Contrary to the popular myth, Hitler was voted into power in Germany because of deflation, not inflation. Hitler was elected in 1932, following three years of deflation – the consequence of restrictive polices after the great crash in 1929.
In contrast, inflation – often quoted as being responsible for Hitler’s victory – peaked in Germany in 1923. This was a full decade before the Nazis democratically entered the Reichstag.
The reason the European elite is now panicked about deflation in the Eurozone is because the political implications of deflation are impossible to predict. In the next two years, every major European country, with the exception of Germany, has an election.
The Hitler example is not meant to be in any way portentous or analogous to today’s Europe, it is simply a way of reinforcing to you how dangerous deflation is and why Europe’s politicians are taking enormous risks in allowing deflation to take hold, particularly as Europe’s economy is mired in debt both public and private.
Of all the financial pathologies to afflict an economy, too much debt combined with simultaneously falling prices, can tip an economy from recession into depression, from which it is extremely difficult to escape.
The ECB is just now beginning to realise that the gravitational pull of falling prices is so strong that it cannot be counteracted using monetary policy alone.
There is a real danger that the debt deflation dynamics that afflicted the world in the 1930s become embedded with catastrophic consequences.
Here’s why. In a normal economy, people and companies buy and sell stuff to each other. In the Eurozone, we all buy and sell to each other. As the Eurozone is a pretty closed economy, each country’s spending is another country’s income. France buys from Italy and vice versa. France’s spending is Italy’s income. The same equation holds at a personal level: your spending is also my income and vice versa.
If there is a shock to demand, such as a massive Eurozone financial crisis, people and companies get worried about the future and they start saving for the rainy day. But if everyone is saving, who is spending? And if no one is spending what happens to income?
Typically, if the private sector is saving, governments will take up the slack, but if they don’t, overall spending falls and so too does, by definition, income.
As debts are expressed in terms of income, if income is falling, debt ratios are rising without any new debt being incurred.
Out on the street, retailers experience a sharp fall in demand for their products. So what do they do? They cut prices to coax people into the shops. But because our incomes are falling, something strange happens deep inside our heads. We don’t see the new lower price as a bargain, but as a harbinger for further price falls. So rather than encouraging people to come out and spend, the very fall in prices repels demand.
When prices are falling and companies and workers can’t pass their costs on via higher prices or wages, their debts get worse, not better. Therefore, good debt goes bad, performing loans become delinquent.
This is when interest rates don’t work. Because the private sector and/or the public sector has too much outstanding debt, it doesn’t want to borrow new credit and because the banks have too much bad debt, they don’t want to lend, irrespective of how low the interest rates go.
As bad debts mount on both the balance sheets of the private sector and the banks, demand and income contracts further. This means that debt ratios actually rise because income is falling faster than debt is being paid off. In turn, debt to income ratios rise, not despite but because of efforts to pay off debt. To introduce aggressive debt repayment schedules while in a liquidity trap is like putting an anorexic on a diet.
This is a liquidity trap and this is when the economy gets stuck.
When the economy is caught in the twin embrace of falling prices and too much debt, the paradox of aggregation comes into play, whereby what is good for the individual may not always be good for the collective.
The banks in Europe, now worried about their own balance sheets, urge the debtors to sell their assets to repay outstanding loans. For the individual debtor this sounds good. They will sell the asset, get some cash, pay off what they can and clean up their balance sheet. They will de-lever and become solvent.
But what happens if everyone tries to de-lever and sell at the same time?
The paradox of de-leveraging tells us that the price of assets will collapse because the markets will be flooded by distressed sellers, who de-lever their way to bankruptcy by crystallizing losses, leaving the economy with asset price deflation. The debtor risks the paradoxical conclusion where the more he repays, the more he owes!
Traditional economics says that the economy will adjust via falling wages and, in time, we will rebalance and see a lower standard of living and start again.
But in reality wages don’t fall, particularly in the Eurozone.
Trade unions and public sector interests – the Insiders – move to protect their own workers. Wages in the protected sector change little. The adjustment doesn’t come through lower wages; it comes through higher unemployment for those on the outside – the Outsiders.
