Saturday, January 24, 2015

Meet Bloomberg’s Latest Idiot: Shobhana Chandra On Why Falling Prices Cause Hungry People To Starve

By David Stockman

Did the Onion hack Bloomberg’s website? Or perhaps it was Charlie Hebdo and The Strawman Collective. Surely only a prankster could write the following with a straight face:
On the surface, everything getting cheaper sounds like a dream come true. It’s not. The prospect is so terrifying that it’s prompted central bankers around the industrialized world to pour trillions of dollars into their economies to prevent a sustained drop in prices.
That’s right, one Shobhana Chandra—–apparently an unpaid Bloomberg intern who snuck one by the night editor—finds honest money to be “terrifying”. But thank heavens for simpletons with a keyboard. In this case, Chandra has distilled the money printers’ “deflation” bogeyman to its utterly ludicrous essence—–and has  wrapped it neatly into
six propositions which most definitely do not pass the giggle test.

The essence of these gems is the old saw that consumers don’t spend money when they see falling prices. Chandra has obviously never gone to Wal-Mart, Best Buy or an Apple Store.

When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? As a result, consumer spending flails.
To be sure, the monetary apparatchiks and their Wall Street bullhorns are not quite this primitive, and tend to gum about “inflation expectations” and other econ-psycho-babble. Thus, Benoit Coeuré, a member of the ECB’s executive board, made these profound observations in behalf of the ECB’s new money printing binge:

We’ve seen inflation expectations going lower, we’ve seen actual inflation numbers going lower. Lights were blinking red across our dashboard, and we had to do something……. We’re pretty convinced it will work, it will work because it is big, it will work because it is open ended. And so we have everything in place to convince companies, to convince people in Europe that inflation will go up, that it will go back toward to 2%.”
Oh, come on. There are no red lights blinking red anywhere on Europe’s price front, as I documented yesterday (see Mario Draghi: Charlatan Of The Apparatchiks).

Just what evidence is there anywhere, in fact, that today’s hard-pressed consumers delay spending on anything in response to falling prices—even when you set aside flat-screen TV’s, i-Gadgets and Red Devil dust-busters?

This very notion defies what actually happens day-in-and-day-out in the real world. Namely, that most retailers can never seem to get their inventories just right, and eventually resort to clearance sales and deep mark downs to liquidate their over-stocked goods. That causes not delay and deferral, but a surge of buying by bargain hunting shoppers. It is a fundamental mechanism of the market’s process of continuous adjustment and rebalancing of supply and demand.

Stated differently, periodic and sector specific bouts of falling prices are evidence of rosy pink health in retail markets. They harness consumer self-interest to the business of clearing excess inventories; and in so doing, they don’t throw consumers into a spending funk or the economy into a downward spiral toward deflationary darkness.

Indeed, consumers handle with aplomb the 20%, 40% and 60% off sales on a recurring basis at even such snooty emporiums as Nordstrom’s and Macy’s. So why in the world is it that a 1%, 2% or even 5% decline in the weighted-average basket of consumer prices published by the government statistical mills would cause them to lapse into a state of catatonic immobility?

The fact is, consumers get their information about the pricing environment not from the BLS or Eurostat—–that’s purely the puzzle palace domain of economists and central bankers—- but from their encounter with the actual goods and services they buy on a regular basis. And when it comes to specific items on their shopping list, just what falling object would cause them to go on strike?
Consumers surely don’t get the urge to strike with respect to necessities like food, drugs, toilet paper and shampoo. And since upwards of  two-thirds of households have virtually no discretionary income after these necessities—plus health care, mortgages, fuel, utilities and taxes—-it might be wondered if the majority of households have anything to do at all with Chandra’s shibboleth that “consumer spending flails” because they are waiting for a “better deal next week”.

At least to my knowledge, there have been no cases of families starving themselves to death waiting for the price of chicken and canned tomatoes to fall further.

Ok, so that implies that the “deflationary psychology” is evidently an affliction of the more affluent classes. But how exactly does that materialize? It seems doubtful in the extreme that it pertains to big ticket durables. Auto prices, for example, are always “falling” sharply compared to the “list” price, but the overwhelming share of car purchases are “financed” through leases or 5-7 year loans.
Accordingly, most consumers are looking at the monthly finance cost—which is heavily driven by direct and indirect interest charges—not the post-discount sticker price.  Perhaps the central bankers have it all wrong then. Instead of cutting interest rates maybe they should be raising them, thereby removing any misbegotten fears of falling prices. And to remove any doubt, the Fed’s new consumer protection bureau could ban “no interest for the first year” deals on furniture, beds and refrigerators to remind skittish consumers that prices are not falling, and that there is no better time to pay 2% more for stuff than now.

Perhaps, then, the “deflationary psychology” is more narrowly but powerfully focused in purely discretionary and “aspirational” items like Rolex watches and Coach handbags. But we don’t need central banks to help with raising prices on that front. Branded vendors long ago solved that issue in the same manner as President Obama did when asked if he had “inhaled” marijuana. That’s just the point, said he.

So here’s the thing. There is no evidence whatsoever that the hedonically adjusted, geometrically-meaned and product- substituted government price indices favored by the central bankers and Keynesian economists have anything to do with consumer behavior; and most especially not in the tiny variation ranges currently being obsessed about.

