Deflation or Inflation next for Europe?

[charles brough]

The current belt-tightening Southern Europe is undergoing spells Euro deflation and a theoretical spiraling-down into depression. This is being countered by the European Central bank's (ECB) buying of government bonds of the afflicted states, but the ECB's rigid, stated policy is only to keep inflation at 2% or less, not to avoid deflation.
http://<br /> <br /> Like the Fede...n_Central_Bank

The question is whether the ECB will modify policy enough to counter a depression? The UCB head, Mario Draghi can be regarde as an economic conservative who is influenced by both the French and German leadership. http://en.wikipedia.org/wiki/Mario_Draghi

The electing of a socialist premier in France could allow Draghi to more aggresssively deal with the deflation-depression threat . . .

[The Don]

The current belt-tightening Southern Europe is undergoing spells Euro deflation and a theoretical spiraling-down into depression. This is being countered by the European Central bank's (ECB) buying of government bonds of the afflicted states, but the ECB's rigid, stated policy is only to keep inflation at 2% or less, not to avoid deflation..

Not quite true. According to Wiki:

http://en.wikipedia.org/wiki/European_Central_Bank

it aims to maintain inflation rates below but close to 2% over the medium term”.

So there is a mandate to avoid deflation.

If there is deflation in Southern Europe, presumably Northern Europe will just acquire the assets because they share a currency.

Energy costs are unlikely to drop, food prices tend to stabilise so the scope for deflation is IMO most likely to come from services.

[Puppycow]

The ECB seems to be willing to pump in new money only when forced to by the bond markets. Deflation, recession, soaring unemployment -- these things do not spur the ECB into significant action. But an imminent debt crisis tends to force their hand.

If bond yields in Italy or Spain pass 7% again, we will see more action not because they want to do it but because they must. The alternative could be economic armageddon.

[charles brough]

Not quite true. According to Wiki:
http://en.wikipedia.org/wiki/European_Central_Bank
So there is a mandate to avoid deflation.
I used the same article and based my post on it. I think the best way to put is that either the ECB or the Wikipedia article are vague about deflation.

[The Don]

I used the same article and based my post on it. I think the best way to put is that either the ECB or the Wikipedia article are vague about deflation.

Deflation would be inflation close to or below 0%. The ECB is tasked to keep it close to, but below 2%.

[Muldur]

The real measure of this will be how well the EU can shore up support for the Euro. If one or more EU members gets economically hosed completely and leaves the Euro, the whole house of cards will topple and it will be inflation as the other nations scramble to resurrect their national currencies.

[stevea]

.... If one or more EU members gets economically hosed completely and leaves the Euro,...

Almost inevitable wrt Greece. Spain would be a lot more painful to the EC.

[daenku32]

China & India are no longer approaching us, economically. We are now approaching them.

[Muldur]

Almost inevitable wrt Greece. Spain would be a lot more painful to the EC.

According to the rumors I'm hearing (and I consider them rumors since they come from an investment house, not a news service), Spain's bond rate is above 6% and climbing back towards the "panic levels" from the 08 meltdown.

Germany is making noises about booting Greece out of the Euro, and there is a run on the banks going on as depositors are trying to get it out of the vaults while they still can.

And Moody's just took an axe to over 20 major Italian banks.

I'm thinking the "double dip" is starting to look more like the run-up to a so-called "inflationary depression"...which stands two chances of remaining a European phenominon...slim and none.

The ONLY thing that might be good to come out of this is a strengthening of the dollar and US Treasuries if a "flight to quality" mentality sets in.

On the other hand, several major European finance firms are opening up new investments denominated in yuans, so that may not happen.

[stevea]

According to the rumors I'm hearing (and I consider them rumors since they come from an investment house, not a news service), Spain's bond rate is above 6% and climbing back towards the "panic levels" from the 08 meltdown.

Germany is making noises about booting Greece out of the Euro, and there is a run on the banks going on as depositors are trying to get it out of the vaults while they still can.

And Moody's just took an axe to over 20 major Italian banks.


Spanish BANKIA S.A. is down 26% today and 64% for the year, rumors of a bank run persist. Germany isn't the EC and can't boot anyone. They can refuse to fund further Greek bailouts and suggest a vote on Greece's membership given that Greek can't meet the EC borrowing regs. Yes Moody's downgrades had been rumored in the financial press for weeks.

