEY THEY POSSESS.
Guess who wins the game? Every single time.
Monopoly. Indeed.
That is a good real world simulation of the real world mechanics at work – except the interest is paid per “pass go” event instead of “annual event.”
The Debt Money Monopolists have already orchestrated the nation state into bankruptcy. We are already there – with no way out under the current rules. We are done. Fork in Turkey; Turkey already cooked and carved; Turkey not sophisticated enough to figure this out given that the Debt Money Monopoly “farmer” has lied to them their whole life.

PS – A steady state economy can easily exist in the real world. But it can’t exist in a debt money system where society’s (ex Debt Money Monopoly which is a class unto its onw) monetary debt is always greater than its monetary assets.

BTW, the above is not my opinion or feeling. I KNOW it because that is what the 5th grade math lays out for anyone with eyes to see. I don’t think 2+2=4, either. I KNOW it. What is surreal is that otherwise super smart people can’t grasp it and aren’t the least bit bothered by the fact they can’t defeat the mathematics involved in the proof. If they tried to defeat it, they’d see that it can’t be defeated.

  • This reply was modified 1 year, 9 months ago by  TheTrivium4TW.
November 29, 2014 at 2:41 am #16954

TheTrivium4TW

>>In every possible short term I think it’s fair to say that for most every living human, growth is preferred. It’s water under the bridge now but at any point the last 50 years or whatever period you choose if we had chosen to reject growth for its own sake the way down would have been less steep but we can’t go back now. Then too at every possible point in the past the same formula applied. Growth was better at every moment along the line. <<

Rapier, in a debt based system where interest is siphoned away from society and into the hands of the architects of the debt based monetary system, the choice is to grow and then die when the bubble busts at a later date or die right now as your engineered insolvency is realized even sooner. Of course, the world collapses right into the hands of the the debt based monetary system, which is the foundational reason Nicole says “why should the bankers get it all” 49 seconds into A Tribute to the Automatic Earth…

What Nicole doesn’t explain are the precise mechanics as to how the “bankers get it all.”
I’ve done that – the Debt Money Monopoly privately controls the definition and issuance of debt based money to society (no vote for you, serfer boys and girls!), they saturate society with inextinguishable debt based mostly on collateralized loans, when the system begins to break down, they got their bipartisan political operatives to offload the Bankster debt onto our society that already held onto inextinguishable debt (now we have even more), they generated trillions more in debt money and kept the proceeds while offloading the corresponding debt onto the tax payer (the one two punch over a monetarily nescient society), and that’s where we stand now.
The next phase, once we fully transition out of this phase, is to rescind credit, bust all the debtors, and seize the collateralized assets.
The biggest bankruptcy will be the government and the assets of the government will be handed over to the Bankster – exactly as has already started in Europe. Greek Islands are going to Banksters – through a fraudulent debt monetary system mechanism and other deceits. Some will say that Germany took advantage of them – and then Germany will go bankrupt, too. This crime is bigger than the nation state.
Now do you see why the Debt Money Monopoly government worked so hard to kick its citizens off of Federally liened land to the Debt Money Monopoly before the Banksters take it over? Cliven Bundy and the 50 or so other ranchers being kicked off federal land all of sudden takes on a whole new dimension.
The takeaway is that “steady state” means “bankrupt society in short order.” It also means less collateral to convey from society once the exponential debt bubble busts.
I **highly** recommend that you read and reread my last two posts until you completely comprehend what I’m saying. When you do, you will either “see the light” or you will be tasked with mathematically showing the error in my logic – something nobody has ever don’t in almost half a decade of me putting this information out as far and as wide as I can get it. And yes, I’m talking people with decades of accounting experience, Masters in Finance (worked for Blackrock of all places), Masters in Economics and even Steve Keen. I emailed him a diagram exposing the whole fraud and he never emailed back. I want someone to prove the 5th grade level mathematics wrong… It would make my day. But they can’t, so they ignore it – what else can they do in order remain nescient of the real world that is as unpleasant as the dystopia 1984. Orwell coined a term with the perfect definition of how schooled and unschooled people deal with revolution information – crimestop. Look up the definition – I see it at work all the time.

November 29, 2014 at 10:53 am #16957

Baron

Interesting articles but unfortunately there are no solutions. It’s because the system is run by humans not robots. You would have thought that humans over thousands of years could have sorted out their finances… but they can’t. It’s part of our flawed human nature. The average person is happy to rub along with his neighbour and generally ‘live and let live’. Our species has many that want more than the average person. These are the people with the ‘drive’ to be in charge. They judge their success by how above average they are in wealth and acquisitions. Many of this group want to achieve their superiority over their average man by trickery not work. These are the ones that ultimately run any system. The problem is they are parasites and eventually their system collapses. Things then fall back to an equilibrium but this doesn’t last as the cycle starts again. The present fiat-fractional banking system is coming to an end. This will collapse and the whole merry-go-round will start anew with something different that everyone will believe will work and a new World will dawn where everyone has a just and financially sound lifestyle. Of, course it won’t work.
The only way to survive and do well is know where you are in the cycle and to use it’s rules to protect yourself.

  • This reply was modified 1 year, 9 months ago by  Baron.
  • This reply was modified 1 year, 9 months ago by  Baron.
November 29, 2014 at 6:06 pm #16973

raptor

Bring on the deflation. I’m not buying the “deflation is bad” tripe. Our system needs to unwind. Peacefully is best. However some lynchings will occur. Debt and its creators must not get a pass. An overpopulated and overpriced world is what has occurred under this system. Let’s try another one for awhile.

November 29, 2014 at 6:45 pm #16979

Professorlocknload

Fannie Mae is going to be another major contributor to the next QE. And yes, this all goes full on Zimbabwe before real Deflation is allowed to gain a foothold.

Bazooka hasn’t been deployed yet, but it’s dusted off and ready.

Rates must “normalize” to save the system. There is only one way to do that.

Devalue.

Period!

November 29, 2014 at 11:26 pm #16990

Golden Oxen

The fallout from a collapse of Fracker junk debt could also pull out the Bazooka, could be very soon the way oil prices are currently falling.

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