These Outsiders eventually listen to the politician who seems to understand their plight. This is when deflation tips over into democracy and we see the evisceration of the political mainstream and its replacement with something entirely different.
Is it any wonder that Europe’s political centre-ground are worried about deflation? The solution to deflation is inflation, yet up to now Germany refuses to allow the ECB to print money to alleviate the situation. Are we all to be put at risk because Germany doesn’t understand the lessons of its own history?
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After I read this great piece I decided to watch old WW11 movie documentaries showing the periods immediately prior to the start of and during WW11 . The parallels are striking with life today and what could come.
The reality is that Europe has been in a psychological depression for the last number of years. This is a Humpty Dumpty issue the system is broken and they are not able to put it back together. The Euro is really the Duro and the German intellect cannot accept the only way out is write down of debt and quanititve easing. At the end of the month Europe will receive the political signal from the Greeks. The question for the Greeks is whether or not they have the pschological strength to strike down debt and leave the Euro. As for… Read more »
David,
A nice explanation of debt deflation, and why lowering interest rates won’t stop it. However :
“The solution to deflation is inflation, yet up to now Germany refuses to allow the ECB to print money to alleviate the situation.”
According to Brian Lucey (Trinity), printing money does NOT cause inflation, in fact the idea that it does is “conceptually and empirically flawed.”:
https://brianmlucey.wordpress.com/2014/12/20/helicopters-money-and-mines/
So what do we do next?
Sounds to be David that Germany is a risk because it hasn’t learned our lesson.
Any comparisons involving the Austrian Corporal are fraught with danger, however what is interesting is that the NSDAP finagled its way in to absolute power with 37% of the vote because the traditional parties had completely lost the faith of the electorate. That last bit sounds familiar.
David, I think you are missing the point. The economy is structured on a certain model, to behave in a certain manner. The context of early 20th Century Germany is no longer relevant. The problem presently is income distribution. Since the fall of the Berlin Wall, we have seen a relentless rigging of the market in favour or monetary speculation, and at a cost to human factor production. People end up having to work longer hours, and more years, and more intensely to pay the bills. This reduces the cost of many products and services. With the resulting deflation. We… Read more »
David, Good description, but I wonder could there be a demographic aspect to all of this that is overlooked? Why do we want inflation? Because it is good for a growing economy with lots of new entrants to the labour force. But where are these new entrants today? Look at the German or, indeed, Eurozone demographic bulge. Its “waistline” has now hit the fifty year old mark. Europeans are not having children, and the new labour force contains a lot of immigrants upon whom low wage inflation has been enforced. Meanwhile the aging, property-owning, indigenous population has benefitted from a… Read more »
P.S. Saw Deco’s excellent post, after posting mine. I agree with all that and see it as an extension of the same thing — once the intergenerational economic divide has been created, it becomes self-reinforcing through the mechanisms that Deco describes.
Merkel is being overrated by the English speaking media. There is a lot of corruption in Frankfurt(Hesse), in relation to be banking sector and Merkel’s political party. The Frankfurt banks practically own the CDU in Hesse. Germans have told me that she produces spectacular gaffes also. And that these were influential in provincial electoral setbacks. And then there is Germany’s demographic problem. It is especially serious in cities like Hamburg, and Dusseldorf, where “moved in” Ossi families (from the former DDR) are the only ones having more than two kids. In fact the DDR gave Western Germany a demographic bailout,… Read more »
Germany has some predicaments to resolve. Housing in certain Western cities is now overpriced. And the demographics in those cities are not supportive of such pricing. (unless the market can be manipulated). The nuclear shutdown policy is costing a fortune. And there is no plan b with respect to “standby power production”. The Russian market is switching to Asian suppliers, and Merkel is proving incapable of addressing the issue at a diplomatic level. In fact it would seem that Washington is determined that there will be no diplomatic solution. Massive deposits, and an aging population that will not be feeding… Read more »
Greetings David, i dispute your thesis that falling prices reduce demand. It’s quite the opposite. Falling prices boost demand! You are taking the Keynesian view which is not universally accepted. I would argue that falling prices boosts demand and leads to higher turn over and profits. It’s like the fall in petrol prices, are they also bad for the economy or will they boost economic activity and profits? If falling prices are bad i presume you include oil in the equation, right?