I'm thinking the "double dip" is starting to look more like the run-up to a so-called "inflationary depression"...which stands two chances of remaining a European phenominon...slim and none.


I don't see where you get "inflationary depression" out of this scenario, where I assume you are referring to the US economy. Recession in Europe certainly, recession/stagnation in the US likely, If/when Greece & Spain and Portugal and perhaps others create new sovereign currencies, then these are likely to experience inflation.

The ONLY thing that might be good to come out of this is a strengthening of the dollar and US Treasuries if a "flight to quality" mentality sets in.

Strong dollar is a very bad outcome. Strong dollar is ideal if you want to make US exports drop, imports increase and also accelerate the loss of US jobs. We are already apparently seeing a little (short term I think) deflation in the US as a flight to quality occurs over the Euro-fright.

I'm not convinced any new sovereign currencies can work well any longer without introducing new rules wrt investment. If you are a Greek national why wouldn't you convert your savings from NewDhrachmas to Euros or other non-inflating currency ? It would be silly not to.

[Muldur]

Spanish BANKIA S.A. is down 26% today and 64% for the year, rumors of a bank run persist. Germany isn't the EC and can't boot anyone. They can refuse to fund further Greek bailouts and suggest a vote on Greece's membership given that Greek can't meet the EC borrowing regs.

And as the major backer behind the EU and the Euro right now they can pretty much insist on (and get) what they want or they might well pull out unilaterally themselves rather than let the Euro drag them down.


I don't see where you get "inflationary depression" out of this scenario, where I assume you are referring to the US economy.

I see it starting in Europe as they scramble to reestablish national currencies and the masses go into "survival mode" and start buying up everything in sight before the currency revaluations hit. That's a classic recipe for inflation. Since the Greek economy in particular is already headed for a depression you have both monetary inflation plus economic depression, hence "inflationary depression". And I don't think it stands much chance of staying contained to Europe unfortunately.

Strong dollar is a very bad outcome. Strong dollar is ideal if you want to make US exports drop, imports increase and also accelerate the loss of US jobs. We are already apparently seeing a little (short term I think) deflation in the US as a flight to quality occurs over the Euro-fright.

US workers can't eat exports. The cost of living continues to soar. We need a strong dollar to allow people to eat and pay their bills.

[The Don]

US workers can't eat exports. The cost of living continues to soar. We need a strong dollar to allow people to eat and pay their bills.

Are you sure that a strong dollar is a good thing ?

You're quite correct that a strong dollar will help to curb inflation by lowering the price of imported goods but it will also mean that the same deflationary pressures will be put on goods produced in the United States if they are to remain price competitive. This will tend to drive down labour costs which will result in fewer workers and/or lower wages. Those affected will be less able to pay their bills.

You point out that United States exports will become more expensive and less competitive. This doesn't just mean manufactured goods, it'll also mean that services will be more expensive. There are a lot of United States based consultancies and financial services companies. These jobs are comparatively easy to offshore.

Another negative impact of a strong dollar is on tourism. Right now there are a lot of adverts here in the U.K promoting the United States as a holiday destination. If the dollar strengthens significantly we'll see a repeat of what happened in the Eurozone as the Euro went from 1.6 to the £ to only 1.1. There was a significant reduction in the number of tourists AND so many more have gone all-inclusive. Local businesses are hurting very badly.



The flow of money in Europe is interesting at the moment. Apparently billions of Euros are moving to the U.K and among other things are supporting or driving up London property prices. So there are inflationary pressures but not in the country of origin.

[Muldur]

Are you sure that a strong dollar is a good thing ?

You're quite correct that a strong dollar will help to curb inflation by lowering the price of imported goods but it will also mean that the same deflationary pressures will be put on goods produced in the United States if they are to remain price competitive. This will tend to drive down labour costs which will result in fewer workers and/or lower wages. Those affected will be less able to pay their bills.

You point out that United States exports will become more expensive and less competitive. This doesn't just mean manufactured goods, it'll also mean that services will be more expensive. There are a lot of United States based consultancies and financial services companies. These jobs are comparatively easy to offshore.

