This started as a long comment at WUWT. I’ve decided to put it here as a bit of a rant / macro-econ note. From down in the comments on:
The Euro Zone is on the edge of a drop into deflation. “Why?” escapes them. Deflation is where the value of a currency rises, instead of falls, as it does in inflation. Now why is that? The news would lead you to believe it is due to the unwillingness of the Central Bank to print enough money and those nasty Austere Germans. But what causes deflation?
Folks not willing to spend. Lack of demand.
Now what might cause a lack of demand? That seems lost on the 1%. They have never heard of having a fixed amount of money to spend. The rest of us, though, know that we are spending all we have (and in many cases spent more than we had, and are still tapped out). “We” are not ‘buying more’ for the simple reason that we can not. No money. Not going to happen. Too many unemployed and too many only buying what they must and still being a bit short when the ’30s’ roll around… and sometimes even when the month is just a 28…
So having electricity ‘skyrocket’ and forcing folks to ‘decarbonize’ by taking more (paid / costly) transit and buying yet more expensive electricity (to replace the wood or coal or gas stove) just means there is that much LESS left over to buy, oh, I don’t know, maybe cars and shoes and bread… that causes demand to drop…
It will not matter if the ECB prints a few Billion more Euros and gives them to folks who own local banks to loan to folks who don’t need a loan and folks who own car dealers and shoe stores. Unless those Euros end up in the hands of folks who need to spend them, they do NOT stimulate demand. You just end up in what is euphemistically called “Stagflation”. The economy is still stagnant, but with a currency surplus causing money value to shrink. Sure, it isn’t deflation; but it is still broken.
That is the logical box the EU is in (and the USA is rapidly approaching). They have pushed the Keynesian Money Supply lever to the wall. And, thanks to all their OTHER policies, have not gotten any growth juice out of it. Now, puzzled, they wonder “Why?”. Perhaps because things like “necessarily skyrocketing” electricity prices move shoe makers to China and because out of work coal miners can’t buy new shoes anyway. At any price.
See, the basic problem is that there is only so much net improvement in total productivity per year (about 3% in good times with great progress, 1% in times of less R&D and improvement). That’s the total “extra take” available to The Power Elite. Period. Full Stop. But they want more than that (and the simple fact is that those ‘at the top’ have the position to get more than that). This works for a while, until those at the bottom are just too tapped out. But TPTB are none too bright about it, and figure if they got 6% last year, they can get it next year. Reality of a 3% max economic growth rate be damned. So they start to flail around for levers of power to move to “fix it”. ONE of them just MUST work!
But they can’t change reality. Postpone it for a year or three, sure… but
“Reality just is. -E.M.Smith” and that reality comes home to roost.
Now Keynesian Policy has great attraction here. Just print up some money and that makes it all better. But just like real heroin, this monetary ‘feel good’ only works for a while; then you need more of it. IFF you used that bit of time for real productivity improvements, you can start a beneficial cycle of virtue that gets real growth going and you can start back up that 3% / year improvement line.
HOWEVER: If you use that “stimulus” so that your friends and cronies get the money and benefit, and it does not go into real productivity improvements; you just wasted about 3 years and all the “juice” that was available from temporarily increasing the velocity of money. But, you see, here’s the hard part: It is NOT easy to identify things that are real productivity improvements. Whole industries try to do this. Some go out of business entirely in the process. At the end of the year (or decade) about 3% is the BEST you can average. Suck that up in hair brained stupidity like windmills, Solindra and Carbon Credits and you end up with net economic shrink, not growth.
Then more of that Keynesian Stimulus just gets you nothing (trending into deflation if low) or stagflation (if large). Since there is NO real increase in goods, services, and “stuff”, there just isn’t any more to share around between all the well connected and Friends Of Da Boss. Any that ends up there had to come from “the little guys” who just have to suck it up and buy less stuff. That, then, results in demand slide and eventually in that deflation / stagflation axis as the productivity trap bites.
FWIW, I think even Keynes knew this. He stated that such ‘stimulus’ could only work in the short term and that in good times money supply had to be shrunk back. Nobody in power pays attention to that part of his work…
At any rate, what must happen in the EU if they follow these productivity reducing policies is a net reduction in production, net reduction in buying power, and net reduction in demand. The only economic choice then is horrific StagFlation, or with anything like a sane stable money supply, Deflation. Either one really really sucks. Essentially the Keynesian Fix has worn off and the junkie can’t get enough to feel high again. It’s either withdrawl symptoms or pay a lot for enough dope to feel a bit better, but still be kind of strung out and getting sicker with each shot. (There’s a well developed Economic theory on this with lots of complicated names and all… but the idea is really that simple and giving it funny names of old Economists doesn’t make it clearer…)
So while TPTB slowly figure out they have all the chips and the other guys can’t cough up any more, the EU will stagnate at best and economically decay most likely. These climate polices can only make it far worse.
