By Bernard Hickey
Who could possibly be against falling prices?
On the face of it most people love cheaper stuff.
Over the last couple of years consumers in New Zealand have relished walking into the electronics store or the phone shop or onto the new car yard to find prices have fallen and often sharply.
Statistics NZ figures for import prices show total consumer goods import prices fell 8% in the last three years.
Consumer durable import prices, which include the likes of mobile phones, computers, washing machines and clothes, fell 24%.
Passenger car prices fell 4% in the three years to September and a close reading of the motoring section shows that European, Japanese and Korean manufacturers have slashed prices again in recent months.
Peugeot, for example, is now offering an SUV for under NZ$40,000 that would normally sell for more than NZ$50,000. Its parent in France is having to dump cars in markets outside of Europe after sales fell as much as 40% in parts of Europe last year.
Japanese car makers such as Toyota and Suzuki are now selling their smaller cars for under NZ$20,000, including 15% GST, powered in part by a slump in the yen.
It's not just manufactured imports.
Total imported services prices, which includes all sorts of things from banking to travel, fell 6.6% in the last three years.
Travel prices fell 18%.
Prices of all sorts of things all around the world are falling, and its not just because of a 40% rise in the New Zealand dollar since early 2009.
Production capacity across Europe and Asia in particular has expanded massively over the last decade and at lower costs per unit as new technology was used and production moved to cheaper locations.
Demand in Europe, in particular, and America to a lesser extent, has also slumped.
That means too many products chasing too few buyers, which creates deflation.
It hasn't helped that central banks from Britain to America, Japan and China have been printing money at a rate of close to NZ$200 billion a month for the last year or so.
That is equivalent to New Zealand's entire economic output printed each month, which depresses the value of the currencies printed and increases the value of those not being printed such as New Zealand. Again, some might say, what could possibly be wrong with cheaper prices? If your income is rising or at least flat then your real purchasing power has increased.
That has been one of the arguments from some in our Government over the last year or so when asked about the lowest wage growth in over a decade. They argued that nominal wage growth may be weak, but everyone should 'feel the power' of the real wage growth.
What is unspoken is that the rise in the New Zealand dollar has helped increase that purchasing power, of imports at least.
But deflation is a problem for any economy if it becomes persistent and widespread and is combined with high unemployment. It encourages consumers to wait before purchasing.
After all, why buy something now if you know that it will be cheaper and you can buy more of it in future?
If everyone delays purchasing at the same time then demand falls, prices are cut again and the economy enters into a deflationary cycle.
One particularly dangerous consequence is the resulting fall in profits when prices fall fast, which encourages employers to lay off staff and cut wages.
That cycle of cutting prices and wages can then spiral into something more dangerous, the likes of which we haven't seen since the Depression of the 1930s.
This fear of deflation is exactly why the likes of Japan and America have been printing money and why the continental Europeans have started openly talking in recent weeks about starting printing too.
They are desperate to create inflation again.
Down in our part of the world there seems to be less of a worry about inflation, even thought it's been below the bottom of the Reserve Bank's 1-3% target range for most of the last 18 months and is at its lowest point since the Depression.
Even on Friday, the bank warned again it need to be careful to 'anchor' inflationary expectations.
Consumer price inflation, as opposed to asset price inflation, is the least of the world's worries. There are some immensely powerful structural forces driving down consumer prices and bearing down on wages for the majority all around the world.
The coming globalisation of services into the cloud has yet to really hit, the ageing of populations in the developed world is bearing down economic growth rates and an epic shift in the income share from wages to profits in the Northern Hemisphere are all sucking any heat out of prices.
The Reserve Bank is widely expected to warn again this coming Thursday that it will have to increase interest rates next year to contain consumer price inflation. The central bank and most bank economists have warned about higher interest rates again and again over the last five years.
Yet they have been surprised time and again in recent years at the sheer weight of the deflationary forces of ageing, globalisation and new technology, which are changing many behaviours all around the world and in New Zealand.
Young people are choosing to travel online via their cheap gadgets than actually buy more expensive petrol.