The main source of deflation….the policy of capitalism for the poor and socialism for the rich.
It is relentlessly squeezing money out of those that sweat and toil, and persistently awarding it to those that corrupt the political process, to use state power to enrich themselves – whether by small amounts or large amounts.
The EU is the institutional framework for implementing policies that enable this transfer mechanism.
The EU – we were sold a pup.
Ruairi,
“i presume you include oil in the equation, right?”
Well, my heating oil tank is only quarter full, and normally I would get it filled, but I’m delaying it as much as possible in the hope of getting a lower price in the future. I’m sure industrial users, airlines and the futures market a doing the same thing on a much larger scale. So, falling oil prices are reducing current demand!
After every credit based boom is a corresponding bust. 1928 or 2008, it matters not. JP Morgan.,..gold is money, all else is credit. No matter how it is twisted, it is a fact that our money system is based on credit. The increase in the money supply only increas s the debt Blaming Germany for the current credit boom is wrong and inflamatory. Rather blame the spendthrifts using borrowed money. The premise of the article is flawed and bas d on ignorant assertions. Plain wrong. There is still no discussion of the source of all the credit. The central banking… Read more »
David, thanks for your article which though impressively written (as always), seemed to have fundamental flaws. I forwarded it to a friend of mine who (without realising who had written it) responded within minutes. See his response pasted below: Hi John, Given the nature of the article, I apologise in advance in having to mention the biography of a certain hyper-statist from Central Europe in the last century. I have only a few minutes to deal with this ‘article’. If we fact check, we will find that Hitler and his cohort carried out the Putsch in Munich in November 1923,… Read more »
Hi David, Super article. The narrative flows a lot more freely and indicates an author at ease intuitively with his subject. One observation re postponing purchases; it’s not just the result of consumers being more thrifty. Sometimes they have less money to spend because wages will fall in deflationary times and taxes will rise meaning less disposable income with a reduction in the velocity of money. The article dovetails beautifully with your bull trap graph of a few months ago and in my view is a treatise which indicates the top of the market. You offered the solution to the… Read more »
Pants Piddling on stage at the PAC
Honahan has accepted that Anglo should have been liquidated and that Lenihan was prevented from doing so by others ie the Taoiseach and Atorney General .
Imagine now what might have happened had liquidation proceeded .
How would that have affected you today ? Would you ( singularly) have been better off ? How would your neighbors have fared out ?
This a rubicon moment because of this new revelation to procrastinate and think of the time before and the time after . A code breaking exercise .
There is an ongoing wage crisis in many economies. This would depress the real estate markets, except there are a series of policies implemented to push up real estate valuations (planning restrictions in urban areas, low interest rates, aggressive lending, highly centralized state systems, substance abuse to drive people out of the cheaper areas, and immigration to pull people into the cheaper areas). There is still a chronic frailty in the economic system – because…..wage pressure is relentlessly downwards. And taxation on labour is profoundly deflationary on the economy. Loose taxation on financial assets is profoundly inflationary on the stock… Read more »
In the previous article on QE, David outlines a situation where QE will drive up asset prices (make the rich richer), whereas here it is deflation.
What is going to happen to Irish House Prices?
Deflation is the result of too low wages and too high personal debt. It’s that simple. People have no discretionary income. And the cure is equally simple: increase wages.
If the general population feels deflated its bound to in due course to infect the economy!
Solution… inflate the people and lets start another bubble.
