Transcript DEFLATION: AN OLD SPECTRE NOW COMING BACK TO …

DEFLATION: AN OLD SPECTRE
IS COMING BACK
UEB/CITUB
SOFIA, JANUARY 2015
[email protected]
PRESENTATION
• RECALLING THE BASICS
• STATE OF DEFLATION TODAY
• HOW DID WE GET INTO THIS MESS?
• (HOW) DO WE GET OUT?
RECALLING THE BASICS
• DEFINITION: GENERAL LEVEL OF PRICES KEEPS ON FALLING
• COULD BE BECAUSE OF
• A LACK OF AGGREGATE DEMAND
• WAGE CUTS
• OR A COMBINATION OF BOTH
DEFLATION TRIGGERS THREE MECHANISMS THAT
REDUCE AGGREGATE DEMAND (FURTHER)
• HOUSEHOLDS AND BUSINESS POSTPONE CONSUMPTION AND INVESTMENT
• DEFLATION PUSHES UP REAL INTEREST RATES…… TAKING ON NEW DEBT
BECOMES MORE COSTLY….. DISCOURAGES NEW INVESTMENT AND
PURCHASING OF DURABLES
• DEFLATION INCREASES REAL BURDEN OF EXISTING DEBT
ONCE YOU’RE IN DEFLATION, IT’S DIFFICULT TO GET
OUT …
• SEE PREVIOUS THREE MECHANISMS…… BUT THERE IS MORE….
• INFLATIONARY EXPECTATIONS MATTER A LOT: THEY ACT LIKE A « SELF
FULFILLING » PROPHECY; IF A BUSINESS EXPECTS GENERAL PRICES TO
GO DOWN, THEY WILL DECREASE THE PRICE OF WHAT THEY
THEMSELVES PRODUCE…
• ZERO NOMINAL BOUND ON INTEREST RATES…… REAL INTEREST
RATES ARE AUTOMATICALLY BEING PUSHED UP AND MONETARY
POLICY CAN’T DO MUCH ABOUT IT (LOOSING « TRACTION »)
ECONOMICS 101
• KEEP THE ECONOMY AT ALL TIMES WELL AWAY FROM DEFLATION
AND ZERO INFLATION
• THIS IS WHY ALL CENTRAL BANKS HAVE A POSITIVE INFLATION
TARGET OF AT LEAST 2% (« SAFETY MARGIN »)
• THIS IS WHY IT IS WIDELY ACCEPTED THAT MONETARY POLICY
SHOULD BE « A SYMMETRICAL » : BE MORE WORRIED AND ACTIVE
WHEN INFLATION IS FALLING AND HEADING FOR ZERO INFLATION
THAN IN CASE OF INFLATION EXCEEDING THE CENTRAL BANK PRICE
STABILITY TARGET
JAPANESE EXPERIENCE IS INTERESTING
• END EIGHTIES, ASSET PRICE BUBBLE PRICKED, CRISIS, DEFLATION
• BUSINESS REACTED TO FALLING PRICES BY PUSHING WAGES DOWN
• THEY DID SO IN TWO WAYS
• REPLACE REGULAR JOBS WITH PRECARIOUS ONES
• WITHDRAW FROM COORDINATED ECONOMY WIDE WAGE NEGOTIATION
ROUNDS
• RESULT: WAGE CUTS AND THESE PROVIDED THE BASIS FOR
DEFLATION TO CONTINUE…. FOR TWO DECADES….
• « ABENOMICS »: RESTAURING COORDINATION OF WAGE
BARGAINING TO GET JAPAN OUT OF DEFLATION
STATE OF DEFLATION IN EUROPE
• …. MAINLY EURO AREA
THE KEY CONCERN: NOT JUST INFLATION…..
BEHIND EU AVERAGES: 14 IN DEFLATION,11
IN « LOWFLATION »
INFLATION YEAR ON YEAR DECEMBER 2014
1.5
1
0.5
0
BE
-0.5
-1
-1.5
-2
-2.5
-3
BG
CZ
DK
DE
EST IRE
EL
ES
FR
HR
IT
CY
LV
LT
LUX HU
MT
NL
AS
PL
PT
RO
SL
SK
FIN SW
UK
…. BUT INFLATIONARY EXPECTATIONS: ALREADY
«UNANCHORED » (OR SHOULD WE SAY
« COLLAPSED » ?)