Not one consumer in 10,000 knows whether the “PCE deflator less food and energy” is rising by 2% or 0.2%, and not one in ten million would modify their behavior, in any event. So when central bankers like Coeuré say they are attempting to “convince people in Europe that inflation will go up, that it will go back toward to 2%”, they are simply indulging in ritual incantation to justify their action.

Indeed, there is no empirical, logical or rational basis for this 2% target in the first place. So the hair-splitting obsession with fractional decimal points of variation around it amount to little more than numerology.

At the end of the day, the whole “deflation” bogeyman is a case of pure ritual incantation——incessantly repeated and amplified by mindless journalists like Chandra. In a heartbeat they will point to Japan’s allegedly long-standing and traumatic experience with deflation and never once acknowledge the obvious. Namely, that Japan has never, ever experienced anything remotely resembling deep and abiding consumer price inflation.

As shown below, Japan’s CPI today is only a tad higher than it was 20 years ago, and is measureably higher than it was in the early 1980’s when its great money printing and stock market bubble began in response to the Plaza Accord in 1985.

Like the rest of the developed world, Japan experienced a long-term decline in the purchasing power of its money, not a mythical financial disease called “deflation”.  Its economy has been stagnant because production and investment have been stagnant and because its labor force has been shrinking—– not because its price level has fallen.

Historical Data Chart

In fact, Japan has experienced a huge deflation, but not in consumer prices. What has been deflating for almost two decades now is the massive overhang of inflated real estate, corporate malinvestment and private sector debt that was fueled by its late 1980s financial bubble.

Yet if the twin Keynesian cures of full-throttle fiscal stimulus and massive money printing could cure the ills from a stupendous bout of bubble finance that would have been evident in Japan long ago. In fact, Japan has never ceased applying these voodoo remedies, and the outcome is not even debatable. Attempting to cure the problem of too much debt and monetary ease with more of the same has not lifted Japan’s GDP at all. In nominal terms. it is no larger than it was 20 years ago.
Historical Data Chart
What this bleeding cure has done is simply saddle Japan with more of the same. That is, a public debt ratio to GDP that is now a debilitating 5X greater than it was before the bubble; and a central bank balance sheet that has sky-rocketed by 6X without reviving real growth.
Historical Data Chart
Historical Data Chart
So, ironically, the “deflation” bogey-man is really a cover story for the failure of the Keynesian elixir. It is being used to justify one more desperate and egregious application of the cure.

Fortunately, by now the argument is getting so threadbare that it reduces to the embarrassing gibberish penned by Shobhana Chandra and repeated endlessly by Bloomberg, Reuters, CNBC and the Wall Street Journal.

Yet it doesn’t take much thought to see that what remains of the story constitutes its own refutation. Just consider Chandra’s gem # 3:
3. Additionally, their (corporations) pricing power — the ability to charge more — vanishes. That makes it harder for them to grow profits.
Let’s see. During the last 10 years Apple has recorded $180 billon in profits——a record that is off the charts. And Apple did have pricing power. That is, the power to slash prices over and over and over again.

Some kind of deflationary buyers’ strike!

David Stockman was the Director of the Office of Management and Budget during part of the Reagan Administration, from 1981 to 1985. He is the author of The Great Deformation: The Corruption of Capitaism in America and The Triumph of Politics: Why the Reagan Revolution Failed.

 The above originally appeared at David Stockman's Contra Corner and is reprinted with permission. 


  1. Deflation of food products would be the worst. I'd ask myself, "Wait, these food prices are going down. Should I wait a week before I eat again? Should I eat next month? Next year? Will I ever buy groceries again?"

    They're so stupid. Everyone knows that as soon as you buy a computer that the next more powerful chip will be in the next model yet we still buy computers knowing that future computers are better and cheaper.

    People will always buy goods even if we think the price may go down mainly because we actually want to use what we buy when we buy it.

    1. Prices also don't adjust that rapidly. What Keynesians lament as "sticky prices" are a healthy feature of a market economy and without them no transactions could ever be made because you'd never have a stable price even for an instant.

    2. "They're so stupid."

      You know....I sometimes wonder if people's brains may be just teeming with mercury. How can anyone believe the shit they spew from their filthy pie holes?

  2. What is it with the MSM trotting out presumably Indian writers, such as the author of the Keynesian nonsense eviscerated above by Stockman, to megaphone increasingly ridiculous establishment propaganda? WaPo did the same thing recently in a piece that attempted to deny the existence of aerosol spraying in the skies for the purposes of geoengineering the weather by dismissing it as a "conspiracy theory." Ritual incantations indeed.

  3. As long as people patronize corporate media outlets like Bloomberg, we'll have to endure the likes of Chandra spewing this garbage masquerading as economics.

    People, stop reading and watching the mainstream media. Only then will we see some legitimate alternatives. It would also have the virtue of bankrupting the firm founded by Michael Bloomberg, a raving and power-mad sociopath.

  4. History is going to look back at the 19th and (at least) 20th century with awe at the power of the free market. Look at what has been achieved despite idiots running around trying to be "in charge" of everything using idiocracy style economics. In Chandra's case, this is surely group think or brainwashing if you like. It's sad to see young people like this sucking at the tit of the machine. But how many of the elite of the elite know the truth and who are they?