It seems David is correct and that the ECB is about to start QE to create some inflation which will keep the ponzi afloat for another while. Proof of this is the decision yesterday of the Swiss CB to end the peg with the Euro because they know the Euro is about to be debased through QE and it will be too expensive to maintain a peg to a currency dropping sharply in value. Just one more quote on the supposed benefit of inflation, which in reality doesn’t exist despite all the nonsense we get from Keynesian economists. Here is… Read more »
Oh! To be like those prudent Germans…..https://medium.com/@WhelanKarl/the-myth-of-the-special-german-saver-718102ae1fd2
For anyone interested in an alternative to this glorification of currency debasement here is an alternative view.
http://mises.org/library/deflation-and-liberty-1
£1 = €1.31 now, or putting it another way, €1 = 76p.
$1 = €0.87 now, or putting it another way, €1 = $1.15.
$1 = €0.73 back in the summertime when we believe non-performing irish property loan books were sold to american venture capitalists, in dollars (assuming).
So, my question is David, have these American Venture Capitalists made a massive fcuk up and wasted a whole lot of money? I do remember you saying they typically have a 3 year horizon and then the sell up and ride off into the sunset with their boots filled.
It is important to separate consumer spending from capital spending. QE will not move the consumer spending needle. David’s hypothesis (that people wait for prices to come down) applies mainly to capital spending, while consumer spending is the real economy.
Good news this evening from Europe.
It seems that only national central banks may be allowed to buy the sovereign debt of their respective countries with a ceiling of 20-25% of their individual national debt. That would preserve the Euro as a solid reliable currency, which is what Ireland needs to grow its economy.
Thank you Germany. Here is the RTE story:
http://www.rte.ie/news/business/2015/0116/673034-ecb-meeting/
I’ve just read Pats’ RTE story. Thank you Germany? Why? Thank you Germany for making any QE so lame that it has no chance of working and Europe cannot escape the vortex of inflation. Great. What are the sovereign banks going to do with the money they get from the sale of bonds? Increase loans to customers – probably not. Increase loans to businesses – lack of sales in a deflationary market means that there will be few takers. The banks will probably invest in the US sharemarket. Dollar bull. The correct solution is fiscal spending by national govts/the Eurozone… Read more »
The War with Radical Islam
http://www.project-syndicate.org/commentary/radical-islam-western-military-intervention-by-jeffrey-d-sachs-2015-01
The War with Radical Islam
http://www.project-syndicate.org/commentary/radical-islam-western-military-intervention-by-jeffrey-d-sachs-2015-01
Sorry, not sure how that got posted twice – usually the site blocks duplicate posts.
Podium Request
As it is a waning moon at the moment and we are all looking forward to a new article from David tomorrow I chosed this moment to divert your attention . I did some time ago explain on site the revelations of new ancient words and that I was having them examined and some readers asked me to let them know how it went . So below in next submission I have tried to do that .
Tinnitus in Words Words we speak have origins .They may not be recent and they may be a very long time ago . Maybe man learned some from animals too .It is difficult to imagine how words first were used and where they came from . The Irish language did have a substrate language spoken on The Isles prior to the arrival of people from Europe recorded as The Celts .My evidence has revealed that this language arrived directly by boat from West Africa in an area now known as Senegal .This language was never part of the language chemistry… Read more »
There’s nothing wrong with religion Adam if you make them toothless like modern day Christianity. But we’re facing elements that are firmly rooted in the middle ages. Islam hasn’t gone through a reformation and there are factions within it that make those bible bashers and crazy cults from the US seem almost sane. They are intent on silencing all criticism. We’re dealing with people who have the mindset of the tudors or borgia popes armed with AK’s and SAM missiles. Think about that while people are trying to protect you while you’re whizzing around at 35000ft. The nutjob end of… Read more »
Swiss bank reset validates the holding of hard assets
https://mail.google.com/mail/u/0/#inbox/14af8968e9856c56
We will have to mine all the outhouses. There’s gold in those sewage pits.
https://mail.google.com/mail/u/0/#inbox/14af878dba934c5d
Iff’s, and’s and but’s.
http://www.thedailybell.com/trends-and-sector-reports/36004/Gold-Sector-Analysis-Gold-Explodes-Against-the-Dollar-as-Swiss-Erase-Euro-Peg/?uuid=6F800609-5056-9627-3C5071902B060BF2
“Second homes and passports, physical gold ownership, access to healthy food and clean water, all these are more important than ever to assure the safety and well-being of your loved ones.”
