Deflation

[12DrinkMore]

LaoPo suggested a topic on deflation be started, so here it is...

We are all suffering at the massive concerted knee jerk reaction from western governments to the supposed evil threat of deflation.

Methinks however, that all is not as it seems.

In 2003 Labour changed from the RPI to the CPI as a basis for measuring inflation. One main change was that the mortgage interest payments and HOUSE PRICES were no longer taken into account. This was a little way into the boom, and maybe Labour was feeling a little uncomfortable facing high inflation, so "we'll change the parameters to get what we want".

http://www.statistics.gov.uk/cci/nugget.asp?ID=665

How convenient! Suddenly the inflation rate dropped from 2.8% to 1.5% thanks to NuLabour's policies.

This was a main factor in the low cost of borrowing, because the interest rates were not raised enough, fueling the boom in house prices.

Deflation has always be present, particularly in the price of electronics, white goods, and to a certain extent cars, where more is offered for the same or slightly higher prices. The rise in the GBP was also reducing the price of imports, so the price of oil was possibly the main upward pressure on the index.

http://www.bp.com/popupimage.do?img_path=l...%20oil%20prices

enabling the UK gov to publish a "comfortable" CPI.

Now the speculator led oil price bubble has collapsed, housing prices are falling and so are mortage payments. Here are the latest CPI and RPI figures.

http://www.statistics.gov.uk/cci/nugget.asp?id=19

As expected, RPI, for the first time in years is falling beneath the CPI. But CPI is still over twice the target of 2%.

Now here's an interesting idea, what can you do to INSTANTLY affect the prices in the UK. Yes, drop the rate of VAT. What has Brown done? Yes, VAT is now 15% down from 17.5%, resulting in a PRICE DEFLATION OF 2.5%! Wow, now wait for the next CPI figure and I'll bet a box of Chang that the CPI will be down to 2.5%, so Brown has "cleverly" managed to manipulate the CPI to justify his actions and also drop the interest rate even further. (Did you really think that knocking 2.5% of the prices will stimulate demand? It will also result in a huge 14% drop in revenue for Brown, but in the end the tax payer of the future will pay it off, so he doesn't care)

So why, originally in the name of deflation (remember Blanchflower "we're behind the curve") have interest rates been dropped? I think it is part of the GREAT BANK BAILOUT as a systemic failure of the banking system is something to be avoided at all costs. With a ZIRP the banks don't have to pay to borrow OUR money, but they can still lend out say 4%, not a bad profit margin.

So, will we see deflation in the UK next year?

Housing, commercial property and stocks in warehouses will all deflate in price as nobody will be buying, there will be no cash, as debts have to be paid and unemployment is shooting up on a daily basis. With electronic goods deflation has been occurring for years without anybody complaining.

But food, transport, oil and the basic requirements, will all head upwards. With the Quid down 25% how can imports not shoot up? The deflation story is a pack of lies, CPI inflation is still over 4% and real inflation (what people experience) has been at 7% plus for several years.

Look at this calculation, which is relevant for retired Brits,

Last year you needed 800,000 Baht in the bank for your pension requirements. At 68 Baht to the Pound this amounted to 11,764 Quid. Now at 52 Baht to the Pound (around 24% devaluation) the same 800,000 Baht will cost you 15,384 Quid, a 31% inflation.

This is being quickly fed through to all Brits living in Thailand, who are much more aware of the effect of the devalued Sqib than the Brits living in the UK, where it will hit in three months or so. The UK government are also assuring more inflation by planning another interest rate drop in January and then along will come "quantative easing", or printing Quids, to ensure that inflation will be back up.

(Have a look at http://www.chrismartenson.com/crashcourse to see how the inflation figures are fiddled in the US to provide less than the real figure, trying to sort through the publications on the uk government statistics site is a headache)

I believe that Brown's first priority is to stabilise the banking mess at all costs. Although he and his government are publically yelling at the banks to lend money, I can't believe he really expects them to start lending left right and centre. It is all an act so he can side step the stream of s h i t from the turdo blower. The costs of bailing out the bankers are enormous and we will be suffering and paying for this over the next 20 years.

And to brighten up your day even further

http://business.timesonline.co.uk/tol/busi...icle5380191.ece

"Mr Strauss-Kahn acknowledged the risk of “social unrest” in some parts of the world as a result of the recession but said that was “only part of the problem... The problem is that the whole society is going to suffer.”

[LaoPo]

Thanks for opening this thread.

It is however solely focused on the UK but if I leave that aside I think deflation is definitely going to be in place and not just in the UK.

You are expecting that prices of oil, and basic commodities are going up. I don't see that happen in the next 6-12 months because demand will slow and is slowing already on a large scale.

But, to keep the factories running almost ALL manufacturers and suppliers are lowering their prices and margins to keep the factories running and create cash flow and thus creating deflation.

We'll see.

Edit Note:

Coming back to your last sentence about the article where Mr. Strauss-Kahn* spoke: "Mr Strauss-Kahn acknowledged the risk of “social unrest” in some parts of the world as a result of the recession but said that was “only part of the problem... The problem is that the whole society is going to suffer.”

:

Personally I think it will be a major danger, the social unrest, and I especially fear unrest in China and it must be a nightmare for the leaders in Beijing how to control the masses.

I know the country pretty well and know of many personal business circumstances whereby people/factories are forced to lower their prices creating the danger of deflation.

