Lifting the Lid on More Deflation Lies

We’ll stay on the theme of Japan for today. And we may even stay on a similar subject for tomorrow after we heard this quote, “All the signs look like we’re [the US] going to follow the Japanese scenario.”

But more on that – perhaps – tomorrow.

Until then, we had to laugh. Yesterday’s Wall Street Journal wrote, “Japan’s government offered a modest stimulus package Monday and the central bank took steps aimed at curbing the rising yen…”

Steps which – oops! – resulted in the Yen rising further. As you can see from the chart below:

To put things in perspective. To see just how, erm, successful the Japanese government and central bank have been in manipulating the Yen weaker, take a look at the longer term chart:

During the past two years the Yen has strengthened by around 20% against the US dollar. Moving from 110 Yen to the dollar to just 85 Yen to the dollar today.

And if you look even further back the Yen has moved from over 130 Yen to the dollar just eight years ago.

As we’ve written a gazillion times before, it’s just not possible to minutely or massively manipulate the market. The market always wins and the manipulators always lose – eventually.

But barely a month goes by without the mainstream printing a story about how the Bank of Japan is going to intervene in the currency market or that the government will take measures to weaken the Yen.

Yet all the time the Yen keeps getting stronger and stronger.

And all the time we’re told that by the likes of Jesper Koll from JPMorgan Chase in today’s Australian Financial Review that “There is no magic bullet that will fight the spectre of deflation.”

It seems the mainstream may have forgotten that the reason there’s no magic bullet is because there’s no “spectre”.

As we wrote yesterday, deflation isn’t the baddie the mainstream economists and bankers would have you believe. It’s only portrayed as bad because deflation is the ultimate magic bullet that will kill off the over-leveraged and bankrupt Western system of banking.

For everyone else deflation is fine.

I mean, let’s take a look at some other numbers. Yesterday I showed you the Japanese consumer price index (CPI) that had “painfully” subjected the Japanese consumer to a 0.4% fall in prices over the last fifteen years.

In contrast Australian consumers had seen a 50% increase in prices. Seriously, which would you prefer? Come on, don’t tell me you’re happy paying 50% more for your groceries today than you did fifteen years ago…

But what about those other numbers? We’ve been told that Australia is a great and vibrant economy for having near full employment. That the unemployment rate is a miniscule 5.2%. Aren’t we good, and up yours to the United States with their 9.9% unemployment rate.

But what about our pals in Japan? You know, the economy that’s moribund, the economy that’s struggling against the “spectre of deflation”?

Erm, well, apparently, according to the Japanese Ministry of Internal Affairs and Communications, as of July 2010, the unemployment rate was a whopping… 5.2%:

Yes, it turns out that hotbed of deflation and moribundness actually has the same unemployment rate as Australia. And the chart doesn’t look that dissimilar to a chart showing the Australian unemployment rate.

Now, I’ll make the same point again. If you’d been unlucky enough to have been unemployed for the last fifteen years, or on a fixed income, which would you prefer, prices falling by 0.4%, or prices rising by 50%?

But even if you’ve been employed over that period, surely you’d prefer flat to falling prices rather than rapidly rising prices. Unless you’re a banker that is.

Look, I’ll say it again, we make no claims to be a Japanese economic expert. We’re sure there’s plenty of bad things about the Japanese economy.

But let me make one thing completely and utterly clear…

Deflation isn’t one of those bad things.

It’s bad that the government swipes the equivalent of USD$1.8 trillion in taxes from its citizens and then proceeds to spend USD$2.1 trillion.

It’s bad that government debt is 189.3% of GDP, when according to anecdotal evidence the Japanese public are rabid savers – as the stats we pointed to yesterday show, 51% of household assets are in bank accounts.

But it’s not bad that Japanese citizens have experienced steady prices over the last fifteen years.

What is bad is that the Japanese government and central bank should conspire to stab their citizens in the back by taking advantage of the good nature of savers by borrowing that money and using it to punt on the foreign exchange market – a punt which the Bank of Japan must be losing heavily on.

It’s bad that the Japanese government and central bank should thumb their noses at their citizens by attempting to devalue those savings by printing more and more money to stave off the “spectre of deflation“.

But why does deflation get such bad press? Aside from the filth and misinformation put out by the banks and their mainstream economic lackeys, the usual excuse given is along the lines of this…

“With deflation people stop buying things, therefore prices go down, companies that bought supplies now have to sell them at a loss, this causes the companies to cut costs and sack people, this causes demand to fall even further and so on and so on…”

It’s a pretty compelling reason to fear deflation isn’t it?

Only it’s not true. Let’s look again at some of those CPI numbers from Japan between 1994 and 2009:

Food prices have risen by 1.3 points.

Fresh food has decreased by 5.4 points.

Housing has increased by 4.9 points.