Also, FWIW, once things are bad enough, the usual outcome is some kind of war, strife, and social collapse. One hopes that Europe can avoid that this time. (Though the history of European wars makes that doubtful). There’s a reason Economics is called “The Dismal Science”…
BTW, don’t expect your leaders nor your neighbors to choose the path that works. It is uncomfortable and requires discipline. Taking more drugs until you hit bottom is the only path that sells… Just ask The Bernank…
A link on South Africa discovering the Stagflation Trap:
Zerohedge on the EU:
The Economist on EU incipient Deflation:
Note that they prescribe, no, demand! that the Keynesian Fix be applied in even stronger dose and blame the Good Germans for too much Austerity… Yes, that will prevent Deflation, but cause Stagflation (until such time as liberty and lower taxes lets small industry grow and the Little Guy get a bit of money ahead and buy something… but central banks can’t just print up a bit of economic freedom and lower taxes…)
The world’s biggest economic problem
Deflation in the euro zone is all too close and extremely dangerous
THE world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan’s economy is struggling and China’s growth is now slower than at any time since 2009. Unpredictable dangers abound, particularly from the Ebola epidemic, which has killed thousands in West Africa and jangled nerves far beyond. But the biggest economic threat, by far, comes from continental Europe.
Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years. Its leaders have squandered two years of respite, granted by the pledge of Mario Draghi, the European Central Bank’s president, to do “whatever it takes” to save the single currency. The French and the Italians have dodged structural reforms, while the Germans have insisted on too much austerity. Prices are falling in eight European countries. The zone’s overall inflation rate has slipped to 0.3% and may well go into outright decline next year. A region that makes up almost a fifth of world output is marching towards stagnation and deflation.
Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the euro zone poses far greater risks. Unlike Japan, the euro zone is not an isolated case: from China to America inflation is worryingly low, and slipping. And, unlike Japan, which has a homogenous, stoic society, the euro area cannot hang together through years of economic sclerosis and falling prices. As debt burdens soar from Italy to Greece, investors will take fright, populist politicians will gain ground, and—sooner rather than later—the euro will collapse.
This parrot has ceased to be
Although many Europeans, especially the Germans, have been brought up to fear inflation, deflation can be still more savage (see article). If people and firms expect prices to fall, they stop spending, and as demand sinks, loan defaults rise. That was what happened in the Great Depression, with especially dire consequences in Germany in the early 1930s.
They, of course, lay the blame on ‘expectations’, but ignore simple “no money in the pocket” reality that drives down demand. How do I know that’s what it is? As I’ve watched my cost of chicken rise from $0.89 / lb to $1.39 / lb and my cost of gasoline go from $2.70 / gallon to $4 / gallon and my income go down / hour; well, I’ve had to “buy less stuff”. My expectations of future prices be damned. (Lately gasoline has dropped back a bit, but is still high). Now I make more than the average guy. So as I am feeling it, they certainly are. Once you have over 75% of folks in this basket (my guess on where I rank), well, it’s a pretty large basket.
Sidebar On Marx: Some of you may notice a bit of Marxist Dogma that is similar to this (but dressed up in a lot more wordy language). Yes, Marx did talk about this behaviour; but in far more limited scope and without the benefit of knowing Keynesian Economics. He also had a lot of other bits quite wrong. So I’d rather avoid a digression into Marx and the economic disparity issues. He saw this problem, but came up with entirely wrong ‘solutions’.
So we’ve got the world in a bit of a pickle.
Mostly due to the West being all Keynesian Stimulus as their only ‘fix’ while enacting policies that assure it will fail into either stagflation or deflation.
Somewhat due to China being given free run to raid our economic systems with Mercantilist Policies.
Some from squandering a load of wealth on capricious wars (net destructive, not productive) and a moderate amount from pushing “Green Polices” far past where they were net benefits to the world and into the land of strong negative economic forces.
You can’t suck 10% out of the economy and ‘fix it’ with Keynesian Stimulus. You have at most 3% to work with. Then it’s off to stagflation / deflation land. But since the whole thing is dirt slow and takes a decade to get bad, and the Keynesian Drug makes you feel better for a couple of years; well, it can take 20 years to be fully broken, and then 30 to get back out. Most folks can’t wait that long. So “watch your back”, it’s gonna be a bumpy ride…