IS GERMAN INFLATION MANIA FOUNDED IN HISTORY OR BASED ON CUNNING?
Bulgaria is facing an increasing danger from the sort of deflation that doesn’t go away very easily. A Bulgarian bank is in deep trouble. Italy’s deflation trend suggests it isn’t far behind. The troubles of its bigger banks are partly known, but more spectacularly dangerous than is generally realised. Portugal has crashed into deep deflation, the Daily Telegraph reports today. Portugal’s Bank BES is being given hourly plasma transfusions under Draghi’s capacious table. The price of Spanish property has fallen 44% since the eurocrisis kicked off. That’s not so much deflation as implosion. Spanish banks are burdened with as much as €40 billion of repossessed real estate. They’re under increasing pressure to sell off these ‘assets’, but the buyers are missing. The degree of desperation became apparent in late June when, despite months of heated denials, the Madrid Government finally announced a tax on bank deposits. This is a bailin whose only USP is that it is stealing customer funds before the sh*t hits the fan. You have to hand it to Mario Rajoy, he’s keener than most on the Djisselbloom template.
Anyone detecting a trend here? Even if you aren’t, it was more than a little disturbing earlier when the ECB’s SuperMario dismissed Italian deflation as something to do with vaguely seasonal transport costs, whateverTF they might be. You get the feeling at times that Signor Draghi is not taking this problem seriously.
Why should he? There are two terrifyingly simple reasons why.
1. Banks make most money from getting confident people to borrow tons of money at rates offering the banks a decent aka indecent margin. But if people are anxious, and Zirp rates apply, and deflation has arrived….few people borrow from banks – and those who do make the banks very little margin.
Zirp was a thinly-veiled attempt to help the banks finance torpedo holes in their Nottingham Lace balance sheets. But it comes at a price in the medium term…and not just for banks: hold that thought.
2. If it seems likely that a month from now, that car/house/TV/paint/freezer will cost less than it does today, consumers hold off from purchasing. Ultimately, after a certain point, deflation is self-fuelling.
I can report to Sloggers my quantitative first-hand experience of the syndrome in France. This should not be dismissed as Sample of One research: it has been undertaken over six months….and it has involved 14 product sectors, 10 multiple retailers – comprising in all a grand total of 73 purchases.
My experience was as follows: every month since March, prices have fallen. On most purchases over €300 it was easy to do a deal….the resultant discounts ranging from 5% to a staggering 42%. Most retailers selling domestic durables and DIY goods have been on a permanent Sales/Bargain footing since January.
The fridge/freezer I bought for €320 last November (25% off for one tiny dent) now costs a dent-free €280. Parquet flooring that cost €14.50 a square metre in April was being knocked out at €7.90 two weeks ago. (Admittedly, it’s bankrupt stock…but, um, why did they go bankrupt?)
The simple reality is that French retail durable consumption is on its arse, with its legs pointing to the heavens. As early as February this year, Wolf Richter at Testosterone Pit (now renamed Wolf Street) observed that “The [French] economy shriveled or had no growth in five of the last eight quarters….private-sector GDP actually declined during that period by 0.2%. And it remains 3.2% below the pre-crisis peak…..In 2013, there were 63,452 business failures, up 5.3% from 2012. Particularly nasty were the second and third quarters when business failures jumped respectively 9.8% and 8.2%….”
All of the nation States I’ve looked at in this piece have one thing in common: very high levels of public debt. Five paragraphs ago, I asked you to hold a thought. This is the new thought that may make you inadvertently drop that old thought: deflation aggravates the problem of sovereign debt, because the debt becomes bigger in real terms during a period of sustained deflation.
Pretty much the whole point of QE (apart from giving the Wall Street Kids free money) was to try and inflate away the real value of US Government debt. Thus in the eurozone context, the hare-brained austerity policies of Brussels-am-Berlin not only truncated the very economic growth ClubMed needed: they depressed consumption, exacerbated deflation, and made the capital owed ‘worth more’….and thus even more onerous when interest rates rise – as they must. Effectively, Schäuble and his fellow loons ensured that the eurozone’s north/south divide would get worse.
Now of course, this suited all those German politicians facing reelection recently: the BundesRepublik’s exports rose (mainly to countries beyond the eurozone, thanks to the euro’s falling value) a feelgood factor was created, and Berlin’s Grand Alles Klar Coalition came into being.
But then came the backfire: two consecutive months of falling German exports. The reason? Lack of demand within the eurozone.
I’m a simple, straightforward sort of chap, and so the conclusions I draw are these: Germany is heavily implicated in the creation of eurozone deflation; this creation has made France’s position more parlous…and ClubMed’s even worse; Germany’s export business is less and less dependent on the EU; thus Berlin faces two equally juicy prospects – quitting the eurozone while leaving behind a trail of central/south east European debt for someone else to clear up, or being so powerful within the eurozone, it can effectively run the region as Grossdeutschland.
Above all, however, there is something here we all need to face up to: eurozone deflation is neither myth nor questionable prediction: it is here. Denial of it is no longer an option.
Related at The Slog: Is Merkel to turn East in her quest for power?
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