Scarcely a block from our office in Paris is a monetary phenomenon that has escaped the financial press. In one of the highest-cost economies in the world, you can buy a woman's shirt for 2 euros. A dress? Four euros. A man's jacket can be had for the price of a cup of coffee.
The shop is tended by Chinese merchants...apparently dodging France's employment laws by only hiring family members. The merchandise, too, dodges high rents by squatting the sidewalk, under improvised blue awnings.
How come such cheap duds in such a dear city? The latest figures show negative consumer price inflation in 14 countries. In Ireland prices are collapsing at a 4.7% rate. In the United States, they are falling at 1.3% annually - their biggest drop in 59 years. In Britain, consumer price inflation is still positive...but falling. But clothing on the Boulevard de la Villette seems to have been thrown out of an airplane. It is not in deflation; it is in hyper-deflation.
What could cause it? A guess: excess capacity, inspired by excesses of credit, consumption and claptrap during the Bubble Epoque. Spurred by what seemed like insatiable demand from the United States and Britain, Asians built superfluous factories...Greeks bought superfluous ships...and Americans built superfluous malls. Now, the feet are in the other shoes - the cheap ones. The action of the bubble years produces an equal and opposite reaction: excess supply bedevils the market. Unable to sell superfluous brand name clothing, the rag trade strips off the alligators and polo sticks and dumps clothes on discount racks.
Last week, we warned about the extremely destabilizing effects of hyperinflation. One day middle class men are saving money for their daughters' dowries. The next, they are putting knives between their teeth and swimming across the Rhine.
Today, we deny hyperinflation thrice before the cock crows...and then deny we denied it. First, Professor Alan Blinder in The New York Times: "the clear and present danger, both now and for the next year or two, is not inflation but deflation."
Second, BusinessWeek elaborates:
"...the inflationary effects of the new money are being fully offset, or more than offset, by the far-reaching and long-lasting impact of household debt repayments. Whether it's voluntary frugality or under the coercion of creditors, Americans have abruptly switched from living beyond their means to saving more and working down the debts they incurred during the bubble years."
Third, as Ambrose Evans Pritchard puts it in the Telegraph: "the Fed's efforts to boost the money supply are barely keeping pace with the deflation shock. Stimulus is not gaining traction. The credit system is broken."
Professor Blinder explains why:
"In normal times, banks don't want excess reserves, which yield them no profit. So they quickly lend out any idle funds they receive. Under such conditions, Fed expansions of bank reserves lead to expansions of credit and the money supply and, if there is too much of that, to higher inflation. In abnormal times like these, however, providing frightened banks with the reserves they demand will fuel neither money nor credit growth - and is therefore not inflationary."
Reserves are what nobody wanted in the bubble years; now we live in a world of squirrels. Bankers add to their reserves; so do individuals and businesses. Americans saved an average of 7% of disposable income since the '30s. In the 2002-2007 bubble, that rate fell to zero. Now, it's back to nearly 5% and rising. Thrift is making a comeback. People are changing their own automobile oil. They are cutting their own hair and planting their own gardens.
When consumers cease consuming, producers cease producing. And shippers have nothing to ship. World trade has collapsed by more than it did at this stage of the Great Depression. And at 65% of capacity, there are more idle factories in America than at any time since they stopped making tanks and airplanes after WWII. Business earnings are falling, with no pricing power in sight. In this respect, this downturn is much more deflationary than Japan's recession of the '90s. When Japan went into a slump, the rest of the world continued to grow. Japan could continue to manufacture and export products - at a profit. Still, with so much excess capacity, producer prices in Japan fell in nine of 10 years in the '90s.
And now the denial: These commentators are right; deflation is the immediate problem. Our guess is that it will be deeper and more vexing than even they believe. The feds' money machine is broken. They can add reserves. But they can't turn the reserves into price inflation at the consumer level. Result: deflation...maybe hyper-deflation. But far from eliminating the danger of hyperinflation, falling prices practically guarantees it. In other words, it's not inflation we worry about; it's the lack of it. Unable to stimulate inflation in the usual way, the feds are forced to resort to extraordinary measures.
Only central banks with their backs against the wall - like Germany in the '20s...Argentina in the '80s...and Zimbabwe in the '00s...would dare to risk hyperinflation. But if its efforts to produce mild inflation don't work, the United States will eventually be in the same desperate position.
Until next time,
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- Inflation or Deflation?
- Debunking Deflation
- World Economy Faces Hyperinflation or Deflation?
- Until This Debt is Reduced, Americans Will Be Reluctant to Borrow or Spend
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Michael on 29 June 2009:
I live in Paris, could you please give me the address of the shop?
Thanks.
Comment by Pete on 29 June 2009:
Great article Bill. Cleared up some questions I had about the deflation/inflation arguments.
Keep up the good work (as always)
Comment by Calum Coburn on 29 June 2009:
Thanks Bill, good array of researched facts.
So what does this mean for the gold / silver price? If inflation leads to higher gold, does this mean that deflation means a lower price in the shorter term?
Comment by Richo on 30 June 2009:
This is why I like deflation - buy USD and short gold!
