<![CDATA[Hedgehogs.net: '' related content]]> http://www.hedgehogs.net/tag/economic+theories?view=rss http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11376345/deflationary-spiral-nonsense-keynesian-theory-vs-practice-eurozone-policymakers-concerned-about-falling-prices Tue, 16 Sep 2014 22:11:20 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11376345/deflationary-spiral-nonsense-keynesian-theory-vs-practice-eurozone-policymakers-concerned-about-falling-prices <![CDATA[Deflationary Spiral Nonsense; Keynesian Theory vs. Practice; Eurozone Policymakers Concerned About Falling Prices]]> Price Deflation Hits Italy First Time in 55 Years

The Italian National Institute of Statistics (ISTAT) reports that consumer price inflation declined by 0.1% from August 2013 to August 2014.
Italian consumer prices fell 0.1 percent year-on-year in August of 2014, matching preliminary estimates. The country’s annual inflation rate touched the negative territory for the first time in nearly 55 years due to a drop in energy prices.

Year-on-year, prices of energy fell 3.6 percent in August, mainly driven by a 1.2 percent drop in cost of non-regulated energy products. Additional downward pressures came from food cost (-0.5 percent), mainly unprocessed food (-1.8 percent) and communication (-9.0 percent). Meanwhile, prices of services slowed (0.6 percent in August compared with a 0.7 percent increase in July).
Italy CPI 2000 - 2014

Eurozone Policymakers Concerned About Falling Prices

A Financial Times headline portrays falling prices as a negative thing: Deflation Takes Shine Off Sales for Italy’s Shopkeepers.
The appearance of deflation in Italy suggests a worrying spread from Spain, another peripheral eurozone economy, where it reared its head this year. Deflation is now stalking the home of Rome-born Mario Draghi, the European Central Bank president, who has sounded the alarm about the need to restore growth across the continent and has taken aggressive and unorthodox measures to do so.

Matteo Renzi, the youthful prime minister who gained power in February with an agenda of radical economic and political reform, acknowledged last week that growth would in fact be “around zero” this year.

The hope is that lower prices will start luring Italians back to the shops. But policy makers – particularly Mr Draghi and other ECB officials – do not seem to be betting on the resurgence of the Italian consumer.

They have been more focused on – and fearful of – the worst case: that the country, along with the eurozone more generally, could fall into a deflationary spiral, in which consumers hold off purchases in the expectation that prices will fall even further. Deflation would also raise the real value of Italy’s monumental €2.1tn public debt load, causing angst among investors.

“Even if you think the probability of damaging deflation is low, if it were to happen it’s a disaster,” says Erik Nielsen, global chief economist at UniCredit, the Italian bank. “The ECB was right to take out an insurance policy against it,” he adds, referring to measures including interest rate cuts the central bank took this month.
Deflationary Spiral Nonsense

The idea that falling prices are bad for the economy is ridiculous. Taking out insurance against falling prices is even more absurd.

Ask any consumer if he wants lower gas prices, lower food prices, lower hotel prices, lower computer prices, or lower prices on any consumer items and the answer will be yes.

Next, ask any consumer who needs a coat, computer, TV, or any other needed item if he would he wait a year to buy one because prices were falling.

Assuming the consumer had enough money to buy any needed item, he would buy that item now.

Thus, the entire deflationary spiral concept of consumers delaying purchases because prices are falling is ridiculous.

Keynesian Theory vs. Practice

Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it's precisely the opposite.

If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.

In general, people like bargains, and when bargains get big enough, people do not wait for even bigger bargains. Consider Christmas shopping. Most do not wait until after Christmas when bargains are even bigger than before Christmas. 

Yet, these ridiculous myths of consumers waiting because prices are falling as opposed to consumers waiting for prices they can afford have been repeated so many times that people actually believe them.

Delays For Other Reasons

People do delay purchases if they don't have a job, or the money, or they perceive prices are simply too high.

The problem is typically debt, not falling prices. If consumers have too much debt or too little income they cannot buy. If businesses have too much debt they cannot expand. If governments have too much debt, they eventually run into problems.

Assets vs. Consumer Goods

Asset prices are different. Consumers will buy houses, stocks, bonds, land, and other assets they if they perceive central bank inflation will bail them out with ever-increasing asset price inflation.

Eventually prices get ridiculously stretched. Then when the greater fool stops buying, bubbles burst, asset prices fall, and then debt deflation takes over. Debts cannot be paid back, businesses cannot hire, and consumers out of a job cannot shop.

Keynesian Nonsense

Keynesian economists want government to pick up the slack when businesses fail. That's nonsense. Several decades of Keynesian and Monetarist attempts to jump start the Japanese economy with nothing to show for it but debt to the tune of 250% of GDP should be proof enough.

