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The Inflation thread


kahuna1

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Just in..."The consumer-price index, which measures what Americans pay for everything from coffee to airline tickets, declined a seasonally adjusted 0.4 per cent in December from the prior month, the Labor Department said Friday. That was the index's largest one-month decline since December 2008. "

Remember when we were warned daily that hyperinflation was just around the corner?That was 6 years ago and we are still waiting!

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From Bloomie todayÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦..This post shows Confirmatory Bias,as it agrees with my long held view.So,take it or leave it.

 

"A specter from the past hovers over the major industrialized nations: deflation. A decrease in the overall price level, deflation was a term relegated to economic history, with the notable exception of Japan following the bursting of its land and stock market bubble in the late 1980s. The everyday experience of the post-World War II generations has been inflation or rising prices. Besides a few exceptions, such as New York Times columnist and Nobel laureate Paul Krugman, many economists, central bankers, and Wall Street strategists primarily fret over prospects for inflation. Sure, prices may be tame at the moment, but inflationÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s resurgence is inevitableÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂor so weÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢re repeatedly told.

 

Really? The trend in consumer price indices clearly point toward increasing deflationary pressures. The epicenter of current concern is Europe, with its latest consumer price index reading at 0.7 percent, down from 1.1 percent a month earlier. SpainÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s year-over-year inflation rate is at 0.1 percent. Germany sports a mere 1.2 percent annual inflation rate, and a number of smaller, troubled countries are in deflation, such as Greece, Latvia, and Bulgaria. A parallel story unfolds in the U.S. AmericaÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s CPI is running at a 0.9 percent year-over-year pace, down from 2.2 percent a year ago.

 

HereÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s the thing: Deflation has become the modern condition. The emergence of deflation isnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t a temporary phenomenon reflecting the economic weakness and high unemployment. No, the underlying trend toward deflation stems from heightened international competition for markets (globalization), widespread migration (immigration), and rapid technological advances (Amazon.com (AMZN)). The Great Recession and the anemic recovery simply accelerated the trend from disinflation and toward deflation."

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Central bank prophet fears QE warfare pushing world financial system out of control

 

Former BIS chief economist warns that QE in Europe is doomed to failure and may draw the region into deeper difficulties

 

http://www.telegraph.co.uk/finance/economi...of-control.html

 

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015. Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.

 

"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."

 

Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel.

 

He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20pc of GDP higher today. "We are holding a tiger by the tail," he said.

 

He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. "Sovereign bond yields haven't been so low since the 'Black Plague': how much more bang can you get for your buck?" he told The Telegraph before the World Economic Forum in Davos.

 

"QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market," he said. "Even after the stress tests the banks are still in 'hunkering down mode'. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up," he said.

 

The warnings come just as the European Central Bank prepares a blitz of bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect QE of around ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬500bn now that the eurozone is already in deflation. Even the Bundesbank is struggling to come with fresh reasons to oppose it.

 

The psychological potency of this largesse will depend on whether the ECB opts for shock-and-awe concentration or trickles out the stimulus slowly. It also depends on the exact mechanism used to conduct QE, a loose term at best.

 

ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a "wealth effect", but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy. Classic moneratists say the ECB may end up spinning its wheels should it merely try to expand the money base.

 

Mr White said QE is a disguised form of competitive devaluation. "The Japanese are now doing it as well but nobody can complain because the US started it," he said. "There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.

 

"The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries - especially in Asia and Latin America - have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up."

 

Mr White's warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through "intertemporal" effects.

 

He argues that this created a treacherous dynamic. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the "zero bound", where monetary levers stop working properly.

 

Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was.

 

Mr White said central banks have been put in an invidious position, compelled to respond to a deep economic disorder that is beyond their power. The latest victim is the Swiss National Bank, which was effectively crushed last week by greater global forces as it tried to repel safe-haven flows into the franc. The SNB was damned whatever it tried to do. "The only choice they had was to take a blow to the left cheek, or to the right cheek," he said.

 

He deplores the rush to QE as an "unthinking fashion". Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing "correlation with causality". The Anglo-Saxon pioneers have yet to pay the price. "It ain't over until the fat lady sings. There are serious side-effects building up and we don't know what will happen when they try to reverse what they have done."

 

The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. "They have created so much debt that they may have turned a good deflation into a bad deflation after all."

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Wiliam Pesak seems to be a Bloomberg outlier, their 'man in Asia'. To me, sometimes he makes sense; sometimes not. (the trouble when you are paid by the column inches)

 

Glenn Stevens must act fast to rescue Australia's economy

Few central bankers in modern history have had a better run than Australia's Glenn Stevens. He steered his country around the global financial crisis, drove its currency to record highs and extended its recession-free run past the two-decade mark.