Comment by Cyber Cynic on 30 June 2009:
It was only recently that these articles were suggesting inflation was going to soar very soon blah, blah, blah.... The mention of deflation was just laughed at.... Interest rates to double digits blah, blah, blah....
Oh how people change their tunes very quickly and carefully when they discover they are wrong.... a vain attempt to seem "in the know" and to try and maintain some credibility . Now it's"....deflation is rampant as we can see by the prices at one sales stand in Paris that has been selling cheap imitations for years blah, blah, blah" Ha!
Comment by rag on 30 June 2009:
it follows tha the changes to money supply are seen in CPI as night follows day but with a time lag - using M1 or AMS as the money supply and the changes to CPI [annual percent changes] then the lag can be 2-3 years = so, the actions by the US Fed in 2008 will be seen in 2010-2011, not 6/2009.
Comment by Justin on 30 June 2009:
Just because some Chinese merchants are dumping some cheap Chinese s**t on the French does not mean the Franc or the Dollar, Pound etc are not losing value against the only asset that matters because it is nobody elses liability, GOLD.
Look at the Gold/USB (30 year bond) ratio, it looks bullish to me. Since it is bonds which central banks hold as assets to back their currency liabilities, I think inflation is the future.
Comment by Greg Atkinson on 30 June 2009:
Yes DR has just about everything covered now from hyper-inflation to hyper-deflation but I notice the buy gold stories have dropped off a bit. I wonder if the gold bulls are selling off a bit of their gold now?
Comment by Gordon on 30 June 2009:
Not me.
Comment by Justin on 30 June 2009:
You sell Greg, I'll buy
Comment by Biker Pete on 30 June 2009:
Dammmnnn! I just bought _sugar_... and now you're talking up gold, ""... the only asset that really matters..."
You're a SFA, aren't you, Justin?
Comment by Justin on 1 July 2009:
Well buy more sugar and gold and silver, and be creative, hold anything but the government's (read your) liability as an asset. Which when you think about it is impossible, is is any wonder the dollar loses its value?
Tea is good, coffee, cattle, heck even those seashells the Pacific Islanders used as money are a better investment, toilet paper......
Comment by Justin on 1 July 2009:
drugs....
Comment by Biker Pete on 1 July 2009:
Oh, oh... Prozak has morphed into Justin...
Comment by Justin on 1 July 2009:
I see from the comments on another article you are a real estate speculator Biker Pete? Here's hoping you've used lots of 'leverage'.
Or plain just overpaid. But then as my real estate agent uncle says "There's no way house prices are going to fall"
Comment by Ned S on 1 July 2009:
Sounds to me like the "cut tall poppies down to size" syndrome is alive and well in Oz. If anyone can explain what difference there is between an RE speculator and a stock market speculator and a bond market speculator and bullion speculator and an energy price speculator and a forex blah, blah, blah speculator maybe I'd have some chance of getting a handle on why so many DR readers somehow have apparently managed to convince themselves their speculating is "moral" and the speculating others do is "immoral". Or do some DR readers think other people should only be allowed to speculate in asset classes that they don't personally want to buy into? Or that speculation should only be allowed in asset classes that no one really wants to buy into??? (That would be a bit silly wouldn't it?)
Get a grip - Any of us who bother reading this crud regularly are at best "amoral" money grubbing speculators (be it with a long term or short term time frame) who will happily turn a blind eye to the fact that what we hope to be succesful in doing, ultimately steals money from those who are less successful speculators than ourselves - Including widows and orphans and aged pensioners and dumb superannuation contributing wage slaves! I don't mind speculators - They take their chances; Maybe they win; Maybe they lose. But moralising hypocrites do get up my nose.
Comment by Greg Atkinson on 1 July 2009:
Ned S - well said. I wonder how many investors in gold only obtain it from mines that are safe and where the workers are treated fairly? The fact is there are often nasty moral issues just under the surface when investing in anything so it is a bit rich (yes..poor attempt at humour I know) to single out the property investors for a verbal bashing. Funnily enough the chart of gold prices looks similar to the chart of property prices but apparently real estate is in a bubble but good isn't?
Personally I wish everyone all the best and do not like seeing anyone losing money. (except crooks of course)
Comment by Biker Pete on 1 July 2009:
Justin, I realise you're concerned about me, but please don't lose a minute's sleep. We overpaid on 23% of our properties; underpaid on 62%; and very grossly underpaid on 15%. We're positively geared, our debt is totally covered by our super... ; we run offsets against all loans; and we screen all our tenants carefully. So take another pill and chill out, son!
Comment by maxdoubt on 5 July 2009:
..mmm feel sorry for the mugged tourists who lost their duds - or maybe the insurance co. who had to cover the missing container and its contents last seen being offloaded from the ship in Marseille. Its a mad mad madoff world - hehe
Comment by DARREN on 27 September 2010:
I do not have any problem with deflation. I personally don't have debt and I have a fixed income, so while inflation steals from me every year, I have would have absolutely no problem with a 10 year or more period of deflation. Bring it!