Consumers are buying imports and travelling overseas rather than buying and travelling locally.
Employers are looking to casualise their workforces and reduce benefits to grow their profits.
Many are looking to reduce costs by moving to robots or into the cloud. All of these forces reduce prices, costs and wages for the middle to lower income groups.
Our policymakers are still fighting the inflationary battles of the 1970s, 1980s and 1990s when the real battle in the years to come all over the world is with consumer price deflation.
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This is an expanded version of an article published by the Herald on Sunday. It is used here with permission.
47 Comments
To have an active economy, you need a mild level of inflation. The is no urgency for consumers to buy now if prices may fall or flatline, there is no incentive for businesses to invest for the future if customers are not buying.
Since 1990 NZ has hd an extremely high punitiveinterest rate policy, set by our global masters. Well, now they have what they want a moribund domestic economy, deflation, depressed regions, but a big money making machine in Dairy, foreign investment, & immigration.
Deflation is far worse than infation.
One of the best ways to keep deflation in check is to keep house prices rising gently because of the continuing knock on and positive effect this has throughout the economy.
Those who dream of a housing "bust" should be careful for what they wish for.
It may well be their jobs and homes that go first.
Deflation rapidly turns an economy into suffering the "Zombie Effect" where ambition, hope, progress and profit are no longer goals to aim for.
We would all become a nation of hand to mouth serfs, surrounded with a myriad of worthless gadgets and moribund assets slowly slipping back to the dank and musty hopeliness of the dark ages.
Deflation rapidly turns an economy into suffering the "Zombie Effect" where ambition, hope, progress and profit are no longer goals to aim for.
If we believe all we read then I think we are almost there aren't we BigDaddy. Sad what greed by those at the top does isn't it.
gently? yet you are one of teh ones hoping to double your money.
Dream of a bust, well dream as in nightmare, I see a bust but believe you me I dont hope for it.
The last paragraph you describe is the coming effect of peak oil, enjoy.
PS stock up on books.
regards
Don't worry about no inflation.
Some people are doing their damndest to reverse the trend.
A couple of Awkland wanna be's from Council, went overseas and spent 58,000$ the equiva-lent of a couple of peoples wages at one hit, in a very short space of time.
Surely that must be inflationery.
YEAH...for the ratepayer.??!!.
Awklanders, You will soon need to be a mere millionaire, to own a crappy million dollar house on paper and pay the inflated ego of those travelling and wasting yer money to live in gridlock.
Not to mention screwing around on your ratepayers money too to achieve that.
Surely someone is having a joke at your expense.
Personally, I think it is a lot of people.
A note to those who cannot see the writing, writ large.
Deflation is only a problem, when you owe money, like a Big Daddy should, until he should see sense and pay orf his debt to society, that he owes at the cheapest interest rates, ever, taken from what is now, a poor saver.
And untaxed returns as long as the Idiot Government dictates, that Big Daddy and his cronies are worth saving, but money isn't.
Soon that may change.
Leverage works both ways.
Ask a few billionaires, a few Banks, who did not see the future.
Payback is everything. Especially when using other peoples......money.
After all, why buy something now if you know that it will be cheaper and you can buy more of it in future?
Me thinks, one doth protest too much.
A different perspective, from around the world, not just here.
Ah, but the biggest problem, is the biggest borrowers over leveraged, to Fractional Reserve style banks, not the biggest savers who pay legitimate taxes, against their income, not farmed out to others, slyly and with Government Connivance.
Socail Engineering some call it.
In other words, some avoid taxes by so called untaxed Capital Gains, leveraged against houses and properties, rented out to house the problematical.
This expecting Capital Gain at mates rates is what bust the bank in UK, USA, Europe and all points South.
So we have just imported a similar treat.
Printed money, inflated growth, to house the great unwashed, to on lend to pumped up, jumped up landlords.
Even gold is headed South. Then pumped up again. Even oil, cannot sustain itself today.
That is why the present Government is so eagerly dispensing deep sea rigging floats.