Another negative impact of a strong dollar is on tourism. Right now there are a lot of adverts here in the U.K promoting the United States as a holiday destination. If the dollar strengthens significantly we'll see a repeat of what happened in the Eurozone as the Euro went from 1.6 to the £ to only 1.1. There was a significant reduction in the number of tourists AND so many more have gone all-inclusive. Local businesses are hurting very badly.

The flow of money in Europe is interesting at the moment. Apparently billions of Euros are moving to the U.K and among other things are supporting or driving up London property prices. So there are inflationary pressures but not in the country of origin.

It's a tough call to make either way. What I know is that the US has outsourced and offshored itself into economic ruin. No workers with good wages to spend means no demand which means lower business proffits which leads to wage cuts, hour cuts and layoffs, which means workers with WORSE wages...rinse...repeat.

We've been so long under the siren spell of "supply side" economics (Bush41 was absolutely correct in 1980 when he called it "Voodoo Economics" that none of our business leaders or political represenatives seem to even remember that supply is useless w/o demand.

So strong dollar means some inflation as prices have to be adjusted for the payment of just wages instead of slave/prison labor level wages.

Weak dollar also means inflation, and probably a lot more of it than strong dollar produces as the purchasing power of money evaporates.

[stevea]

And as the major backer behind the EU and the Euro right now they can pretty much insist on (and get) what they want or they might well pull out unilaterally themselves rather than let the Euro drag them down.

Major backer ? It's a weird concept like saying California and Texas are the major backers of the US dollar or the Fed. Germany has the largest economy in the EC, at ~21% by GDP. Currently German has one of the regular members of the ECB + the Pres of the German bank is one of the nation-bank governors - so they have 2 votes of 23. Germany has no special control of Euro monetary policy.

Perhaps you are confused by news of Merkel's involvement wrt backing the Greek bailout plan. The extraordinary bailout requires agreement by the member nations to actually fund, and Germany has the biggest amount at stake.

The notion that Germany rules the ECB is plain wrong. They might be able to indirectly cause the ejection of Greece by refusing to nationally back further bailouts, but so could France.


I see it starting in Europe as they scramble to reestablish national currencies and the masses go into "survival mode" and start buying up everything in sight before the currency revaluations hit. That's a classic recipe for inflation.

No one is scrambling to establish national currencies yet. Just today the new Greek Pres rejected Merkel's idea of a Greek vote to see if they should exit the euro. I suspect he's being unrealistic, but that's a different matter. If/when it happens I think th ECB will be heavily involved in making a smooth transition There could potentially be a Euro-B that inflates well above the Euro.

Yes, panic buying can cause short-term inflation, but it not a likely scenario. Keep in mind the ECB wants Greece to others to repay their debt in Euro-terms not in inflated Drachma terms, otherwise they could just forgive the debt. So if the Euro-debt won't be inflated away and if the citizens savings won't be inflated away what will be ? Other sources of debt including pensions and 'sticky' salaries I think. The more I think about it - the more convinced am that the sovereign currency scheme cant work unless citizens are prevented from moving savings out of drachmas.

Since the Greek economy in particular is already headed for a depression you have both monetary inflation plus economic depression, hence "inflationary depression". And I don't think it stands much chance of staying contained to Europe unfortunately.

Greece is a tiny economy that has a long long history monetary failures and a very spotty record of stable governments. It's not a major influence and not a good model case to base speculation.

Strong dollar is a very bad outcome. Strong dollar is ideal if you want to make US exports drop, imports increase and also accelerate the loss of US jobs. We are already apparently seeing a little (short term I think) deflation in the US as a flight to quality occurs over the Euro-fright.

US workers can't eat exports. The cost of living continues to soar. We need a strong dollar to allow people to eat and pay their bills.

Whaaa ??? This is so wrong ! "Strong dollar" means a high valued dollar compared to other currencies. It does not translate directly into intra-national inflation nor deflation. Since we are a net importer of goods then the dollar price would decrease and cause a little direct deflation - but only a negligible amount (a 20% (much) stronger dollar would result in ~1% deflation due to 2011 trade imbalance).

But of course the knock-on effect is that US exports decline since US labor is too expensive, so US export jobs are lost. Further US domestic products are more expensive so we will import more goods and shutdown more local production leading to more unemployment and a lower real GDP. It's been called "exporting jobs".

