De toenemende disinflatie in de EU en de USA (2 grafieken).

From: Erwan MAHÉ

Money exists not by Nature but by law. Aristotle

Nothing New Under the Snow …

14 March 2013

Given the snowy weather of late, I took the liberty of tweaking the popular expression a bit. Besides, given the current economic climate, the headline seems to fit. Many readers have asked me why I am not writing as many Thaler’s Corners of late. After all, they used to come out almost daily in 2007-2010 and now they are down to once a week … or less. This letter was never conceived as a press review, since other brokers do that sort of thing quite well. Instead of following the changing attitudes and comments of political and monetary leaders, I think it is far more useful to continue with my analyses of the macroeconomic situation.

Given that the economy is moving in the direction that we have long predicted, with the US economy gradually picking up while the Eurozone remains stuck in its same old budgetary and monetary errors, I don’t really have much to add. I do not believe the macro or micro-economic indicators or client investment flows provide any reason to change our biases for the time being. Between the strong disinflationary trends in the Eurozone and interest rates, which we have been promised will remain at rock bottom for a long time, both equities and fixed income products remain strong. That said, it is time to take another look at these trends.


We continue to believe that the governmental austerity policies on the Eurozone, formalized since France’s capitulation at the Deauville summit of October 2010 (yes, the PSI was a tax on private-sector savings!) along with the ECB’s way too restrictive monetary policies, can only exacerbate the deflationary trends on the Eurozone. The word, deflationist, may seem a bit strong for some people. After all, unlike in the 1930s, salary rigidities (sticky wages) today prevent prices from falling as quickly as in the 1930s. But today’s deflationary is also expressed by the contraction in the number of people employed! It is worth examining some of the latest price indices.

Sweden: inflation fell to -0.2% YoY in February, which is the lowest rate since the air pocket of 2009. But the situation today is totally different, since back then commodity price, as tracked on the CRB (see US graph, below), fluctuated from a +50% YoY jump in the summer of 2008, to a -50% YoY plunge in March 2009!

In Norway, the central bank, via its press release on monetary policy, has just announced today a downward revision of its inflation forecasts and the postponement of plans to hike key interest rates until the spring of 2014. They revealed all that while explaining that the domestic economy is operating at higher than normal resource utilization capacities and that unemployment is low!

Switzerland announced this morning that it was also revising downward its inflation forecast for the years ahead to -0.2% for 2013, +0.2% for 2014 and +0.7% for 2015, with an expected 3-month Libor at 0% for another three years. They emphasized that considerable risks continue to weigh on the Swiss economy, due to Eurozone-linked tensions.

France: inflation came to 1% YoY in February, the lowest in 38 months, and +0.6% for the core index (-0.6% on the months). In the meantime, energy prices climbed steeply, driven by surging petrol products (+2.5% on the month)! Prices of manufactured goods fell 0.2% YoY.

Germany, which would seem to fill all the prerequisites for inflationist risk, presents:

– extremely low yields on debt (0.05% on 2 years, 0.45% on 5 years, 1.48% on 10 years, 3.36% on 30 years);

– a heavily cash rich banking system, due to deposits from peripheral nations;

– a much better employment market than the rest of the Eurozone, with unemployment today at 6.9%, compared with 12.1% in 2005, regardless of the Great Financial Crisis!;

– a real estate market considered being among the strongest in Europe, with constant foreign investment, both in the residential and commercial sectors;

– a big balance of trade surplus, whose monthly average has climbed from €11.6 billion in 2009, €13 billion in 2010, €13.1 billion in 2011 and €15.7 in 2012! And despite all that, the latest inflation figures out March 12th show February prices up by a mere 1.5% YoY. Core inflation in January came to 1.1%.

All in all, while inflation has hardly collapsed for Europe as a whole, given +2% in January and an expected +1.8% for February, it is solely due to the hikes in indirect taxes established in countries being put through austerity treatment, whose efforts to cut government budget and thereby improve their current account balance are leading a drag on domestic consumption. I find it incredible to see the ECB claim that there is no urgent need for action, despite the persistent disconnection in the transmission of its monetary policy toward the peripheral nations, because there is no real deflationist risk, although the ECB itself is responsible for these austerity plans, indirect taxes and resultant hikes in indirect taxes. As for Mr Draghi’s latest press conference, I just felt like saying, “come on, Trichet, you can come out now!”

And what can we say about the Bundesbank, which, for the second consecutive year, has booked gigantic provisions in its P&L, €6.7 billion in 2013, while returning only €643 million to the federal budget. Is it because European nations promised to return to Greece the profits made by their central banks on Greek government debt purchased via the SMP? If so, that would really be repugnant. The German government has nonetheless promised to return €600 million to Greece, which will leave it almost nothing. In short, although the European Central Bank remains trapped in a theoretical straitjacket recalling the economic horrors of 1929-1935, the persistent deflationist trend on the Eurozone guarantees us rock bottom interest rates for years to come! And we will see the same thing in the United States, regardless of the latest job creations figure on that side of the Atlantic, as you will see below.

United States

Many seem to believe that the Fed will tighten money policy earlier than we thought just a few weeks ago, due to the better job creation figures. First, remember that the criteria advanced by the Fed fall into two categories. While they are mainly concerned with the employment market, they also involve price growth. But the latter has given no reason for alarm. The graph below tracks the price indices monitored by the Fed: the PCE, and especially Core PCE, which it compares to annual price changes as measured by the CRB, the commodity price index. As you can see, there is no reason for worry on that front. Not only are inflation indices again heading downward, but, at +1.2% or +1.3%, they are well below the Fed’s target comfort range! And with commodity prices now under pressure (slowdown in china + shale gas in US) and a sprightly dollar, this hardly helps matters.



As for the employment market, the pace of job creations is obviously strong, and the latest +236,000 job creations in February is good news. But, like the unemployment rate, this is one of many employment market indicators monitored by the Fed. One of the most important, which also characterized the output gap, is the labor participation rate. The higher the figure, the lower the number of workers available to respond to growth in demand. The lower the figure, the easier it is for businesses to find people to return to the employment market, after dropping out for years, given the desperate job prospects. A pretty picture is worth a thousand words, so check out the following graph.

Labor praticipation rate in the USA


Knowing that a 1% change in this index represents 3.5 millions of people, we get an idea of the Fed’s margin for maneuver before changing its policy. But there again, there is no need to rush to hedge risk of a hike in short-term interest rates!
Ah, the joys of a Liquidity Trap …

The Macro Geeks’ Corner (MG)

An interesting news from Greece, with the establishment of a public jobs program paid at a maximum of €490 per month, limited to one unemployment person per household.

‘OAED plan offers 5-month work stints in local projects’

By Christina Kopsini/

This plans looks strangely like than of the “job guarantee” so important of the eyes of Modern Money Theory tenants. Here’s a description I dug up, with numerous other links in it:

Is MMT’s Job Guarantee Crucial?

By Pavlina R. Tcherneva / Credit Writedowns

Have a good evening and good weekend!

3 Responses to “De toenemende disinflatie in de EU en de USA (2 grafieken).”

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