Tuesday, June 9, 2009

Deflation Everywhere Except in Commodity Trades

From Bloomberg: China’s Consumer Prices Decline 1.4%, Aiding Recovery Efforts.

China’s consumer prices fell for a fourth month, making it easier for the government to maintain its “moderately loose” monetary policy to revive the economy.

Prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, the statistics bureau said today. The median estimate in a Bloomberg News survey of 16 economists was for a 1.3 percent decline. Producer prices fell 7.2 percent, the most on record. . .

Energy-price increases may help to end deflation by year’s end, said economist (Sherman) Chan.

DoctoRx here. I would comment that since China imports most of its oil, price increases in energy may end deflation, but it would be ending the "good" deflation and replacing it with "bad" inflation.

Out of Japan comes similar deflationary news, in Japan Machine Orders Slide as Companies Cut Costs, as demonstrated:

Orders for Japanese machinery fell to a 22-year low in April as dwindling profits forced companies to cut costs amid the worst postwar recession.

Bookings, an indicator of capital investment in the next three to six months, fell 5.4 percent to 688.8 billion yen ($7.1 billion), the lowest since April 1987, the Cabinet Office said today in Tokyo. Economists predicted a 0.6 percent drop.

A separate report today showed that producer prices, or the costs companies pay for energy and raw materials, tumbled 5.4 percent from a year earlier, the biggest slide since 1987, according to the Bank of Japan. . .

Still, even after showing signs of stabilizing, exports and production have fallen by more than a third from last year’s levels. Only about half the nation’s factory capacity is being used, putting pressure on managers to cut costs and delay investments.

A survey published this week by the Nikkei newspaper showed that Japanese companies plan to cut capital spending by an unprecedented 15.9 percent this business year.

You get the picture. There is oversupply of almost everything right now. The five years from 2003-7 were perhaps the strongest five years of growth in world history. Outside of the U. S., massive investment in productive capacity, much of it for consumers in the West, occurred. In the U. S., Britain, Spain, and Australia, massive overinvestment and speculation in homes occurred.

Governments and central banks could of course cause inflation simply by mandating an extra zero on every salary, transaction, etc. That would, however, destroy the financial system. It is not going to happen. Debt deflation and price competition is everywhere. The price rises in oil and some other commodities is so speculative as to provide no signal as to where prices will be in 1, 3 or 6 months time.

Global interest rates are the lowest in the history of the modern world for a reason. That reason has to go beyond central bank manipulation. Inflation will return, and at some point with a vengeance, for sure. When is impossible to predict.

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