No if you want 100% employment look to monetary policy of Japan of the 1980s or China more recently. You peg your currency LOW (weak dollar). Then imports are too expensive creating demand for local production, and your exports are in high demand due to the favorable exchange rate. It's called "exporting unemployment".

Whether there is inflation or deflation is largely dependent on the relative amounts of currency (and it's rate of circulation) to goods produced. Strong-dollar/weak-dollar is a result of artificial 'pegging' of currencies or more commonly the free-market un/desirability of holding assets denominate in dollars vs other currencies.

[Muldur]

Major backer ? It's a weird concept like saying California and Texas are the major backers of the US dollar or the Fed. Germany has the largest economy in the EC, at ~21% by GDP. Currently German has one of the regular members of the ECB + the Pres of the German bank is one of the nation-bank governors - so they have 2 votes of 23. Germany has no special control of Euro monetary policy.

Aside from the control offered by them being the biggest EU economy, which is considerable. They can threaten to leave the Euro themselves if the other nations don't play ball (and yes, the other big nations could as well).


Perhaps you are confused by news of Merkel's involvement wrt backing the Greek bailout plan. The extraordinary bailout requires agreement by the member nations to actually fund, and Germany has the biggest amount at stake.

And is being called upon to make one of the biggest contributions.

The notion that Germany rules the ECB is plain wrong. They might be able to indirectly cause the ejection of Greece by refusing to nationally back further bailouts, but so could France.

Maybe you're getting different reportage where you're from, but Germany in the US media is one of if not the leading voices of the EU, which seems to be following it's lead pretty closely.

We'll see if that keeps up with the new French president set to loggerhead with the austerity-minded Germans.

No one is scrambling to establish national currencies yet.

Yet being the key word. I wasn't saying it was happening right now (though there is a huge run on the Greek banks ongoing).

Just today the new Greek Pres rejected Merkel's idea of a Greek vote to see if they should exit the euro.

Greece won't voluntarily leave the Euro, IMO. It can't. But it can (and I suspect will) be either kicked out or threatened with such in the near future.

If/when it happens I think th ECB will be heavily involved in making a smooth transition There could potentially be a Euro-B that inflates well above the Euro.

They can try. But sometimes mob psychology sets in.

Yes, panic buying can cause short-term inflation, but it not a likely scenario.

At present. If the Eurozone suffers another 08-type shock, esp if it happens anywhere near the time Greece hits the breaking point, the private investors may bolt on the financial side, which could set of the "main street" Europeans.

Keep in mind the ECB wants Greece to others to repay their debt in Euro-terms not in inflated Drachma terms, otherwise they could just forgive the debt. So if the Euro-debt won't be inflated away and if the citizens savings won't be inflated away what will be ? Other sources of debt including pensions and 'sticky' salaries I think.

How can you inflate only one part of the financial supply?

Greece is a tiny economy that has a long long history monetary failures and a very spotty record of stable governments. It's not a major influence and not a good model case to base speculation.

I'm not so much worried about Greece in and of itself except that it could start a "daisy chain" of defaults as well as put investors in the mood of getting out of all "sovereign wealth" positions, including those in otherwise stable(ish) areas like N Europe and the US.


Whaaa ??? This is so wrong ! "Strong dollar" means a high valued dollar compared to other currencies. It does not translate directly into intra-national inflation nor deflation.

Again, how can you only inflate some of your currency? It's all one pile. Inflation is the loss of purchasing value of a currency. The opposite of that is a strong currency that holds it's value.

But of course the knock-on effect is that US exports decline since US labor is too expensive, so US export jobs are lost. Further US domestic products are more expensive so we will import more goods and shutdown more local production leading to more unemployment and a lower real GDP. It's been called "exporting jobs".

That's a separate issue, and needs tending to. You can't consume indefinitely if you don't produce, which leads to consumers with wages to spend. We need "jobs conservation" in the US. No foreign workers should be hired, and no foreign sources should be used when US workers and sources sit idle.

No if you want 100% employment look to monetary policy of Japan of the 1980s or China more recently. You peg your currency LOW (weak dollar).

Which would be catastrophic in the current economic climate where millions and millions of people are forced to depend on a fixed and limited income from social insurance programs for their survival.

