Tag Archives: deflation

US economy in deflation and slump

By Andre Damon
February 28, 2015
World Socialist Web Site


Stock Market DropThe US Commerce Department said Friday that Gross Domestic Product, the broadest measure of economic output, grew by only 2.2 percent in the fourth quarter of last year, down from an earlier estimate of 2.6 percent and a sharp fall from earlier quarters.

This followed the announcement by the Labor Department on Thursday that consumer prices fell by 0.7 percent, the largest fall since December 2008. Over the past 12 months, prices have fallen by 0.1 percent, the first annual deflation figure posted since October 2009.

These figures belie official claims that the US is an economically healthy counterbalance to the overall slump and deflation that now encompasses most of the world. In fact, US economic growth, hampered by an enormous impoverishment of the working class in the years following the financial crisis, remains far below pervious historical averages.

On Tuesday, Standard and Poor’s said that it’s Case-Shiller Index showed that home prices grew by 4.6 percent over the past year, the slowest housing price increase since 2011. “The housing recovery is faltering,” David Blitzer, chairman of the index committee at S&P Dow Jones, told the Los Angeles Times. “Before the recession, anytime housing starts were at their current level… the economy was in a recession.”

Meanwhile the number of people in the US newly filing for jobless benefits jumped by 31,000 to 313,000 last week, in the largest increase since December 2013, reflecting a series of mass layoffs and business closures announced this month.

On February 4, office supply retailer Staples announced plans to buy its rival Office Depot, which would result in the closure of up to a thousand stores and tens of thousands of layoffs. The next day, electronics retailer RadioShack filed for bankruptcy, saying it plans to close up to 3,500 stores.

Mass layoffs have also been announced at online marketplace eBay, credit card company American Express, the oilfield services companies Schlumberger and Baker Hughes, as well as the retailers J.C. Penney and Macy’s.

These disastrous economic developments come even as the Dow Jones Industrial Average hit an all-time record of 18,140 on Wednesday, though it retreated slightly later in the week. Worldwide, the FTSE All-World Index is near its highest level in history.

The rise in global stock indices reflects the satisfaction of global financial markets with the pledge by the Syriza-led Greek government to impose austerity measures dictated by the EU, as well as indications by Federal Reserve Chairwoman Janet Yellen in congressional testimony this week that the US central bank is likely to delay raising the federal funds rate in response to recent negative economic figures.

The US federal funds rate has been at essentially zero since the beginning of 2009. Together with the central bank’s multi-trillion-dollar “quantitative easing” program, this has helped to inflate a massive stock market bubble that has seen the NASDAQ triple in value since 2009.

This enormous growth in asset values has taken place despite the relatively depressed state of the US economy, which grew at an annual rate of 2.4 percent in 2014. During the entire economic “recovery” since 2010, the US economy has grown at an average rate of 2.2 percent. By comparison, the US economy grew at an average rate of 3.2 percent in the 1990s and 4.2 percent in the 1950s.

The ongoing stock market bubble has led to a vast enrichment of the financial elite: the number of billionaires in the US has nearly doubled since 2009. The financial oligarchy, however, has not used its ever-growing wealth for productive investment, as shown by the decline in business spending in in the fourth quarter of last year. Instead, it has either hoarded it or used it to buy real estate, art and luxury goods.

On Thursday, Bloomberg reported that global sales of “ultra-premium” vehicles, costing $100,000 or more, surged by 154 percent, compared with a 36 percent increase in global vehicle sales overall. The report noted, “Rolls-Royce registrations have risen almost five-fold. Almost 10,000 new Bentleys cruised onto the streets last year, a 122 percent increase over 2009, while Lamborghini rode a 50 percent increase to pass the 2,000 vehicle mark.”

Meanwhile, the number of people in poverty in the US remains at record levels. In January, the Southern Education Foundation reported that, for the first time in at least half a century, low-income children make up the majority of students enrolled in American public schools.

To the extent that jobs are being created in the US, they are largely part-time, contingent and low-wage, replacing higher-wage jobs eliminated during the 2008 crash. A report published last year by the National Employment Law Project found that while American companies have added 1.85 million low-wage jobs since 2009, they have eliminated 1.83 million medium-wage and high-wage jobs.

Earlier this month, Jim Clifton, head of the Gallup polling agency, denounced claims that the US unemployment rate has returned to “normal” levels. “There’s no other way to say this,” he wrote. “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.”