 

That's all in jeopardy now, however, as Stevens, governor of the Reserve Bank of Australia, stands still while China's slowdown and deflationary forces close in. Markets are registering their disappointment by driving the Aussie dollar below 80 US cents for the first time since 2009. The message from traders: It's time for a rate cut. The question is, will Stevens act ahead of, or at, the central bank's February 3 policy meeting?

 

The odds he will are rising, but remain too low for comfort. The European Central Bank's quantitative-easing program and the Bank of Canada's surprise rate cut add to the pressure on Stevens to trim a benchmark rate he's held at 2.5 per cent for 17 months.

 

The most immediate danger is China, to which commodity-rich Australia has increasingly hitched its fortunes. The collapse in global commodity prices challenges Beijing's claim that its economy is growing by 7.3 per cent. Even more than the plunge in crude oil, iron ore at its lowest price in more than five years suggests China is growing slower. Such metals fuel the Chinese urbanisation trend that's been lifting world growth. As Premier Li Keqiang explained at Davos this week, China's move to a consumer-led economy from an investment-led one is real, and the fallout will be felt everywhere. China's "new normal" is particularly bad news for Australia's mining industry.

 

Advertisement "People are covering their eyes and refusing to believe that what is happening now is not just a cyclical story, but also a structural story," economist Dong Tao of Credit Suisse told Bloomberg News.

 

As Goldman Sachs and others call an end to the commodities supercycle, the Australian government's fiscal policies are anachronistic. Prime Minister Tony Abbott's efforts to trim the budget deficit are out of sync with a deflationary world. The nation's 2.7 per cent growth rate has lulled the Canberra establishment - and, unfortunately, the central bank - into a dangerous complacency.

 

Though the ECB's bond-buying dominated the week, the more important action for Australia came in Canada, a fellow "commodity currency" nation. Its January 21 move to cut its benchmark rate a quarter of a percentage point to 0.75 per cent "led to a mini-explosion in speculation" that Australia might be next, says Nick Parsons of National Australia Bank. And rightly so, considering that Australia's key rate is at least 1.25 percentage points higher than that of any other major developed economy outside New Zealand.

 

Central bank policy must lead economic dynamics, not follow them. Today's 2.3 per cent inflation rate in Australia leaves Stevens reluctant to ease policy. But more important is where prices are headed six to 12 months from now. Here, events in Singapore may be instructive. (For the Asia region, its small but open economy often acts a weathervane.) At the moment, Singapore - where consumer prices fell 0.2 per cent in December - points to deflation ahead.

 

Stevens should be preparing Australia for its arrival. Why isn't he? Perhaps it's the RBA's strict mandate to keep inflation between 2 per cent and 3 per cent. Or the same doctrinaire fear of overheating that has central banks from Seoul to Jakarta maintaining tight policies. But these blind spots can cause even the best central bankers to lose their way in this fast-changing world. Stevens must get his bearings to avoid a big policy mistake.

William Pesek, a Bloomberg View columnist based in Tokyo, writes on economics, markets and politics in the Asia-Pacific region

 

Bloomberg

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That's all in jeopardy now, however, as Stevens, governor of the Reserve Bank of Australia, stands still while China's slowdown and deflationary forces close in. Markets are registering their disappointment by driving the Aussie dollar below 80 US cents for the first time since 2009. The message from traders: It's time for a rate cut. The question is, will Stevens act ahead of, or at, the central bank's February 3 policy meeting?

 

Hi nipper, heaven help us if the RBA start down this track---pensioners already screaming, domestic property way overvalued, and US rates supposedly to rise?

 

For pity's sake--NO to any rate cut.

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Flower are you seriously suggesting that the income pensioners receive from bank deposits is a consideration when setting monetary policy?

 

With a growing band of retirees presumably no government wants to countenance open ended/never ending state pension support, maybe the RB totally ignore that sector, but the pollies certainly cannot, probably of even greater concern is housing which is totally overblown pricewise and would explode following a rate cut.

 

Cannot see any conservative government stopping negative gearing, putting CGT on housing, all to reign in housing costs, don't suppose the big four want to loose that section of their deposit base either. Any further financial pressure on retirees will see them forced to enter the stockmarket in search of yields with likely disastrous results if the world economies weaken.

 

At this stage the RB is not yet stuck between a rock and a hard place and should sit pat--IMO.

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wren, you could point out to others (I won't bother) the difference between

 

- Monetary policy; decided by, in Australia's case, the RBA, and

 

- Fiscal policy; largely guided by government of the day through the mechanism of budget settings in order to enact social policy

 

 

 

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wren, you could point out to others (I won't bother) the difference between

 

- Monetary policy; decided by, in Australia's case, the RBA, and

 

- Fiscal policy; largely guided by government of the day through the mechanism of budget settings in order to enact social policy

 

nipper, and one does not influence the other?

 

btw; the difference is already understood.

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