Whether there is inflation or deflation is largely dependent on the relative amounts of currency (and it's rate of circulation) to goods produced. Strong-dollar/weak-dollar is a result of artificial 'pegging' of currencies or more commonly the free-market un/desirability of holding assets denominate in dollars vs other currencies.

In some cases, that "peg" is what's keeping the dollar from collapsing entirely.

Which is one reason why I go WTF at Obama pushing the Chinese to let their currency float. If unpegged it would skyrocket vs the dollar and could set off the domino chain I worry about in the financial market either directly or as a result of China dumping dollar denominated debt as fast as they could get it off the books.

[kevsta]

Which is one reason why I go WTF at Obama pushing the Chinese to let their currency float. If unpegged it would skyrocket vs the dollar and could set off the domino chain I worry about in the financial market either directly or as a result of China dumping dollar denominated debt as fast as they could get it off the books.

with the Chinese economy now slowing dramatically you are far more likely to see the Chinese devaluing the Yuan again, than letting it float higher, IMO

they cannot devalue the $, the €uro and the Yuan all at the same time.

(except against gold of course)

[The Don]

So strong dollar means some inflation as prices have to be adjusted for the payment of just wages instead of slave/prison labor level wages.

Strong dollar would mean lower inflation because so much is imported AND because wages would be driven down in an attempt to compete with even cheaper imports

Weak dollar also means inflation, and probably a lot more of it than strong dollar produces as the purchasing power of money evaporates.

Strong dollar would probably not result in inflation.


Unless the strong dollar is accompanied by significant trade barriers, imports will rise which will at least have the effect of driving down the dollar (as exporters change their dollars into local currency)

[KevinCanada]

With so much turmoil, I would think Europe will see wild swings in different sectors now. With some area's seeing abnormally high inflation and other area's seeing deflation.

To me Europe right now is a balloon that is popping that was 50% air and 50% sand in it. Have to wait and see where the chunks of earth fall and hope that one area is not hit to hard.

[KevinCanada]

with the Chinese economy now slowing dramatically you are far more likely to see the Chinese devaluing the Yuan again, than letting it float higher, IMO

they cannot devalue the $, the €uro and the Yuan all at the same time.

(except against gold of course)

I hope they let it float higher, or other countries try to stop them from further devaluation.
It has really become a joke now. Chinese goods are so cheap and our trade policies allow companies to all go there.
Locally I cannot think of their name off hand, this company in manufacturing of plastics, They were large enough that they are a member of the Toronto stock exchange, over a thousand employees.

They packed up the factories and payed the freight for the plastic mold presses (large heavy machinery)
re-opened the same factories that were scattered over Canada and the USA in china to ship the parts back here they were making for the General Motors assembly lines.
The only thing that stayed was head office in Cambridge, Ontario.

What they did was wrong on so many levels, but our trade policies with china allows this to happen.
I also believe this helps our pathetic growth in North America. 2% growth, 3% growth.
It is shameful.

Edit: It was Automated Tooling Systems (ATS)

[kevsta]

I hope they let it float higher, or other countries try to stop them from further devaluation.


they wont yet, they have more to lose than the West.

I would also advise reading Currency Wars by Jim Rickards (http://www.amazon.co.uk/Currency-Wars-Making-Global-Portfolio/dp/1591844495), this is well underway now and will only intensify as the global economy gets worse.

[stevea]

Aside from the control offered by them being the biggest EU economy, which is considerable. They can threaten to leave the Euro themselves if the other nations don't play ball (and yes, the other big nations could as well).

Such nonsense thinking. do you imagine these people are infantile ?


And is being called upon to make one of the biggest contributions.
Naturally ~23%..


Maybe you're getting different reportage where you're from, but Germany in the US media is one of if not the leading voices of the EU, which seems to be following it's lead pretty closely.


I am in the US and the difference perhaps that I read the financial press and not the gumby-news. Germany & France were indeed leading proponents - but they have no more than proportional control and responsibility. The issue is that if Germany rejects a bailout (at ~23% of the load) then others will want to shirk too. It is NOT a boxing match where the biggest contender throws their weight around - sheesh !


We'll see if that keeps up with the new French president set to loggerhead with the austerity-minded Germans.
Sarkozy was more prone th be an adult and fund bailouts. I don't know the new guy.