“Gallup defines a good job as 30+ hours per week for an organization that provides a regular paycheck. Right now, the US is delivering at a staggeringly low rate of 44%, which is the number of full-time jobs as a percent of the adult population, 18 years and older.”

Clifton added, “I hear all the time that ‘unemployment is greatly reduced, but the people aren’t feeling it.’ When the media, talking heads, the White House and Wall Street start reporting the truth—the percent of Americans in good jobs; jobs that are full time and real—then we will quit wondering why Americans aren’t ‘feeling’ something that doesn’t remotely reflect the reality in their lives.”

Euro zone officially tips into deflation

By Stefan Steinberg
January 9, 2015
World Socialist Web Site


Stock Market DropFigures released by Eurostat on Wednesday confirm that the euro area has fallen into deflation for the first time since 2009, when the region suffered the disastrous economic consequences of the 2008 financial crisis.

Consumer prices in the euro area fell by 0.2 percent in December 2014, compared to a 0.3 percent price increase in November. In Germany, Europe’s biggest economy, inflation fell to just 0.2 percent, reflecting the universal impact of the current crisis.

According to Eurostat the main reason for the sharp 0.5 percent drop was the decline in energy prices, particularly oil, which has halved its price since June.

In addition to the US campaign to put pressure on Russia, the huge decline in the oil prices reflects the grip of recessionary tendencies worldwide. Financial commentators are already predicting that, due to what some of them have termed, “secular stagnation”, i.e., long-term economic slowdown, inflation will fall below 2 percent in 2015 in all the G7 nations. The last time such a comparable fall in inflation took place was in 1932, in the middle of the Great Depression.

The onset of deflation in Europe will have disastrous consequences for the continent’s working population, already suffering severely from years of austerity policies dictated by the IMF and European financial elite. In response to falling prices, consumer demand sinks, employers reduce wages, production levels are cut, unemployment grows, and the savings of ordinary workers are devalued.

A separate report issued this week revealed that mass unemployment continues to persist throughout the continent. According to the official figures, unemployment rose in Italy to 13.4 percent, in Portugal to 13.9 and France 10.3 percent. In Spain and Greece around a quarter of the workforce remain unemployed with youth unemployment highest in Spain (53.5 percent), and Greece, (over 50 percent). In fact the official Eurostat figures wildly underestimate the true extent of unemployment in Europe.

The main exception to growing unemployment was Germany, whose major exporting industries have been able to profit from the decline of the euro in recent months, adding several tens of thousands of jobs in December.

The banks and financial markets have largely reacted to the news of deflation in Europe with euphoria. They anticipate that the onset of deflation will tip the hand of European Central Bank head Mario Draghi to introduce his widely anticipated program of quantitative easing at an even earlier date. Following in the footsteps of the massive QE programs introduced by the central banks of the US, UK, and Japan Draghi has announced plans to increase the deposits of the ECB by one trillion euros in order to buy up government bonds.

All of Europe’s main markets surged on the news. Thursday’s issue of the German business newspaper Handelsblatt ran the headline, “DAX recovers. Investors banking on the ECB.”

The ECB has the next meeting of its governing board on January 22 and the markets are intent on ensuring that Draghi commence his QE program on that day.

In anticipation of making substantial profits via the QE program, investors have been purchasing large quantities of government bonds, whose interest rates have plummeted to record lows.

German five-year bond yields dropped below zero for the first time ever, meaning that in effect investors are paying the German government to deposit their money for the rest of this decade. As one commentator writes in the British Daily Telegraph: “Nothing like this has been seen in European history since the 14th century…”

The major political consequence of the ECB’s bond buying program will be the intensification of national conflicts inside Europe. Italy and France have joined the chorus of southern European countries, including Spain, Portugal, and Greece, who are in favor of the ECB bond-buying program combined with a more selective implementation of austerity policy.

For their part the German finance minister Wolfgang Schäuble and Jens Weidmann, the President of the Bundesbank and Germany’s representative on the board of the ECB, have made clear that they are adamantly opposed to any program of quantitative easing.

They fear that a program of mass purchases of government bonds would lessen the pressure on other countries throughout Europe to implement drastic austerity measures and labour market reforms. In a recent interview with Handelsblatt, Draghi went on record that there was substantial German opposition inside the ECB to a bond-buying program.

