Wikinvest Wire

The Swiss slide into deflation

Monday, April 06, 2009

Ambrose Evans Pritchard is alarmed at the prospect that the entire nation of Switzerland may soon be sucked into a giant black hole otherwise known as "deflation".

Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.

"This is something that we must prevent at all costs. The current situation is extraordinarily serious," said Philipp Hildebrand, a governor of the Swiss National Bank.

The SNB is not easily spooked. It is the world's benchmark bank, the keeper of the monetary flame. Yet even the SNB's hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.
Hard men throwing away the rule book? Where do you go from there?

In the words of Dr. Peter Venkman, before you know it, dogs and cats will be living together, human sacrifice ... mass hysteria!

Apparently, the scourge has already hit mainland China.
It is remarkable that China's fall into deflation has attracted so little notice. China's CPI was minus 1.6pc in February. The country has built too many factories producing goods that the world cannot absorb. The temptation is to shunt this excess capacity abroad. A faction of the politburo is already itching to devalue the yuan.

Of course, Britain has already played the currency card. That is different. The pound's fall, though welcome, is a side-effect of the Bank of England efforts to stem the credit crunch. There has been no currency intervention.

Crucially, Britain has a current account deficit. Many countries toying with devaluation are exporters with surpluses – 15.4pc of GDP for Singapore, 8.4pc for Switzerland, and 6.1pc for China. If these countries refuse to let their imbalances correct, world demand must implode.
While I'll be the first to agree that times are perilous today, it seems silly to think that readings of minus one percent on consumer price indexes are going to make things any worse.


Bruno T said...

They're asking us to believe that people who heretofore would lease cars, buy furniture on credit, and do other foolish things to "have it now" will stop buying because it will cost 1% less in a year. Bhwaahaaahaa!

Chuck Ponzi said...

No, Bruno,

They will stop buying because they won't have a job.

They won't have a job because their company cannot make enough money selling their product.

In a levered and inflationary world, you could take out today's debt and expect that the future prices of your product could rescue you if you made a poor business decision. Now, they just lay you off. Which is why it's called a spiral. Each subsequent round of layoffs and price adjustments means more layoffs and more price adjustments. It will not stop until the excess supply is wrung out of the system or you disincentivize savings enough. Most politicians would rather disincentivize savings.


Bruno T said...


I was referring to the quote "Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes."

This is referring only to "spending psychology". They are trying to say that people will wait to buy things because they will cost 1% less in a year. That is BS. My point is that it will take a much bigger "deflation" than 1% for people to postpone purchases. People were perfectly happen to pay 18% interest to have a TV set today. Why would they postpone getting one to save just 1%?

Unemployment will indeed reduce spending but it is a different concept entirely.

People will not spend for many other reasons (fear of job loss, loss of money in investments, loss of wealth effect from home value dropping) but deflation based psychology as posited in this article is not one of them.

Actually, they may postpone a home purchase in the US hoping for lower prices in a year. But this was a study on Switzerland, not the US, and home price expectations 1 year out would have to drop way more than an expected 1% for it to have any "psychological" effect on home purchases.

Meanwhile, go price a pickup truck today vs December '08. A Ford f-150 XL reg cab with ac/auto, 4.6L V8, and bedliner was about $16,000 about 4 months ago. Today a similar 2009 F-150 is about $21,000 That is UP about 30% in real world pricing. I think this shows that once the glut of unneeded luxury and other consumer items is sold off, prices will rise, and rise dramatically, because input costs will rise and because they cannot continue to sell items at a loss indefinitely.

The same will happen with homes, we just have a bigger surplus of those.

Anytime you have an economic "fast stop", you will have fire sales of goods by sellers desperate for cash. It statistically will look like deflation temporarily, but it is quite different. The money entering the economy by the truckload will have the effect of raising prices for most things, just give it time.

This deflation 'scare' is a tool used to get our ok to print money to expand government and bail out the foolish and over-extended at the expense of savers and the prudent. The idea that inflation is good is one forwarded by those who wish to keep us indebted and punish savers.

The indebted fear deflation. The prudent don't mind prices falling. But trillions of newly minted dollars in the next year or so with more on top of that each year for as far as the eye can see say we don't have to worry about deflation anyway.

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