Yeah this is not the outcome Germany or the EU needs to worry about. It's experiencing Japanese deflation for 20 years.
>This is a looming political issue that's only just beginning.
Yes there's been plenty of hard money cranks that have said this for 10 years since the Great Financial Crisis in the US. Zero Hedge, gold bugs, hedge fund managers, etc have all been sounding the alarm about "money printing" and the deficit. There's no inflation in sight.
GDP per capita (PPP) in Japan has more than doubled over the past 30 years. https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locat...
Slow growth is only a problem if you rely on investing to generate your income. Otherwise, even no growth at all is fine.
Can someone elaborate on why deflation is so bad?
The money gets more valuable and the assets get cheaper. so the incentive in every micro-decision is to hoard money and not spend. Why spend when the same thing will get cheaper tomorrow/next week/month/year...?
So, the key factor of the Velocity of Money declines, and the entire economy either grinds or crashes to a (relative) halt.
My understanding is that deflation is also very hard to get out of. Requires massive liquidity injections, and doing that without creating a crisis of confidence by overshooting is tough.
For the current situation, my working conjecture (w/o running hard numbers/models) is that the Great Recession 11yrs ago destroyed so much wealth/value, and was so deflationary, that the central banks may never soon fill the hole with new liquidity. The evidence is that despite nearly continuous quantitative easing and other CB programs, over a decade later, we're still seeing this kind of phenomena - they just can't create & maintain even minimal inflation. Not sure what to do about it, but that's what I see...
(edit: typos)
Inflation prevents low income earners from saving, but they aren't in a position to take risk and invest. Therefore, it causes their networth to drop in relation to the wealthy (who can take risks to keep up by investing).
Inflation also keep wages down, as it's easier to pay the same wage , and any increase must be above inflation rate to remain at the same purchasing power.
Inflation also leads to speculation, rather than to invest in productivity increases.
With deflation, you end up not spending as much on discretionary/luxury goods, and only spend the minimum necessary. The prevailing theory is that this leads to slowdown in the economy - but I say it leads to low to zero mal-investments. If you have a high chance that your capital is going to have more purchasing power later, you would only invest in good, known ventures that is not speculative (e.g., building basic infrastructure that has a sound business model, rather than building fad apps).
However a deflationary spiral of declining money supply (usually created by destruction of value), where labor utilization & wages decline makes things much harder for ordinary people.
That said, I'd like to note the the above answer was to a question about what is bad about deflation. The good thing about deflation may be that it tends to be followed by increasing growth, possibly in no small part because central banks try to do something about it.
If you care about the environment, global warming, resource depletion, etc this is a good thing. Are we not currently producing more stuff than can be reasonably used?
> Why spend when the same thing will get cheaper tomorrow/next week/month/year...?
This is exactly how computing technology has been for several decades. Plenty of spending still goes on, because items have immediate utility. Being able to save by buying a loaf of bread tomorrow doesn't matter when you need to eat today.
Many countries would kill to have these problems, which might just be completely irrelevant. The numbers from Japan look pretty good.
Deflation isn't inherently good, inflation isn't inherently good. Most popular economic indicators are probably trash.
Which is metaphorically like rewarding couch-potatoes.
Rather that letting the winners enjoy their success, while wiping it out in the long term if it’s not funneled towards material investments that can benefit also the “non winners”, with jobs and quality of life improvement.
Seems like the narcissistic Randians are at the steering wheel, and no stepping down in sight
Or reduce taxation and make everyone but government richer.
Also, how would Germany invest in infrastructure if order books at construction companies are filled 1-2 years in advance? If anything, they'd fuel inflation and price out private investment.
Secondly. Bonds are not assets that "do nothing for no one;" they don't sit there in a vault. They are a loan to busineses, and they allow businesses and governments to build factories, bridges, and even other companies. They invite additional capital into the market, which can be used to make more high risk / high reward investments, for a small cut of the rewards. Even savings is a loan to the bank, which recirculates the money with their own loan desk. Negative interest rates in Germany aside, very little money in the system sits in an idle 'pile of gold.'
And that's really the problem here -- electronic deposits with the ECB cost banks money, so they're not using the central bank. The money still exists, and economy is still moving, but the normal holder of cash deposits is charging instead of paying for it. This is why it was theorized that 0 percent was the lower bound on interest rates, so it would be a more surprising outcome if this sort of thing didn't happen.
Inflation is like ante at a poker game. Without the ante, everybody would just keep folding until they get the nuts and there would be no action.
Well, it's how the FOMC operates. There's plenty of state and local bonds issued that match the model. But if you want to play the #notallbonds card, be my guest.
I'm not sure you understand these assets if you think they do nothing. If you want to rent an apartment then someone has to build and own it first. If you want to borrow money for your business then someone has to save money and put it aside so it becomes available to you. Your comparison to scrooge mcduck doesn't make sense because you're assuming that the money will never be used. If your goal is to save 20000€ over 7 years to buy a car without financing then you would be incredibly foolish to put that money into a risky asset. If the stock market crashes the same year you wanted to buy your car the you will need to obtain liquidity by borrowing money from a bank (remember those stupid scrooge mcducks swimming in their pile of gold? now you're begging them to give you money) and getting the car loan you wanted to avoid with the hope that in 3 years the value of your asset recovers and you can finally sell it to pay off the loan.
Are banks not able to in effect create money in todays system?
But seriously, there’s no harm damping things a bit. Runaway growth can have its issues too. I reckon best is to keep your inflation just ahead of population growth.
US has such a strong economy because barely anyone save. Japan had so much savings that they literally need exports to survive, there’s no home market to speak of because everyone save so much. Once export tanks, their economy tank.
1. EU is single market 2. Germany micraclously had strong currency at the time EU was created, so Germany businesses bought everything in cheaper EU countries and winners became bigger winners engulfing all small players across whole EU 3. EU taxes winners of the game and sends some money to improve the quality of life in poor nations but this ensures that poor EU nation get trapped in middle range and never surpass Germany.
They've managed to get all benefits of "imperialism" without any of the downsides.
https://www.politico.eu/article/what-rich-countries-get-wron...
Besides, "lost and won" is terribly weird when you just look at money flows but exclude goods. Hey, sell me your $30k car for $1000, you'll be the winner, because you get $1000 from me and we'll not look at the car. Not saying that that's an accurate description of EU-trade, just that it's weird to only look at money flows.
Another problem with that in general is that it's not just about old and new EU members. Luxembourg is an old member, is the tax oasis that works hard to help companies evade taxes in France and Germany, and is also leeching EU subsidies, not contributing to the EU funds.
That's the entire point of the article, the author is not "confusing" them:
>The talks cannot just be about public money, and should not become a brawl between "net contributors" and "net beneficiaries."
I very much believe they are intentionally confusing them because it makes their point. In a "that's basically the same, don't look too hard, just listen to these huge numbers" kind of way.
The German Saver knows better than most that inflation destroys savings.
Inflation benefits debtors by allowing them to pay back their loans in depreciated currency. Germany isn't exactly a nation of debtors, although most of Europe is.
This is a looming political issue that's only just beginning.