Eurozone deflation: Who are the winners and losers?
Deflationary death spiral
There's good and bad deflation. malign or benign deflation.
"Malign deflation, the kind that accompanied the Great Depression, is a consequence of shurnken spending, corproate earnings, and payrolls … prices aren't falling due to abundant goods & services but because there's less money to go around."
Benign deflation … results from improvements in productivity … businesses become better at making goods leading to an oversupply., … in this scenario we can have deflation but without any nasty side effects such as … interest rates, weak demand and rising unemployment.
Eurozone's deflation is driven by a collapse of demand rather than a productivity boom.
Nobel Prize-winning economist Paul Krugman has said Europe's economy is worst today than it was during the 1930's. That's when …
bad deflation caused by excess supply and good deflation created by deficient demand.
secular stagnation.
predictions … if correct can adjust beforehand.
Winners:
Consumers
Consumers have cheered as the price of petrol, food, clothing, laptops and even airfares fell.
However, over a period of time, deflation tends to cut average prices and average wages leaving consumers no better off.
Chart: real wages vs. inflation
Home buyers:
Chart: house prices.
savings (up) + house prices (down).
Retirees:
Don't have to worry about getting pay cuts or losing their jobs.
Savers:
"True deflation should strengthen the value of our currency vis a vis the things money can buy."
The pounds we put into the bank will in theory become worth more over time …
Also rapid deflation tends to push up interest rates … increases returns savers get on cash deposited in banks.
Losers:
Borrowers:
"In a deflationary environment, those who have borrowed funds from lending institutions are now reluctant (or unable) to repay the money they borrowed."
"The faster the rate of deflation, the higher the real interest rate."
What's more, banks are reluctant to make loans because they fear defaults and falling values of collateral.
… zero lower bound … nominal interest rates cannot be negative … ties central bankers' hands in terms of limiting real interest rates … makes debt more expensive to service etc. … real cost of borrowing increases.
equally illusionary … refinancing.
. Real value of debt rises.
. Cost of borrowing increases.
. Banks lose out as people more likely to default.
Banks:
For similar reasons as above.
Retailers
Deflation stops people spending the the hope goods will become cheaper in future.
e.g. you need a new XX which costs XX. If you bought it today it would cost XX but wait a little bit longer and you could get it for XX. This means you will save XX.
Oil companies
European Central Bank
Deflation, or the zero lower bound, is bad news for the European Central Bank because of its effect on monetary policy.
Central banks cut interest rates when they want to boost the economy and raise them when they want to put the brakes on.
Central banks will stimulate an economic growth by cutting interest rates and reign it in by raising them.
Pushes them into non-conventional monetary policy such as quantiative easing … nonetheless unclear how effective this is. … CNBC COMMENT …
Job seekers:
We already know deflation pushes down prices, also eroding the sales revenue and thus profits of producers. This will eventually put pressure on wages companies pay workers because of cost-cutting … as well as less hiring.
Chart: unemployment? wages?
Firms are forced to curtail production, stop investing in capital expenditures such as new machinery, and lay off workers.