Yet being the key word. I wasn't saying it was happening right now (though there is a huge run on the Greek banks ongoing).

There is a good chance they never will establish a separate currency. Neither the Greek Prez nor Drahgi(sp?) want it. You are speculating. My point is that your timeline is wrong. There are already bank runs and no (zero) impetus to establish a separate currency yet. Of course IF they establish a Drachma I think they will take one of two courses, a quick (over the weekend) switch, or else a slow boil-the-frog plan like the transition into the Euro. I suspect the latter is more likely IF there is any new currency.



Greece won't voluntarily leave the Euro, IMO. It can't. But it can (and I suspect will) be either kicked out or threatened with such in the near future.

Highly unlikely. You ignore that the EBC wants Greek debt repayment.. There may be arm-twisting behind the scenes, but I doubt the Greeks leave until they have a plebiscite on the matter.

They can try. But sometimes mob psychology sets in.
That's why a slow orderly transition is in the interest of the EBC - Duh ! Again - it
s fairly unlikely to happen IMO.

At present. If the Eurozone suffers another 08-type shock, esp if it happens anywhere near the time Greece hits the breaking point, the private investors may bolt on the financial side, which could set of the "main street" Europeans.

"main street" is another mindless meme worthy of a rethink. No the real damage is already baked in the cake - mostly in Spain. There is no escape clause. It's all about how the EBC reacts.

How can you inflate only one part of the financial supply?

How can you not understand something so simple. Only things denominated in the inflating currency see the price shift of inflation. If the Greeks switch to a NewDrachma and inflate that currency - then the any Greek citizen with a 3 digit IQ will move all their savings across the border and into Euros and will not experience the loss of savings due to inflation If the Greek bonds guarantee repayment in Euros (as they certainly do today) then any NewDrachma inflation has no impact to the bondholder of value due. To inflate away Greek debt, the debt contract would have to be converted to NewDrachma and away from Euros.

Yes sovereign currency inflation would decrease the Greek standard of living without encountering the Keynesian stickiness.. It would also make borrowing more expensive. So it might help decrease the ongoing deficits (or not).

I'm not so much worried about Greece in and of itself except that it could start a "daisy chain" of defaults as well as put investors in the mood of getting out of all "sovereign wealth" positions, including those in otherwise stable(ish) areas like N Europe and the US.

Unlikely. The Greeks have been insolvent something like a third of all years in the past 400. So it's not news nor surprising, not a good model to estimate what happens in Spain or Italy. Further it's a tiny economy. It's bad news certainly but not earth shattering.


Again, how can you only inflate some of your currency? It's all one pile. Inflation is the loss of purchasing value of a currency. The opposite of that is a strong currency that holds it's value.

??? Read it again. A strong currency does not require or exclude inflation. The exchange rate of currencies is not directly related to inflation except for the small impact of the rate on net imports.


That's a separate issue, and needs tending to. You can't consume indefinitely if you don't produce, which leads to consumers with wages to spend. We need "jobs conservation" in the US. No foreign workers should be hired, and no foreign sources should be used when US workers and sources sit idle.

What ARE you thinking ? The strong-dollar exchange rate you ask for causes all these problems you regret. If the dollar is strong then ppl inside and outside the US prefer other nations goods to ours. It kills US jobs.


Which would be catastrophic in the current economic climate where millions and millions of people are forced to depend on a fixed and limited income from social insurance programs for their survival.

You are confused. A weak or pegged currency does NOT directly cause inflation nor harm those on fixed incomes.

In some cases, that "peg" is what's keeping the dollar from collapsing entirely.

Utter nonsense. If anything it keeps the dollar overvalued and destroys US jobs, causes additional US social costs, debt and taxes.

Which is one reason why I go WTF at Obama pushing the Chinese to let their currency float. If unpegged it would skyrocket vs the dollar and could set off the domino chain I worry about in the financial market either directly or as a result of China dumping dollar denominated debt as fast as they could get it off the books.

Domino chain ? Nope - no pizza here.

This is pathetically wrong - makes no sense at all. a stronger yuan means we import less and export more, keep more US jobs and have less trade deficit and debt and social costs.

You are somehow very mixed up and conflating the idea of a strong/weak currency (favorable exchange rate) with deflation/inflation. They are not the same and only tangentially related..