Falling prices are never the problem. Rather it's central-bank sponsored inflation that causes asset bubbles and promotes debt and malinvestment that is the problem.

The solution, that no central bank cares to promote, is to not sponsor assets bubbles in the first place. Once in asset bubbles, the best thing to do is let the bust play out.

Assuming Japan remains on its current path, the upcoming collapse in the Yen will provide the final proof that Keynesian economics is pure idiocy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com ]]>
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11374317/coping-with-complexity Tue, 16 Sep 2014 17:00:21 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11374317/coping-with-complexity <![CDATA[Coping with complexity]]>

Martin Wolf says something that I'm in two minds about:


http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11374309/interest-rates-the-1 Tue, 16 Sep 2014 17:00:07 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11374309/interest-rates-the-1 <![CDATA[Interest rates & the 1%]]>

Nick Rowe says some of the answers to Paul Krugman's question - why do some of the 1% want to raise interest rates? - are daft conspiracy theories. I'm in two minds here.


http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11372807/world-stocks-hit-onemonth-low-caution-ahead-of-fed Tue, 16 Sep 2014 13:34:09 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11372807/world-stocks-hit-onemonth-low-caution-ahead-of-fed <![CDATA[World stocks hit one-month low, caution ahead of Fed]]>

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11372367/deflationary-spiral-nonsense-keynesian-theory-vs-practice Tue, 16 Sep 2014 10:49:08 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11372367/deflationary-spiral-nonsense-keynesian-theory-vs-practice <![CDATA[Deflationary Spiral Nonsense; Keynesian Theory vs. Practice]]> September 15th, 2014 Mike Shedlock


http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11370393/japanese-household-spending-slumps-59-cries-for-more-monetary-stimulus Sun, 07 Sep 2014 17:19:52 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11370393/japanese-household-spending-slumps-59-cries-for-more-monetary-stimulus <![CDATA[Japanese Household Spending Slumps 5.9%; Cries for More Monetary Stimulus]]>
Let's take a look at what actually happened.

Japanese Household Spending Slumps 5.9%

Yahoo!Finance reports Japan Household Spending Slumps, Output Flat as Tax Pain Persists
Japanese household spending fell much more than expected and factory output remained weak in July after plunging in June, government data showed, suggesting that soft exports and a sales tax hike in April may drag on the economy longer than expected.

Household spending fell 5.9 percent in July from a year earlier, nearly double the drop forecast in a Reuters poll, as the higher levy and bad weather kept consumers at home instead of going out shopping.

Weak exports left companies with a huge pile of inventories, forcing them to continue cutting back on factory output, separate data showed.

Industrial output rose 0.2 percent in July, much less than a 1.0 percent increase projected in a Reuters poll, data by the Ministry of Economy, Industry and Trade showed. That was a tepid rebound from a 3.4 percent fall in June, the fastest drop since the March 2011 earthquake.

Japan's economy shrank at an annualized 6.8 percent in the second quarter from the previous three months, more than erasing the 6.1 percent first-quarter surge in the run-up to the sales tax hike.

Analysts generally expect Abe to approve another tax hike in December, but that decision promises to be politically divisive, coming just as the government hammers out details of a promised corporate tax cut.
Amusing Details

The Financial Times has some amusing details in Japanese Economy Flounders After Sales Tax Rise
Consumer prices rose 3.4 per cent in July compared with a year earlier, including the added tax. Stripping out the tax effect as well as the impact of volatile fresh-food prices – the formula favoured by the Bank of Japan – showed underlying inflation was 1.3 per cent, a level unchanged from June.

The BoJ is facing a dilemma. The dramatic monetary expansion it embarked on in April last year has succeeded in reversing persistent consumer-price deflation, a goal the central bank had pursued fruitlessly for years.

But inflation is now both too high and too low: too high because wages have not kept pace with price rises, making the average worker worse off; but also too low, because the BoJ believes even larger price rises are needed to keep Japan out of deflation for good.

The bank has set a target for core inflation of 2 per cent but most private-sector economists believe that, unless demand in the economy picks up suddenly, more monetary stimulus will be needed to reach it. Yet simply printing more money could further widen the price-wage gap, in the short term if not the longer.

“It is important to recognise that the VAT hike has had a material impact on real income levels, suggesting that spending is now being held back mostly by a decline in real purchasing power,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse.
Inflation "Too High and Too Low"

Got that? Spending was supposed to pick up due to inflation. Instead it went south because of a decline in purchasing power, exactly the opposite of what Keynesian theory suggests.

The standard, Keynesian answer ... "more stimulus is needed" to raise prices to even more unaffordable levels.

