Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Deflation Bonanza! And the Fool's Mission to Stop It

Economics / Deflation Jan 21, 2015 - 11:14 AM GMT

By: Mike_Shedlock


Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

The recent move in the Swiss franc puts a spotlight on the issue. For example, on Sunday, in Swiss Peg Removal: Did Anyone Win? I commented ...

One widely recognized "big loser" is the tourism industry. For sure, hotel prices in Switzerland rose as much as 40% overnight compared to prices elsewhere.

But Swiss grocery shoppers buying food imports from France, Spain, and the rest of Europe benefit mightily.

Which of those is more important? I suggest the benefit to Swiss shoppers is more important, at least in the grand scheme of things. Moreover, those consumers will have more money to spend on other things ... like restaurants, travel and hotels.

Shopping Bonanza!

On Monday came a Wall Street Journal story that exactly matched my prediction: Soaring Franc Creates Bonanza in Swiss Stores.

The soaring Swiss franc that caused howls in financial markets is creating a bonanza in stores, where shoppers are suddenly getting discounts on everything from vegetables to party dresses.

On Monday, Basel-based Coop said it was cutting prices on more than 200 types of fruit and vegetables imported from the European Union. The supermarket chain, Switzerland's second-largest retailer behind Migros, said further price cuts for imported fish, poultry and cheese were also in the works.

Coop isn't the only retailer going into bargain mode. Furniture chains, travel agencies and fashion companies are among the retailers slashing prices to rope in shoppers.

"For us housewives, this is welcome news for our daily shopping," said Anita Mueller, who was perusing sales on Banhofstrasse, Zurich's main thoroughfare, on Monday morning.

Even luxury stores are passing on the savings. The window of Grieder & Cie., a high-end department store in Zurich's shopping district, bore a message informing shoppers their money would go further.

"Due to the sudden rise of the Swiss franc against the euro and to give us time to adjust our prices to the move, we are now offering a 20% discount on all of our non-reduced goods for an indefinite time," the message read.

Swiss consumers are also taking advantage of their improved buying power by crossing into Germany. BVB, the transportation authority in Basel, added more trams to the border town of Weil am Rhein to accommodate the rush of Swiss bargain hunters looking to take advantage of their muscular Swiss francs.

TUI Suisse, one of Switzerland's biggest tour operators, cut prices by 15% on vacation packages to sunny destinations around Mediterranean Sea. Tours of Greece, Spain, Turkey, Italy and Portugal are all included in the sale, which is dubbed the "euro discount." TUI Suisse, which has branches in many shopping malls across Switzerland, is also lowering prices on trips to Morocco and Egypt for departures through the summer.

Don't Cry For Exporter Yet

In Swiss Peg Removal: Did Anyone Win? I also commented ...

"Conventional wisdom is that Swiss exporters will be crucified and importers will benefit. Certainly there is an initial shock. But long-term, look at it this way: The price of materials used in exports (metals in watches and Swiss-made machinery) will get cheaper. ...

So, don't cry for exporters just yet.

US Dollar vs. Swiss Franc

Last Thursday, the value of the Swiss Franc related to the US dollar soared as much as 28 percent. About half of that has been recovered.

Swiss exporters will find they can import commodities about 14% cheaper than early last week. They do lose out current inventories of goods, but this is not the widely-believed export disaster story except for the initial stock market carnage.

Guess What?

Shoppers are shopping! They are even booking extra trains to Germany to do so. Fancy that! Other travel is up as well. Gee who coulda thunk?

The widespread belief is that when prices fall, shoppers will wait and wait and wait. I Have been mocking that view for years.

Economic Challenge to Keynesians

Let's once again review my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"

Challenge to Keynesians

I challenge Keynesians and Monetarists to prove rising prices provide an overall economic benefit.

Sure, those with first access to money benefit (the banks, the already wealthy, and government bodies via taxation). But that is at the expense of everyone else.

The absurd underlying notion behind the battle cry for inflation is that if prices fall people will stop buying things and the economy will collapse.

Reality Check Questions

  • If price of food drops will people stop eating?
  • If the price of gasoline drops will people stop driving?
  • If price of airline tickets drop will people stop flying?
  • If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  • If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  • If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  • Will people delay medical procedures in expectation of falling prices?
  • If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?

Krugmanites Cheer Abenomics

The idea that falling consumer prices will lead to a downward spiral is absurd. Everyone in Japan would have died long ago if that was true.

Instead of accepting the gift of falling prices (a clear benefit to consumers), Japan fought it every step of the way with the Krugmanites cheering every step of the way.

Japan Deflation Fighting Results

  • Japan has gone from being the largest creditor nation in the world to being the largest debtor nation in the world
  • Japan now has the largest debt-to-GDP ratio of any developed country, roughly 250% of GDP.
  • Japan has totally and completely squandered every bit of its savings.
  • Keynesians cheered every step of the way, amazingly concluding, Japan failed because it did not spend enough!

Keynesian Theory vs. Practice

Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it's the opposite.

If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.

Central Banking's Grand Experiment

In spite of the above, and ignoring the total failure of both Monetarism and Keynesianism in Japan for decades, on January 15, Bloomberg author Barry Ritholtz came out in praise of Central Banking's Grand Experiment.

I took the other side of the debate in Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph.

In praise of the Fed (and with a pointed finger at the ECB), Ritholtz proposed this tombstone epitaph for Bernanke "At least we tried".

I responded ...

And here's the irony: "At least we tried [to create inflation]" is not only the essence of the rising income inequality problem that Fed Chair Janet Yellen (and countless others) moan about, it's also the very essence of the ever-increasing debt problem the world faces.

Final Epitaph

Ritholtz offered his epitaph. Here's mine. It's in regards to today's central bankers in general, written from the perspective of future historians.

"These fools thought the world needed 2% inflation, thought they could end the business cycle and recessions, and thought they could steer the global economy like a car on a curvy, mountainous roadway. The actual result was a series of economic bubbles of increasing magnitude, culminating with the currency crises of [date]."


Lacy Hunt at Hoisington Management pinged me with this interesting thought: "Academic research indicates that QE in the US contracted rather than expanded economic activity, just as it did in Japan. Thus, Steen could have made the even stronger case that since it didn't work in the US or Japan, it will not work in for the ECB."

To that I will add, I am positive Lacy is correct. Any alleged economic benefit of QE was a monetary illusion coupled with enormous "temporarily" hidden costs.

  1. Bubbles in equities and junk bonds
  2. Expansion of wealth inequality
  3. Massive increase in debt 100% guaranteed to slow future growth

Contrary to widespread popular belief, constant meddling in free markets never provides long-term economic benefits.

Asset Deflation vs. Consumer Price Deflation

Central Bankers to the Rescue - Not.

The fear of falling consumer prices is absurd.

Ironically, by fighting routine price deflation, central banks create asset inflation, pent-up volatility (the Swiss franc is a prime example), speculative bubbles of increasing amplitude (housing is a prime example), and income inequality.

When those asset bubbles break, banks are inevitably in trouble over loans made on speculative assets (for example housing bubbles or more recently loans made on wells that need $90 oil to be profitable).

Then, the central bankers inevitably try to ease the shock, further encouraging moral-hazard speculation. The pattern repeats over and over creating bubbles of ever-increasing magnitude.

Musical Tribute

In spite of central bank foolishness, a musical tribute is in order.

Simpler Epitaph for Central Bankers

In retrospect, my above proposed tombstone epitaph for central bankers is far too long. I now propose a far simpler gravestone engraving "We F'd Up".

By Mike "Mish" Shedlock

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2014 Mike Shedlock, All Rights Reserved.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Shedlock Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules