Ireland gets deflation
For the time being, I am more worried abut the potential inflationary effects of quantitative easing than about the deflationary impact of deleveraging. But, the latest news from Ireland shows us that deflation is alive and well. This comes via the Irish Independent:
Consumer prices recorded a second annual drop in April as the cost of energy, clothes and food declined amid a deepening recession.
Prices based on a European Union measure dropped 0.7 percent from a year earlier after falling at the same rate in March, the Cork-based Central Statistics Office said today. The decline in March was the first annual drop since the data were first collected in 1996. Prices rose 0.1 percent in April from the previous month.
Crude oil has dropped around 60 percent since reaching a record $150 a barrel in July. At the same time, waning consumer demand as unemployment rises has prompted stores to cut prices.Tesco this month said it will reduce prices at some Irish stores by as much as 22 percent.
Rising unemployment and tax increases have “heightened consumers’ reluctance to spend,” Lynsey Clemenger, an economist at Ulster Bank in Dublin, said in an e-mailed note today. “Prices have further to fall, as the consumer strike continues.”
The EU measure excludes mortgage interest payments. Based on an Irish gauge, prices fell 3.5 percent in April from a year earlier, the biggest decline since 1933.
In my opinion, the ECB’s recent announcement that it was getting into the covered bond market has a lot more to do with Spain and Ireland than it does with Germany. Spain and Ireland suffer from their joining the Euro to escape the impossible trinity of free exchange rates, independent monetary policy and free capital movement. Having sacrificed monetary policy for a fixed exchange rate, the Spanish and Irish are seeing some horrific debt deflation dynamics. The ECB seems to have awoken to this and is now engaged in quantitative easing via the covered bond market (although Trichet denies this). See Edward Hugh’s take on this from a Spanish perspective.
So, Ireland has joined the deflation camp along with Spain, the U.K., Switzerland and China, to name a few. If you think this deleveraging cycle is too powerful for the money printers to override, you’ll see the increasing number of countries with deflationary numbers as a bad harbinger. However, if like me, you are equally concerned about the upturn in commodity prices and the steepness of the yield curve, you will also see inflation as a looming threat.
To be continued.
There’s a big difference between the UK and Ireland (and other smaller EU nations) – the UK controls its own monetary policy, and its printing presses. And it is using them. Ireland has to accept the verdict of the ECB, which is generally controlled by the bigger nations, particularly Germany and France. The former is scarred by folk memories of inflation from the 1920s. Any softness by the ECB on inflation will provoke a backlash in Germany, which is the largest fund provider to the EU. Hence the ECB has higher rates than in the UK, and has only just started to consider QE.
So while the UK is flirting with deflation (on the RPI inflation measure only, as this includes the cost of mortages, and they have fallen massively in the last year as Base Rates are now down to 0.5%. CPI inflation is still ABOVE the BoE target of 2%!), I think Ireland maybe in for a severe bout of prolonged deflation. It can do nothing but cut spending, raise taxes and attempt to escape the debt deflation trap the hard way.
The UK on the other hand is printing money like no tomorrow and borrowing money with no obvious way of repaying it. The most likely result will be inflation, culminating in a bond strike, currency collapse, and possibly hyperinflation.
At what point will people finally stop paying on their debt? The Titanic is sinking. We’re headed for a world where a credit rating is irrelevant. Don’t people see this? Think of all those things that you think you need credit for–a house, a car, a college education and luxury items at the shopping mall and ask yourself, is there any other way that you can get these items without credit?
A house could easily be replaced by a rented apartment or a mobile home that you could save money for. They could say that people who don’t pay their bills on time would find it hard to find an apartment. So, we’re just going to have people who have money to pay for rent and are working just live out on the street because they didn’t pay their light bill five years ago? Right.
What’s wrong with moving closer to work, walking, a bicycle or public transportation?
I happen to think that I shouldn’t have to pay for a college education. I think that should paid for with tax dollars.
And do you REALLY need to buy luxury items at the shopping mall?
So you see….we don’t need credit to survive. All of this credit was introduced into the economy as a means to help facilitate globalization. The long credit-fueled consumer binge in the United States has helped to give billions of jobs to third world countries, but it has also perpetuated the stagnant wages that has existed in the American economy since the 1970’s. We now have people in Walmart making low wages helping to sell items that are made by people…making low wages. You only get what you give. This is the future.
So consumers should stop worrying about the fine china. The Titanic is sinking and it’s only a matter of time before the rumors are confirmed. Consumers should stop trying to save their credit record because we’re headed for a world where a credit rating is irrelevant.