Why China is gonna fight the good fight in Africa, Middle East and a few islands closer to home.
So now all you Big Daddy's expect the gravvy train to keep flowing your way, via QE, via inflation for all their ticky tacky little boxes, so they can live like a lord, a Big Daddy to all the little rentiers and ironically drive around in gas guzzlers to boot to inspect their little fiefdom.
It may be called QE, but it is a deperate attempt at inflating away a problem, whilst stiffing others with the bill, often the elderly and those who do not oil the wheels of state, but sometimes came here on a "get out of China free card".
Hence why this Goverment kow tows to em.
Any fool who expects "Piggy in the Middle" to keep paying, should realise just what happens when QE, stops and kicking the can down the road finishes.
The top tier problems are not working. Not working and getting Benefits.
Same in China, same here, just bailing.
And Big Daddy always expects his major benefits to keep him in the style he is accustomed too.
Ask a Syrian, why they are revolting, Ask an Eygyptian.
You can only pork the trough for so long, Big Daddy.
And even fractional banks, know when to call it quits, when we spend way more than the entitled 'Grand Poobah Big Daddy' and his cohort, zanyzane deserves.
LVR is not just for those with little deposits, it is also for those who do not know when to stop, even fractionally.
And little ole New Zealand is no different to elsewhere, just a little slow on the uptake.
Even a fractional reserve has its limits, that is why the peasants are revolting, Wheeler is shitting a brick, over inflated houses and why unemployment is rife, except those trying to start, then stop a bubble, with their grandiose scheming.
And I do not blame Wheeler, he never started the "Merry Go Round", Greenspan and Brown did in UK, but even now, it is getting harder to stop.
Because we bet it all on the house. Did we not.
Or on a crappy car in Detroit, but that is a different story.
Bye bye.
POP................ or should I call you Big Daddy.
And yer Mother ..was she called Fanny Mae, at least she had non-recourse loans.
Do you??.
Talk of a possible 150 basis point rise in rates over a two year timeframe, and suddenly all the spruikers and ticket clippers are screaming blue murder.
No more lending, banks going bust...care for some more hyperbole with that !
If the current bubble is that huge it's time if was deflated a bit.
The overleveraged are about to have their wealth transferred to the cash rich.
Happens every cyle.
I love the smell of interest rate rises in the morning.
So, let me get this straight.
Following a 150 basis point rise, the economy is going to collapse because some economists think they might rise further ?
I certainly hope there are some people who think this way.
They are the ones who lead the transfer of wealth to people whom I consider to have a more reasoned outlook.
The problem is the leverage has got excessive as that's all there is to create the bonuses our financial gods think they deserve.
Coming to a lampost a rope and a banker. Now I dont say I want that, far from it (jail time, yes), but Im quite surprised angry citizens have not popped a few off yet. Sadly it seems we are hell bent on not avoiding such events. So for those who think inflation is huge and real just remember this only holds together while ppl have a stake in it.
regards
PS I dont mean NZ, but the USA and EU....
There's another factor in the 'cheaper stuff' equation which hasn't been addressed, and that's falling standards and quality. I'd argue that quality and materials have been reducing faster than prices, with the result that cheaper stuff is largely an illusion, because while the prices may have fallen, the value extracted from that stuff over the product lifetime is even more reduced.
Buying a $1000 fridge every five years is a hell of a lot more expensive in money, time and resources than buying a $1500 fridge every ten years. But that's what we're all doing.
Great article giving food for thought. We do have to be careful here in NZ that we are not too hasty to jump onto the other side of the monetary policy divide, driven solely by short term cyclical changes. It is a worry that Europe is now close to "turning Japanese" with all the required ingredients for the onset of deflation.The importance of a US recovery is becoming greater by the day. Germany has a lot to answer for in Europe. If they are so against money printing, cutting their surplus is the least they could do.
Inflation: We are not in any danger of runaway inflation. At all.
Do we really think that 1973 is on our doorstep? With 10.2% inflaion?
