– Bloomberg’s Handy Guide To Why Falling Prices Are Horrible For You (ZeroHedge, Jan 22, 2015):
With almost perfect comedic timing, Bloomberg unleashed the mainstream media’s Draghi-confirming raison d’etre for QE… explainining why – shock horror – deflation is bad for you. No matter that the QE efforts of The Fed (and BoJ) entirely (totally and utterly) failed to spark any increase in inflation expectations, we must try try try again. However, despite the exuberant disgruntlement with deflation that Bloomberg offers, Portuguese economy minister Guindos had something ‘odd’ to say this morning: “European deflation is positive.” We are sure he will issue some clarifying statement soon enough walking back such a dangerous and anti-authority comment.
1. When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? As a result, consumer spending flails. For most nations, that’s a big chunk of their economy, and any slowdown in consumption threatens growth.
2. Businesses behave pretty much the same way. They postpone buying raw materials, hoping to get a break on costs, and delay investing in that splashy new facility or hiring an extra hand.
3. Additionally, their pricing power — the ability to charge more — vanishes. That makes it harder for them to grow profits.
In such an environment, if companies want to grab a bigger market share, they have to slash prices. That makes things worse.
4. Lower profits = less money to go around to workers. Employees don’t get the raises they were expecting, they cut back on spending even more, and the ugly cycle repeats. That’s why they call it a deflationary spiral.
5. The sad thing is, even when prices are falling, the amount you owe doesn’t. Borrowers get crushed under the weight of that debt. In a mild scenario, companies and consumers hold back on other purchases to continue meeting their obligations. When things get really bad, they go bust altogether.
6. Policy makers usually have an antidote to economic slowdowns, but it’s trickier when interest rates are already near zero. That’s exactly the situation with the ECB and much of the industrialized world. That forces officials to turn to unconventional tools.
* * *
Having read all that propaganda, here is what QE did for America’s inflation expectations…
And what Portugal’s economy minister said this morning…
- *GUINDOS SAYS EUROPEAN DEFLATION IS POSITIVE
* * *