Oh yeah! That will get everyone spending money they do not have to buy things they do not need.

And to top it off, Abe wants still more consumer tax hikes to rein in debt.

Keynesian Success

To be fair, I expect that someday Abe will succeed beyond his wildest dreams if he stays in office long enough. 

Want to know what success looks like?

Here's a recent example that depicts the ultimate in Keynesian Inflation Success.

I rather doubt it gets that far, but with politicians hell-bent on "success", one never knows.

Mike "Mish" Shedlock
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11369137/a-difficult-question Sat, 06 Sep 2014 00:27:46 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11369137/a-difficult-question <![CDATA[A Difficult Question]]> So why does it matter if the gold price is rigged? A freely-determined gold price is central to ensuring that reality and not financial bubbles guides us in our financial and economic activities. Suppressing the gold price is rather like ... Read More...

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11368892/week-ahead-magazine-august-24-2014 Sat, 06 Sep 2014 00:23:01 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11368892/week-ahead-magazine-august-24-2014 <![CDATA[Week Ahead Magazine: August 24, 2014]]>
This past week saw the S&P 500 Index set a record closing price of 1,992.37 on Thursday. One article in this week's magazine notes the equity market has gone over 1,020 days without a 10% correction. Investors seem content on buying market "dips". This most recent dip saw the market decline 3.94% from its July 24th closing price down to 1,909.57 on August 7th. The "V-shaped" recovery from August 7th has seen the market advance 4.3% to Friday's close.

From The Blog of HORAN Capital Advisors

The only major U.S. index that remains negative for the year is the small cap Russell 2000 Index which is down .3%. The leader is the Nasdaq composite index which is up 8.7% followed by the S&P 500 Index, up 7.6%. The Dow Jones Industrial Average remains the laggard and is up 2.6% on the year.

Much of the focus this past week was on Janet Yellen's Jackson Hole presentation. The comments had little market impact with treasury yields rising just slightly across most of the interest rate curve. Most of the economic news last week was fairly positive. As we noted in our earlier post today, manufacturing, leading indicator data and jobs data seem to be supportive of a positive economic climate looking out to year end. From an international perspective, economic data remains mixed and saw weakening in most area's Purchasing Managers Indices.

A number of economic data releases are scheduled to be reported this week. Some of the potential market moving reports are:
  • New home sales (M)
  • Durable Goods Orders (T)
  • GDP and jobless claims (Th)
  • Personal Income and Outlays (F)
The magazine as well as blog posting has been lighter this week as we were visiting out of town clients during the first half of the week. Below is the link to this week's magazine.

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11368541/sttg-market-recap-september-2-2014 Fri, 05 Sep 2014 23:45:50 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11368541/sttg-market-recap-september-2-2014 <![CDATA[STTG Market Recap September 2, 2014]]> U.S. investors returned from the Labor Day holiday to a generally quiet session. The S&P 500 finished down 0.05% while the NASDAQ rallied 0.39%. The Institute for Supply Management's index of factory activity, which rose to 59, the highest since March 2011, from July's 57.1 - was generally a non event. Construction spending was announced as increasing 1.8% in July. Original post:...

Read the full article at StockTradingToGo.com

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11366133/breaking-up-the-treasury-your-money-or-your-life Fri, 05 Sep 2014 07:33:04 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11366133/breaking-up-the-treasury-your-money-or-your-life <![CDATA[Breaking up the Treasury: Your money or your life]]> TONY BLAIR once kidnapped a civil servant. It was 2005 and the then prime minister, who was heading to EU budget talks in Luxembourg, needed an economic expert. So he purloined a Treasury official. The reluctant bureaucrat was later dumped in Paris without passport or money, recalls Jonathan Powell, a former adviser, in his book “The New Machiavelli”. Oddly, the man “just wanted our assurance that we wouldn’t tell the Treasury that he had been travelling with us.” If the news got out, his career could have ended.The tale illustrates the potency of Britain’s finance ministry, which has long wielded more power than its international counterparts—or, it sometimes seems, the prime minister’s office. In the post-war years the Treasury was a hub for Keynesian demand management. Under Margaret Thatcher it became the engine room of a monetarist revolution. It commandeered social policy during Mr Blair’s administration. Now it oversees austerity, the lodestar of the coalition government.Yet a report published on September 4th, “The Destruction of HM Treasury”, says Whitehall’s leviathan should count its days. The two authors know their stuff. Stian Westlake directs policy at the National Endowment for Science, Technology and the Arts, a charity taken seriously by Treasury types. Giles Wilkes was an adviser to Vince Cable, the business secretary.Mr Westlake and Mr Wilkes argue that...