Deflated prices = disposable lower quality, yes agree! - Saw a good poster on SM advocating people to buy from small local businesses & self-employed for Christmas. IE support the owner-operated jeweller and buy a watch from him/her rather than the from the bigbox retailer which adds to faceless corporate profits. Local, vibrant economies with consumers & small business oweners trading with each other would be a healthy thing.
I go out of my way to buy quality, don't mind paying more for something that's good value, and prefer NZ-made, but it's harder and harder to find, except second-hand. Note to manufacturers of the cheap and crappy: there's only so much tolerance available for being flooded with flimsy garbage that has to be replaced every few weeks. We're getting fed up with it, opting out, and going elsewhere.
We don't have cheap stuff. That's a nonsense. We have overpriced-for-what-it-is badly-made disposable crap which is made by slave labour, wastes money, time and resources, and is being shipped halfway around the world to end up in landfill six weeks later.
In my book, that's stupidly expensive stuff.
Actually, editors, how about a feature on NZ manufacturers, artisans and cottage industries in time for Christmas?
Bernard, the theory that Deflation is bad for everybody is pure nonsense. It does not compute with logic.
1. Why would we be againsts lower pirces or stable price of goods and services ??
If our income remains the same year after year, but prices remains the same as well, then we are neither better off or worse off. But if income does not increase while prices of goods and services increase year after year, then we are obviously worse off. ie inflation is bad for the average worker.
2. Why would falling prices of goods be bad? Do you buy a TV or Car if you know that the price is going up even when ou do not need to change either the Tv or the car ? How many people buy TVs and Cars just because the prices are going up ?? What benefit is it to him to buy another car or Tv when he don't need it ?? ie We only buy TVs or cars when our present one is unusable or we wish to upgrade, so we change one TV for another....not load up on good just because prices are going up !!
3 The present rant againsts deflation is because deflation workd againsts investors with leveraged assets. Deflation makes it more difficult for leveraged assets to become profitable while inflation makes leverage assets affordable and profitable...ie the people with money in assets (Rich People, if yu don't understand) wants inflation because it is the way to easy money for them.....But have you considered how many people have leveraged assets?? Do the poop have leveraged assets ?? Will inflation benefit them ??
4. Japan has been experiencing deflation for the past 20 odd years, is it really bad for the average people in Japan ?? If so why are they not rising with riots and indignation ??
You've missed an important point in #1.
If your income stays stable for a year. And prices stay stable for a year. (but not arbitarily locked - eg price freezes)
Then next year, if you've purchased quality durable goods, or purchased in a strategic manner, then you will be on a plane of constant improvement. This is how a lot of the old families in Europe used to get so rich, they didn't buy much, but what they did buy lasted generations.
Poor people might buy food service items 4 -6 times in their life time. The rich people would pay 5 times as much, but the next generations didn't need to buy anything, and thus could repeat the same savings elsewhere.
But it does make things hard for the government, such spending and durability and prudence is hard to tax! Requires less resources, makes far less polution and has less energy consumption - which means less needs to be monitored. And worst of all, such people have time to think and act in leisure which is totally unacceptable. How can people be slaved to debt and forced to obey if they do such things!
Further....
Deflation is not the cause of economic stagnation.
1. The computer industry is the best performing industry fr the past 3 decades. Yet the industry is a perfect example of deflating prices...prices remains stable while the quality doubles every 2 years.
2, The budget/low cost airlines industry has been growing exponentially the past 2 decades just by deregulation of the industry, yet prices for flights has been falling all the while.
There are many more examples.
"Policymakers still fighting inflationary battles of the 1970's etc" NO THEY ARE NOT. Inflation has been rampant in NZ since D Brash let go the tiller (just look at Treasury's own graph). The PolicyNerds spend their time dreaming up tricky new and loopy ways of hiking allgovernment taxes and charges (and then excluding them from their stats when it suits them).
Ergophobia
Yes they are, or they think they are, but they are not.
Core inflation is around 1 to 2%, really thats the overall inflation rate its not "rampant". Now yes sure rates etc are going up at 4~6% hence other sectors with no more money in ppls pockets have to deflate to stay in the game.