Opponents of the ECB program and EU skeptics inside German political and financial circles have also made clear that they will challenge the legality of any move by the ECB to implement fiscal policy on a pan-European scale. They argue that any such policy is incompatible with the remit of the ECB.

The latest downturn in the European economy will intensify class tensions throughout the continent under conditions where the traditional political elites are increasingly discredited. Bourgeois commentators have already warned of political upheaval in 2015—a year in which national elections are due in no less than eight European countries. The first of these elections is due in just over two weeks’ time in Greece, the country which has been at the eye of the European storm for the past five years.

Central Banks Have Failed Because They Can’t Push Wages Higher

By Charles Hugh Smith
December 10, 2014
Washington’s Blog


You can print all the money you want, but it will never boost wages to keep up with prices.

Central banks have been pursuing two goals for the past six years: ignite inflation and an expansion of debt that will supposedly generate “growth.” Despite squandering trillions of dollars, yen, yuan and euros, central banks have failed to ignite sustainable inflation or growth.

There’s nothing mysterious about their failure: you can’t get “good” inflation or growth if wages are stagnant or declining.

The central banks don’t bother to distinguish between “good” and “bad” inflation: any and all inflation is considered not only wonderful but essential to propping up the Ponzi scheme of debt-dependent consumption, a dynamic I described in Central Banks Create Deflation, Not Inflation.

“Good” inflation is wages rising faster than prices. When wages rise faster than consumer prices, households have more money to spend on consumption, and it’s progressively easier for them to pay down debt and support additional borrowing.

“Bad” inflation is prices rising while wages stagnate. In “bad” inflation, prices keep rising as central bank money-printing devalues the currency, but wages don’t rise along with prices. As a result, wages decline in real terms, i.e. purchasing power.

In Japan, where the central bank and government have struggled for years to generate price inflation as the means to “re-start growth,” wages have fallen by 9% in real terms since 1997. (source: Voodoo Abenomics: Japan’s Failed Comeback Plan Foreign Affairs)

I explain this in further depth in Inflation Is Not “Growth” (July 23, 2014).

These charts reflect the stagnation of American wages and household incomes.

source: Rising Wages Where? Real Wages Post First Annual Decline Since 2012

Real household income has declined across the entire income spectrum:

Deduct healthcare expenses and debt service, and what’s left of wages for the rest of life’s expenses is tanking: Courtesy of longtime correspondent B.C.:

Meanwhile, the purchasing power of wages is in steady decline:

source: What Inflation Means to You: Inside the Consumer Price Index (Doug Short)

The point is that lowering interest rates to zero and issuing unlimited free money for financiers to generate asset bubbles has had a negative effect on wages and household income. This is not accidental or bad luck–central bank money-printing and bond-buying have not had any positive effect on wages because they cannot possibly have any positive impact on wages.

In effect, central banks have been trying to pound nails with a handsaw: they don’t have the tools to counteract the deflationary influences of labor surplus. Wages are stagnating/declining not because money isn’t cheap enough or assets aren’t high enough; wages are in structural decline due to three factors:

1. Global wage arbitrage: everybody is competing with everyone else globally for work that is tradable or that can be commoditized

2. Costly human labor is increasingly replaceable with software and robotics

3. The rising costs of labor overhead (social welfare taxes, healthcare, etc.) push employers’ costs higher even as employees’ paychecks stagnate or shrink.

These are global factors, affecting employers everywhere from the U.S. to China. No amount of liquidity or free money can reverse these structural trends.

Frantic voices can now be heard suggesting central banks issue free money directly to households. Considering central banks have stolen hundreds of billions of dollars in interest from saver-households in the past six years, there is a painful irony in these calls for free money to households, now that free money for financiers has failed so catastrophically.

A free money giveaway won’t fix anything; all it would do is give households the means to pay down a bit of debt or make interest payments on subprime auto loans for another month or two. Free money giveaways are not a substitute for earned income.

Debt jubilees won’t work either, as all the debt that proponents want to cancel is an asset to somebody else–and often that “somebody” is a public or private pension fund or another worker’s 401K retirement fund.

The game has been lost, but central bankers are still on the field, wandering around in disbelief that their unspeakable powers to issue money and credit have failed. You can print all the money you want, but it will never boost wages to keep up with prices.

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