Swiss slide into deflation signals the next chapter of this global crisis - AEB

Discussion in 'Economics' started by lrm21, Apr 6, 2009.

  1. lrm21


    Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.
    "This is something that we must prevent at all costs. The current situation is extraordinarily serious," said Philipp Hildebrand, a governor of the Swiss National Bank.

    The SNB is not easily spooked. It is the world's benchmark bank, the keeper of the monetary flame. Yet even the SNB's hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

    Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.

    "We don't fully realise in the West what a catastrophic collapse Japan has suffered," says Albert Edwards, global strategist at Société Générale. "The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen."

    This is about to go into reverse as Tokyo hits the ping-pong ball back across the net. "As the unfolding collapse in the yen gathers pace, the West will see its green shoots incinerated to dust," he said.

    Japan's industrial output fell 38pc in February (year-on-year), mostly concentrated into the last four months. No major economy imploded at this speed in the 1930s. The country has been hit by a double shock. As an export power it has taken the brunt of Anglo-Saxon belt-tightening: as the world's top creditor it is cursed by a "safe-haven" currency that soars in moments of danger – largely because the Japanese bring home their wealth till the storm passes. Normally, Japan can cope. This time, the yen's rise has pushed the economy over a cliff.

    The yen must come back down to earth, and soon, or Japanese society will start to disintegrate. If necessary, the Bank of Japan will force it down by intervention, as occurred in 2003-2004.

    Will China stand idly by as Japanese unleashes a shock to the global system through competitive devaluation? That depends whether you think China's spring recovery is the real thing, or an inventory build-up before the next downward slide. The Communist Party says 20m jobs have been lost since the bubble burst. This cannot be tolerated for long.

    It is remarkable that China's fall into deflation has attracted so little notice. China's CPI was minus 1.6pc in February. The country has built too many factories producing goods that the world cannot absorb. The temptation is to shunt this excess capacity abroad. A faction of the politburo is already itching to devalue the yuan.

    Of course, Britain has already played the currency card. That is different. The pound's fall, though welcome, is a side-effect of the Bank of England efforts to stem the credit crunch. There has been no currency intervention.

    Crucially, Britain has a current account deficit. Many countries toying with devaluation are exporters with surpluses – 15.4pc of GDP for Singapore, 8.4pc for Switzerland, and 6.1pc for China. If these countries refuse to let their imbalances correct, world demand must implode.

    Mr Hildebrand denies that the SNB is pursuing a "beggar-thy-neighbour' strategy. Like the yen, the franc suffers from the safe-haven curse: everybody buys it in a storm. This tightens monetary conditions. The SNB cannot easily offset this. It has already cut interest rates to near zero. There are not enough Swiss government bonds in the market to rely on the sort of "QE" asset purchases being carried out by the Bank.

    Ultimately, I suspect this crisis may mark the moment when the Swiss franc loses its safe-haven role. Credit default swaps (CDS) measuring risk on five-year government debt have reached 127 for Switzerland, higher than Britain at 118. Norway has the world's lowest CDS at 48, reflecting its status as a petro-democracy.

    Switzerland's banks are over-leveraged. Loans to emerging markets equal 50pc of GDP (half to Eastern Europe). Banking secrecy is dying. Fortunately for the Swiss, they have built up $700bn in net foreign assets for a rainy day. Improvident Britons are less lucky. But that is another story. What we risk now is a game of deflation "pass-the-parcel" worldwide. The economic establishment was caught off guard from 2003 to 2007 because it overlooked the way that Asia's unbalanced relationship with the West was feeding a credit bubble.

    It may be caught again as the same warped structure leads to a chain of (panicked) devaluations.

    Enjoy the "bear-trap" rally on global bourses this spring. But remember, we have only just begun to see the mass lay-offs and hardship caused by this slump. The politicians will act to save their skins. Markets may not like the result.

    Ambrose Evans-Pritchard
  2. This feels like a case of the prisoner's dilemma. If every country ends up devaluing their currency, then the only thing that will benefit are hard assets.
  3. jem


    Countries have been messing with the invisible hand of economics for decades. It could not go on forever.

    Japan has no resources and other countries can manufacture as well for less money.

    Japan's standard of living has to collapse.

    As does Britains, as does the U.S. and western europe.

    We all can't have service and financial sectors that drive the economy.
  4. irniger


    As I understand, hard assets like land, buildings, inventory are going down in value with deflation. Cash is king. Debt is bad.

    In inflationary times these assets are appreciating. Cash loses. With the approaching pay back of the present money flush we will run into inflation which is good for debts but bad for cash.

    With recession going on, stay in cash, get out of debt. And when inflation comes, get out of cash and into hard assets

  5. Maybe we are looking at 18 to 24 months of deflation. Gerald Celente was talking about economic warfare and the devaluation race way last year. He was saying that it is obviously going to hurt everybody but the US is probably going to get hurt less than the rest of the world.... Damn, Japan going off the edge of the world, I really did not thing things were this bad, obviously I'm reading the wrong news...

    I can survive deflation just fine, house paid for, safe full of real hard assets, guns ammo and shooting skills for the riots and thievery but I have a rental that is mortgaged about half way to the hilt, I wonder how that will go... rents fall fast? Typically they don't fall very fast but this is extraordinary times... if the rental can make it through the deflation it will be fine in the inflation for sure... if we have hyperinflation we will be paying mortgages with pocket change eventually...
  6. lrm21


    I don't believe we will have price deflation. Asset deflation will continue on asset backed by debt.
    - real estate, leverage investments. Since the value of the asset was never tied to fundamental but debt leverage.

    But commodity prices need to explode at some point

    1) No one is adding to supply of commodities like foods, minerals. There is no credit to expand production everyone is cutting back.

    As always the pendulum will swing the wrong way and the cut backs will be over done

    2) Deflation of currencies translates into higher import prices. This also means producers are incentivized to sell abroad then to sell at home.

    See Argentina where they are a top 10 meat producer but the had starvation because all meat was being sold abroad

    3) Look for government to then step, and force rationing and price controls. This what we did in the 70's. and the 1930's. Export controls will be put in place attempting producers to sell a portion of their production at home and of course at a loss, this will force producers out of the business. Thereby creating greater shortages, higher prices. See Venezueala today.

    Once the cycle starts it must flow to its natural conclusion.
  7. Thanks, good post. Wow, wage and price controls have never worked at any time in any history anywhere from what I've read... they have to "do something" though.

  8. Daal


    The swiss should be a proxy on whether central banks will be succesful in beating deflation