I suggest you be careful what you wish for. Pushing the sectors already under such deflationary pressure harder because you imagine there is inflation and we'll get deflation no holds barred and un-stoppable.
regards
The answer to economic stagnation in the Developed world in which NZ is a member is really deregulation of business and labour. In my example above, both industry did well because of deregulation (or lack of in the case of computerisation)
In NZ, the perfect example is housing which is tied up by red tape until now it is almost strangled....The total regualisation of the housing industry from Land Use conversion, Material Standards, Builder regulations etc etc has caused the industry to stagnate and prices to rise because of shortage of supply.
Any small business in NZ can tell you of the red tape nightmare that is causing them to either stop growing or even never got started in the first place.
Actually have just been to India on business trip for 3 weeks & met a lot of people making a lot of money, the velocity of business deals & western investment investment is incredible. Sure, inflation too high & currency issues, but there is a pace of business & investment that is on the go despite huge infrastructure & overpop issues.
I'm not sure that talking in very general terms about 'deflation' actually means much.
Any macro-measure tends to conflate a whole lotta micro-trends, many of which may well be pointing in completely different directions. I'll mention just a few, and common taters might add some more.
But of course, BH is writing this piece for the Sunday Heraldix, so let's not ferget that it is, shall we say, somewhat diluted ter begin with. Deflated, one might even term it.
Oh, them micro-trends: a sampling.
- Robotics - the textile mill joke is appropriate here. Textile is returning to the States, but the typical mill has a fraction of the staff it used to. Joke: it only takes one man and one dog to run the show. The dog's there to stop the man foobarring the machinery.
- Credentialism- by keeping kids in education for mostly worthless credentials (media studies, anyone?) for extended periods, Gubmints achieve a trifecta of outcomes, none intended: delayed personal earning saving capacity (thus depressing national income), delayed marriage and child-rearing (thus extending generational cycles and extending dependency) and increasing debt (because that's how living gets paid for in the meantime)
- Dependency-generation as deliberate political policy. As some wag noted, if you rob Peter to pay Paul, you're always assured of Paul's vote. Labour has been particularly adept at this over the decades. This policy tends to reduce its hapless victims to economic bystanders, and employers and capitalists, quite rationally, then tend to prefer robots and self-service, to employing these diminished/damaged souls (at whatever labour price).
- Miniaturisation - the getting of the same output from much, much less mass. This is very evident in IT, drones, small electrical appliances, and so on.
- Mass customisation - getting exactly what yez wants, without having to order 20K units and ship 'em all around the globe. The car industry's 'platforms' are a riff on this theme: the Volkswagen MQB is one such. 3D printing, and the ubiquitous design there-build locally used by everything from clothing to books, with Interweb plumbing joining the two, is another.
- Optimisation (what used to be called Operations Research) which focusses on minimising wastage of all sorts: repositioning (trucks, rentals, aircraft), re-work, routing/shipping/transport etc. This has changed from being industry-specific and expensive, to being a general-purpose and cloud-delivered cheap business essential.
Waymad... robotics.... Optimisation.....Customization...Miniaturization... To me these all come under the title of "productivity gains"..
For me inflation/deflation , in a general , macro sense, is a monetary phenomenon.... which is why Central banks have a mandate to control the Money supply and manage inflation....and have a focus on inflation/deflation.
In that regard ...I've always had a problem with the use of hedonics ( is that the term.?) in calculating the CPI.... It is a distortion that does not make sense to me.
Productivity gains are naturally deflationary and should result in an increase in everyones standard of living..... in that regard falling prices and/or getting more for your money should be welcomed and celebrated..
Why on earth we would wnat to counter this force of productivity gains by increasing the money supply to generate inflation ....is beyond me..???
In my view it is the compounding growth in Money supply that is the major cause of the increasing disparity in wealth distribution.
Agree these are all 'productivity gains' broadly defined, but....
But the issue is really twofold, as I tried to insinuate.
