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Sunday, October 19, 2014 10:33 PM


Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"


The ECB has been concerned about falling consumer prices. I propose that's 100% stupid, yet that's the concern.

When the euro declined vs. the US dollar, the ECB was happy that inflation would inch back up. The fear now is that falling oil prices will take away the alleged gain of a falling euro.

With that backdrop, credit the Financial Times for the absurd headline of the week: Eurozone Fails to Benefit from Weak Currency as Oil Price Slides.

Pity the policy makers given the job of rescuing the eurozone from deflation.

The unorthodox steps the European Central Bank has taken since June – including a programme of private-sector asset purchases – have caused a steep fall in the euro. The single currency is down 8.4 per cent against the dollar and 4.75 per cent on a trade-weighted basis from its peaks this year.

The weaker exchange rate will ease pressure on the ECB in its fight to raise inflation back to its target of just below 2 per cent. Mario Draghi, the central bank’s president, has said the currency’s earlier strength explains 0.4 percentage points of the fall in inflation since 2012. In that year, prices were growing 2.7 per cent a year.

But just as this depreciation is starting to fuel inflation, the ECB must contend with a fall in oil prices that all but wipes out the effect of a sliding currency. A weaker euro should swiftly raise the cost of imported energy. Instead, Brent crude has fallen 9 per cent in euro terms this month alone. This is the main reason why eurozone inflation fell again in September to 0.3 per cent, a five-year low – a figure confirmed by data on Thursday.

“The drop in oil prices is a problem for the ECB,” says Marco Valli, an economist at UniCredit, adding, however, that the situation would have been far worse without the single currency’s fall.

“The impact on inflation is already visible and significant – if you still had the euro at 1.40 to the dollar, eurozone inflation would probably be zero.”
Pity the Keynesian Fools

Financial Times writers Delphine Strauss and Claire Jones say "pity the policy makers." I say pity the fools who believe the thesis of their article.

There is absolutely no benefit to rising consumer prices. Things are even worse if prices rise but wages don't.

The very essence of rising standard of living is more goods at lower prices thanks to innovation and rising productivity. And there is no reason to believe wages will rise (or keep up with prices) if prices do rise.

Challenge to Keynesians
 
I challenge Strauss and Jones (or anyone else but especially Keynesians and Monetarists) to prove rising prices provide an overall economic benefit.

Sure, those with first access to money benefit (the banks, the already wealthy, and government bodies via taxation). But that is at the expense of everyone else.

The absurd underlying notion behind the battle cry for inflation is that if prices fall people will stop buying things and the economy will collapse.

Reality Check Questions

  1. If price of food drops will people stop eating?
  2. If the price of gasoline drops will people stop driving?
  3. If price of airline tickets drop will people stop flying?
  4. If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  5. If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  6. If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  7. Will people delay medical procedures in expectation of falling prices?
  8. If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?

Deflationary Spiral Nonsense

I have discussed this many times before, most recently in Deflationary Spiral Nonsense; Keynesian Theory vs. Practice; Eurozone Policymakers Concerned About Falling Prices
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.

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.
Asset Deflation vs. Consumer Price Deflation

What central bankers should fear is falling asset prices, more specifically, loans made on assets in an asset bubble.

The irony is central banks create asset inflation by fighting something everyone on the planet should welcome.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

11:25 AM


Nonperforming Spanish Loans Near All-Time High as Overall Credit Shrinks


Huky Guru posted a couple of interesting charts on his blog today about shrinking credit but rising percentage of nonperforming Spanish bank loans: NPLs of banks rebounded to 16.59%. Seven points higher than in the 1994 crisis.

Spanish Bank Shrinking Credit



Nonperforming Loans



The "real" numbers are normalized to account for a change in methodology.  Today's number is just off the all-Time high of 16.73 percent in January of 2014. The "official" high was 13.62% in December of 2013.

Both sets of numbers are "far above the crisis in 1994, when nonperforming loans peaked at 9.15%."

The above charts provide further evidence the recovery in Spain is imaginary.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Saturday, October 18, 2014 12:45 PM


FBI Director Warns Google and Apple "If You Don't Decrypt Phones, We'll Do It For You"


The Fourth Amendment to the US Constitution is crystal clear in meaning.

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

FBI Director, James Comey, an Obama appointment, does not give a damn what the Constitution says.

In a recent speech, Comey warns If Apple and Google Won't Decrypt Phones, We'll Force Them To

Everyone is stoked that the latest versions of iOS and Android will (finally) encrypt all the information on your smartphone by default. Except, of course, the FBI: Today, its director spent an hour attacking the companies and the very idea of encryption, even suggesting that Congress should pass a law banning the practice of default encryption.

It's of course no secret that James Comey and the FBI hate the prospect of "going dark," the idea that law enforcement simply doesn't have the technical capability to track criminals (and the average person) because of all those goddamn apps, encryption, wifi network switching, and different carriers.

"Encryption isn’t just a technical feature; it’s a marketing pitch … it’s the equivalent of a closet that can’t be opened. A safe that can’t be cracked. And my question is, at what cost?" Comey said. "Both companies [Apple and Google] are run by good people, responding to what they perceive is a market demand. But the place they are leading us is one we shouldn’t go to without careful thought and debate."
Safe That Cannot be Cracked

A safe that cannot be cracked and a door that cannot be opened except by the rightful owner is precisely what everyone should want. It's what the Constitution explicitly states. Instead, Comey wants the right to read your papers and search your effects.

Perhaps it’s time to suggest that the post-Snowden pendulum has swung too far in one direction—in a direction of fear and mistrust," claims Comey.

Excuse me, but what pendulum is Comey talking about?

The privacy pendulum has not budged an inch in the right direction. Not one new privacy law has been passed or even discussed.

To prove how much above the law these law-enforcement jackasses are, one Pentagon official stated "I would love to put a bullet in Snowden's head".

No one threatening to kill Snowden has been censured.

For blatant disrespect of the US Constitution, Comey ought to be fired, but there's nary a peep from Obama.

I suggest we need a cultural change from the top down starting with a president who understands and respects the Constitution.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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