Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.
Archive for the ‘Deflation’ Category
“When real interest rates start to move up, that’s when the crisis could hit.”
So the Federal Reserve Board spent six years and boosted its bond portfolio to $4 trillion in an effort to boost the rate of inflation to 2%.
How did that go? Not so well.
This week, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis. It was the third consecutive month of decline; over the past year, the “all-items index” decreased 0.1% before seasonal adjustment.
In other words, the U.S. has joined Europe and is in deflation mode. It’s the first time the CPI hit negative territory for the year since the beginning of the financial crisis in 2009. Imagine how low prices would be if the Fed didn’t buy all those bonds!
That dropping oil prices caused U.S. deflation underscores the foolishness of the Fed fantasy about a 2% inflation rate.
As David Stockman’s Contra Corner put it, “the CPI measure of inflation is so distorted by imputations, geometric means, hedonic adjustments and numerous other artifices, that targeting to 2% versus 1% or even a zero rate of short-term measured consumer price inflation is a completely arbitrary, unreliable and unachievable undertaking. Yet, (Fed Chair Janet) Yellen’s latest exercise in monetary pettifoggery is apparently driven by just that purpose … ”
“Oh, no!” you’ve probably been thinking. “The cost of filling my gas tank dropped again!”
Falling prices are a good thing for the cash-strapped American consumer, whose income on-average has fallen to where it was in 1994, as we’ve reported. But behind every silver lining, there’s a black cloud and leave it to us to find it.
Deflation is typically a sign that all is not well with the economy. Prices drop when the economy is so weak that consumer demand drops. When prices drop, profits decrease, stock prices drop, and unemployment and bankruptcies increase. Consumers put off purchases and wait for prices to fall further, which contributes to even further deflation. Deflation was an issue during the Great Depression and every period of deflation has been accompanied by a recession.
Raúl Ilargi Meijer of The Automatic Earth says deflation “eats societies alive,” explaining that “Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power.”
There’s plenty funny about quantitative easing. This UTube computer-animated video explains QE2 much better than anything I’ve seen or read elsewhere. Check it out.