– See more at: http://www.thedailybell.com/editorials/36003/Anthony-Wile-Alarmism-Goes-Global-Now-Comes-the-Tipping-Point-Meme/?uuid=6F800609-5056-9627-3C5071902B060BF2#sthash.yReKiPmW.dpuf
“The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business start up activity as Gallup CEO Jim Clifton rages, for the first time in 35 years, American business deaths now outnumber business births. Wall Street, Clifton explains, needs the stock market to boom, even if that boom is fueled by illusion. So both tell us, “The economy is coming back.” Let’s get one thing clear, he exclaims, “This economy is never truly coming back unless we reverse the birth and death trends of American businesses.”
http://www.zerohedge.com/news/2015-01-14/gallup-ceo-blasts-us-leadership-economy-not-coming-back
http://www.thedailybell.com/news-analysis/36000/Should-the-Fed-Stop-Paying-Interest-to-Banks-on-Reserves/?uuid=6F800609-5056-9627-3C5071902B060BF2
A little deflation caused by efficiency and better production is a good thing. Why are central bankers and governments so afraid of it. Is everyone a Keynesian now?
Central banks now control every aspect of your life , with coming disastrous consequences.
Prepare yourself to protect yourself.
http://www.thedailybell.com/news-analysis/35996/British-Sobs-of-Deflation/?uuid=6F800609-5056-9627-3C5071902B060BF2
Federal open market committee rigs the stock markets (FOMC)
https://www.google.ca/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=FOMC
Yes we are at risk but not because of Germany.
It is time to cash in your paper chips and sit in cash or bullion. Your choice.
http://www.silver-phoenix500.com/article/examining-stock-market-dow-jones-total-market-groups
Banking system manipulation of the gold price downward results in a massive flow from London to Hong Kong. Result is, there is little gold in London vaults but the Chinese et al build huge vaults to house their increasing hoard. He who has the gold rules!!!!!!!!
http://www.tfmetalsreport.com/blog/6520/how-they-did-it
““This country cannot move forward with integrity until it faces the fact that bankers have criminalized the financial services industry. We, the people, have to demand an honest government that enforces the law, even against super-rich criminals.”
http://wallstreetonparade.com/2015/01/two-lawyers-make-the-case-for-rico-charges-against-jpmorgan-execs/
JP Morgan fined billions but no charges laid—————yet
Boom Goes The Dynamite: The Crashing Price Of Oil Is Going To Rip The Global Economy To Shreds
By Michael Snyder, on January 12th, 2015
http://theeconomiccollapseblog.com/archives/boom-goes-dynamite-crashing-price-oil-going-rip-global-economy-shreds
We are at risk as the Saudis et al are pissed at the US actions re Israel and Iran and Syria.
http://www.usagold.com/cpmforum/2015/01/18/swiss-franc-trade-wipes-out-830-million-hedge-fund/ Of course our warning in that newsletter was delivered in the context of owning gold as a portfolio insurance against such risks. As happened last Thursday, you retire in the evening and all appears to be normal, or at least as normal as can be expected in these precarious times. You wake up in the morning only to find that the interconnected global financial village has just gone over a cliff. One owns gold not because he or she thinks it might turn a profit. One owns it to protect his or her portfolio against the very same kind… Read more »
http://kingworldnews.com/man-asked-speak-chinese-officials-warns-disastrous-series-defaults/
What to expect in 2015? Foreign Affairs More American troops will be sent overseas to places like Iraq, Afghanistan, Syria, and Ukraine. There will be no military victories to brag about. More American military personnel will be killed in 2015 than in 2014. Military contractors will be used in growing numbers and their casualties will not be counted as military casualties. The Ukraine civil war will not end, and the United States will be further bogged down in this conflict. Relations with Russia will continue to deteriorate. The neocons in Congress will gain even more influence over our foreign policy.… Read more »
Our risk is not Germany. In fact a case is to be made that it is everyone but Germany who is the problem.
http://blog.milesfranklin.com/ponzi-schemes-and-you