Fuel light and water charges are up by 8.9 points.

Furniture and household utensils have fallen by 36.6 points.

Clothes and footwear are down by 1.9 points.

Medical care is up by 11.6 points.

Transportation and communications are down by 6.1 points.

Education is up by 17.6 points.

Reading and recreation are down by 17.3 points.

Miscellaneous is up by 6.9 points.

And all up, the Japanese consumer price index has fallen by 0.5 points, or around 0.4% – in FIFTEEN YEARS!

The facts are, there are certain items – food, fuel, light, water, housing, clothing, footwear, transportation, communications, education, and medical care that most people are unlikely to stop buying.

In fact, get this, in an economy with falling prices there’s even the chance you’ll buy – shock horror – more stuff because your savings have increased in value. Do you ever go to the shops and buy less food because the prices are more expensive?

I’m sure you do. Perhaps you substitute for other items. But the point is, higher food prices won’t stop you from needing to eat. And by the same token, lower food prices won’t stop you from eating either. As I say, perhaps you’ll even eat more.

It’s a perverse argument the anti-deflationists have put around. That falling prices will lead to all sorts of economic misery. It’s just lies, plain and simple.

But what about those other industries? Industries where there is more consumer discretion. Clothing, transportation and communications would fit in that category as well, as would reading and recreation. And so would furniture and household utensils.

Will the firms that manufacture those goods or provide those services really go out of business if prices fall?

Perhaps some businesses will. Businesses go bust all the time, even in an inflationary economy. But to suggest that it would be any more so in a flat to deflationary economy is just nonsense.

Businesses operate under the assumption that they’ll make a profit – although not all will. If a business believes it is going to make a loss then it will take action to remedy that. Perhaps that will involve cutting costs such as labour. Or maybe shutting up shop and going out of business.

But ultimately, businesses make purchases and hire staff based on the belief that they’ll be able to sell goods or services for a profit.

Therefore, in a deflationary environment, businesses anticipate future price falls and take that into account when they buy wholesale or when they hire workers.

Look at those CPI numbers from Japan again. With the exception of the furniture category, all price movements have been relatively stable. Business people would no doubt have adjusted to that and forecast for it.

A lack of price inflation simply means that prices haven’t risen. It means business costs have remained static. It means that workers don’t need to get a pay rise. It means that the standard of living in Japan has remained relatively stable, whereas in inflationary countries such as Australia, the UK and the US, the standard of living has declined.

Yes, declined – higher debt, higher mortgages, and a higher cost of living. That my friend is the impact of inflation.

The notion that deflation results in prices going to zero and everyone becoming unemployed is plainly ridiculous. It’s just as ridiculous as someone arguing that house prices will fall to zero.

It won’t happen because of human action. At some point on the supply and demand curve people would believe that a certain price is worth paying, even if they believe the price could fall further.

Just as the price of plasma and LCD televisions continue to fall, people still buy them. Just as the price of computers continues to fall, people keep on buying them.

Here’s an example. Five or six years ago even an average plasma TV would set you back $5,000 – that was too much for your editor. Two years ago an average LCD TV would set you back $3,500 – again that was too much for your editor.

But four months ago, when the price of an LED LCD HD TV was going for $1,500 we decided to buy one. I’m sure if we looked in the catalogues today that same set would cost us no more than $1,000…

The point is, $1,500 was a price we were prepared to pay. But most other people we know were prepared to pay much more than that. Even though they knew and we knew the price would ultimately be much less in the future.

Do those price falls mean technology firms are losing money and going out of business? Sure, some probably are, but most aren’t. Either way, what do you care, don’t you just want the best product for the cheapest possible price?

You see, it’s the creative destruction and competition that forces prices down. If prices rise too high then it should lead to falling prices as competitors recognise the opportunity to undercut the competition while still making a profit.

Eventually wide profit margins should shrink to much narrower profit margins. Along the way, those firms with high fixed costs go bust. But that’s good. The company with lower fixed costs is able to increase market share and hire more people.

It’s only when you governments and central banks interfering that the market becomes distorted. And typically, as we all too often see in Australia, that distortion leads to price increases – technology excepted.

The way we see it, for all the talk about Japan being a basket case – and again, without being a scholar of the Japanese economy – we’re more inclined to think that the Japanese aren’t doing too badly at all.

Yes, they have to put up with an incompetent bureaucracy that’s doing its best to “free” them from deflation and “save” them with inflation, but at least Japanese savers know that the 100 Yen that’s in their bank account or under the mattress today is most likely to have the same purchasing power when they come to spend it next year or the year after…

Unless of course their government is “successful” in its fight against deflation!

Can you say the same thing about the money in your bank account? Thought not.

Cheers.
Kris Sayce
For Money Morning Australia

Tagged as: bank, deflation, dollar, economy, government, Japanese, price, Yen