It is a danger that is larger than inflation because it effects the unemployment number. It is a mere 5 weeks to Chinese New Year and I'm afraid that many millions will receive a message during their holidays: "don't come back - factory closed or you are no longer needed..."

If social unrest happens, also in Thailand (!) the world will face more problems than we already have.

* http://business.timesonline.co.uk/tol/busi...icle5380191.ece

LaoPo

Edited December 22, 2008 by LaoPo

[Hairy]

Deflation is going to be currency-specific, and it's unlikely to happen in the US or UK because the central banks are busy running their printing presses 24x7x365.25 right now. (Really, the "printing press" metaphor is out of date, since it's all done with the click of a mouse now.)

A finance/economics forum I used to read, until I gave up on the tinfoil-hattery there, has a dictatorial owner/founder/moderator who was banning people for suggesting that, contrary to his belief in the deflation fairy, we might be headed into stagflation. A month or so back, I checked back in, and now the huddled masses there are bleating that he was the first to understand that we'll be heading into serious inflation (thanks, no doubt, to his godlike insight) once the housing-price declines end, due to the Fed's and Treasury's interventions.

[HardenedSoul]

LaoPo suggested a topic on deflation be started, so here it is...

We are all suffering at the massive concerted knee jerk reaction from western governments to the supposed evil threat of deflation.

Methinks however, that all is not as it seems.

Spot on there, mate ! I'm back in the UK for a few weeks and food, utilities and transport have gone up noticeably.

All those telling themselves that oil is going to stay at or around $30-40 are delusional. People are still driving around like crazy and, even if there has been a decrease in the miles being racked up globally, there's no way that it can justify a price drop to current levels. The oil price has been shorted to hel_l and back by the same speculators who pushed it to $147. All those readies sitting in the "safe haven" of US Treasuries will be looking for a new home real soon and then we'll see if deflation is the threat it's being touted as. Buying oil with devalued pounds or dollars is gonna be painful

[H2oDunc]

LaoPo suggested a topic on deflation be started, so here it is...

We are all suffering at the massive concerted knee jerk reaction from western governments to the supposed evil threat of deflation.

Methinks however, that all is not as it seems.

Spot on there, mate ! I'm back in the UK for a few weeks and food, utilities and transport have gone up noticeably.

All those telling themselves that oil is going to stay at or around $30-40 are delusional. People are still driving around like crazy and, even if there has been a decrease in the miles being racked up globally, there's no way that it can justify a price drop to current levels. The oil price has been shorted to hel_l and back by the same speculators who pushed it to $147. All those readies sitting in the "safe haven" of US Treasuries will be looking for a new home real soon and then we'll see if deflation is the threat it's being touted as. Buying oil with devalued pounds or dollars is gonna be painful

HS the price of oil has purposely been brought down. It as not been brought down by the speculators. They do not have the power or money to do such a thing. Back in June / July a guy on the Geoff rense radio show told us all that the price of oil would be $50 a barrel by the time of the election, it was. This was when EVERYBODY was predicting it hitting $200. It is now around the $30 a barrel. he also said that this would continue for a long time and that OPEC would try to raise the price but fail. OPEC cut production to all time low and the price has gone down if anything. The aim of this we are told is to bankrupt the Arabian oil states who have set their budgets at oil being $85 a barrel. The guys name was Pastor Lindsey Williams and he has lots of video's online to watch, well worth a look. A Google search brings up loads. Also his book " the non oil crisis " is an excellent read. As for Brown, he has fiddled the books for the last 11 years and it will only be when they are kicked out will the full extent of this be known.

Another guy worked out that the American cost every adult in the USA $2 million and in the UK around 80,000 pounds per person. His plan was instead of giving it to the very people who have just lost Trillions to then loan it back to us at interest was to give it directly to the people. They would then pay off any arrears, buy a new car, Tv etc and generally spend. This would simulate the economy far better than giving it to the Banking bandits.

Also I read with amusement that 21 banks in the USA who have received over a Billion each in bail outs have either refused to say what they have done with the money or are unable to explain where it has gone. OH and they would now like another 350 billion. You couldn't make it up !!!

[flying]

Also I read with amusement that 21 banks in the USA who have received over a Billion each in bail outs have either refused to say what they have done with the money or are unable to explain where it has gone. OH and they would now like another 350 billion. You couldn't make it up !!!

It is true.

http://www.boston.com/news/nation/washingt...h_its_a_secret/

Makes me sick really.

[HardenedSoul]

HS the price of oil has purposely been brought down. It as not been brought down by the speculators. They do not have the power or money to do such a thing.

Have to disagree with you there. Of course the speculators have the power to do this. There was no fundamental reason for oil to go to the $147 it did in summer. There was no evidence to suggest that there were billions more miles being driven in between Q4 2007 and Q2 2008. Oil rose purely on concerns that demand from emerging economies would outstrip supply. The speculators - and I include hedge funds & banks in this category - jumped on the short financials/long commodity game, sending the price to its all-time high.

In the same way many of us are baffled as to how Asian decoupling was ever considered to be a probability given the continent's dependence on exports to the US and Europe, I think we'll all look back with sheer disbelief at the sheer arrogance of those who thought that the price of the most important commodity in the world could really remain so low when all the evidence suggests that easy oil is a distant memory.