ROLE OF (COORDINATED) WAGE BARGAINING
• WITH DEFLATION/LOWFLATION, EMPLOYERS HAVE A POWERFUL
ARGUMENT NOT TO INCREASE WAGES …
• …. « INFLATION IS LOW OR ZERO, SO WHY INCREASE NOMINAL
WAGES AT ALL »….
• ….HOWEVER, IF WAGE INCREASES ARE ZERO/VERY LOW….INFLATION
WILL BE ZERO/NEGATIVE IN THE NEXT ROUND
• ALREADY INDICATIONS OF THIS STARTING TO HAPPEN IN AUSTRIA,
GERMANY
• AGAIN, A MECHANISM THAT REPRODUCES/INTENSIFIES THE
PROBLEM
EURO AREA « PERIPHERY » IS IN A DEBT TRAP
1
FI
MT
0.5
SK
Inflation / deflation in %
0
DE
EST
LT
FR
IT
SL
LV
NL
PT
-0.5
IE
BE
-1
CY
LU
ES
-1.5
-2
-2.5
EL
-3
0
50
100
150
200
250
Total Debt ( public plus private) as a % BBP
300
350
400
450
500
THE DEBT TRAP IN BULGARIA
CONSOLIDATED PRIVATE SECTOR DEBT IN % OF GDP,2013
200
180
160
140
120
100
80
60
40
20
0
BG
EL
DE
IT
FR
UK
HOW DID WE GET IN THIS MESS?
THEIR OBSESSION WITH WAGE COMPETITIVENESS :
UNIT WAGE COSTS SINCE 1999
60
50
DE
40
IE
EL
ES
30
IT
CY
20
LU
MT
SL
10
SK
0
2001
-10
2002
2003
2004
2005
2006
2007
2008
2009
2010
THE GERMAN MODEL GOES EUROPEAN: WAGES IN
MUCH OF THE REST OF EURO AREA BEING
DRAGGED DOWN
45
40
35
30
IE
25
EL
ES
20
FR
BE
15
DE
10
5
0
1
-5
2
3
4
5
6
7
8
9
10
11
12
13
14
ZERO UNIT WAGE COSTS EQUAL ZERO
INFLATION
ZERO UNIT WAGE COSTS EQUAL ZERO
INFLATION
(HOW) DO WE GET OUT?
THE ECB’S WALL OF 1 TRILLION MONEY ...
• ECB DECIDED TO PRINT 1 TRILLION OF EURO’S TO BUY FINANCIAL
ASSETS (MAINLY SOVEREIGN DEBT)
• WILL THIS WORK?
• CRUCIAL QUESTION: WILL MONEY FLOW INTO REAL ECONOMY/
INVESTMENT ?
EXPERIENCE FROM UK
• 375 BILLION £ PRINTED
• ECONOMY PLUS 1,5 %
• VALUE OF SHARES GONE UP BY 20%
• 40% OF ALL SHARES OWNED BY 5% OF POPULATION
• THESE HOUSEHOLDS HAVE EACH BECOME 128,000£ BETTER OF….
• … MEANWHILE WAGES HAVE COLLAPSED IN THE UK, PRECARIOUS
WORK ABOUNDS
« RUNNING TO STAND STILL ? » (DRAGHI
QUOTE)….
• ….OR RUNNING TO FALL INTO THE ABYSS OF DEFLATION?
• ECB (AND COMMISSION AND MEMBER STATES OBLIGE ECB IN THIS)
KEEPS ON PUSHING FOR MORE AND « RADICAL » STRUCTURAL
REFORMS TO BE « IMPOSED »
• THIS IS HIGHLY CONTRADICTORY
• IT IS PUSHING ECONOMY FURTHER INTO DEFLATIONARY
TERRITORY…..WHILE HOPING THAT QUANTITATIVE EASING WILL
MORE THAN OFFSET THIS… VERY RISKY
ETUC PROPOSALS
• EUROPEAN INVESTMENT PLAN: WITH A FOCUS ON THE MOST
TROUBLED ECONOMIES (NOT THOSE THAT AREA ALREADY STRONG)
• YES TO QUANTITATIVE EASING BUT ITS SHOULD BE « (PUBLIC)
INVESTMENT EASING »
• REFORM THE STRUCTURAL REFORM AGENDA: FOCUS ON WAGES
AND COLLECTIVE BARGAINING AS AN ANCHOR FOR PRICE STABILITY/
AS A CIRCUIT BREAKER OF DEFLATIONARY TRENDS