1 - what measures, upon which 'inflation' or 'deflation' are pronounced, actually consist of. You've rightly pointed out money-supply as a factor, I've pointed out some micro-trends (robotics, optimisation) which influence the money-requirement per unit of output.
2 - the larger issue of demand surely also is there. I've pointed at the extended-adolescence which crimps pure consumption and defers household formation. Plus, the operation of the 'pure productivity gain' measure, tends not to include the societal cost of the displaced labour. And there's always that displacement.
What you call credentialism is what I would call creditism. In a credit based money supply the name of the game is to lend money. It is a Ponzi scheme that relies upon an expansion of lending. The lending to young people before they even enter the workforce is a sign that the ponzi is running out of new inputs.
Oh deflation matters alright, hugely.
Some of your points are correct, but the problem is once you "improve things" to the point of not needing wage earners then you dont have any spenders and you dont have much of an economy.
Dependancy, dont agree that its wanted, its a by-product of having too many children. hapeless victims well tahts the outcome of the "improvements" the skills needed get higher and higher so less can have them and get to use them. eg IT, thinags are getting more and more complex, interlinked and harder to deploy and look after....take my present situation, 8 years ago 130 servers, today 500 with the same staff more or less and we are too slow....mind boggling really.
regards
Only in NZ financial expertise, when the rest of the world is printing like made to stop their dollar being valued highly, would the NZ response be to _increase_ the OCR (ie restrict money flow, pushing the dollar value up).
There most be some superduper clever fellows in NZ, that know more than the entire rest of the world. Pushing up the NZD to buy with money we don't have. Perhaps that's why the Kroner put South African in such a leading financial & economic postion all these years!
Now someone (who isn't just an apologist) can explain to me how pushing up base interest rate is going to contain consumer price inflation....when most large purchases are on "interest free" or even cash purchases. I realise how it screws up NZ business people trying to hire and compete (because they're leveraged on their capital equipment) and it screws over anyone on a tight budget with a mortgage (all landlords can just pass on the cost, as it's market wide.) ... so how does this help NZ?
If inflation is 10% in other countries and ours is 1-2% (when our economy is theoretically "booming" from foreign cash brought in from house and asset sales and business investment (into what? the foreign assets?)
So if our is 1-2%, and theres' is 5 - 10%? are we sliding by 3-8%.
Or against folks like Japan, where things are developing under the surface as they realign themselves, are our attempts to forced complaince to 1-2% a massive market manipulation?
"The coming globalisation of services into the cloud has yet to really hit"
Very true, sort of, what we might well see is a move away from small datacentres to more huge ones. What does that really solve?
a) You still have to maintain the operating system (eg access) and more importantly the application. Sure there are some savings; like no backups to do and OS patching (maybe) try running an old application on an OS or version it wasnt designed for.
b) Costs and financial control....messy.
We'll see....
regards
As a Babyboomer I dont relish the thought of Deflation , particularly in respect of my retirement assets, which could lose value before I retire .
I have a small retirement fund from my days working for Standard Chartered PLC and we will see Corporates making less profit , asset prices falling and paying lower dividends .
Its not just manufactures that lose value , it creeps to asset prices too , and heaven forbid even houses
Deflation is far worse than inflation
as a non-babyboomer I dont relish the thought of having to constantly pay through inflation for your pension, while having to invest and pay for mine, while trying to support my family and business. Without a market correction, their is no risk, without risk, inflation will skyrocket until we eventually hit other peaks
I don't see any deflation at the supermarket.
Maybe most households are already saturated with crap they don't need and don't need to buy anymore.
If shelter wasn't so expensive maybe there would be more disposable income to spend.
Why is annual inflation so important? What is the cumulative inflation of the past 30-40, 100 years? Maybe a correction is required?
As long as we continue to use money as a tool that it was never designed for (measuring wealth, prosperity and success), as long as we continue to value financial and material "wealth" above all else humanity will continue to fulfill the definition of insanity.
A world with an unfettered belief in economic theory and being ruled by our egos has created the issues we face today. Using the same thinking will not solve these problems.
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