From: http://www.nytimes.com/2009/04/21/business/global/21deflate.html?_r=3&hp
Spain’s Falling Prices Fuel Deflation Fears in Europe
VALENCIA, Spain — Faced with plunging orders, merchants across this recession-wracked country are starting to do something that many of them have never done: cut retail prices.
The nation’s jobless rate, already a painful 15.5 percent, could soon reach 20 percent, a troubling number for a major industrialized country.
With the combination of rising unemployment and falling prices, economists fear Spain may be in the early grip of deflation, a hallmark of both the Great Depression and Japan’s lost decade of the 1990s, and a major concern since the financial crisis went global last year.
Deflation can result in a downward spiral that can be difficult to reverse. As unemployment rises sharply and consumers cut spending, companies cut prices. But if sales do not pick up, then revenue can decline further, forcing more cuts in workers or wages. Mr. Maestre is already contemplating additional job and wage cuts for his 250 employees.
Nowhere is this cycle more evident than in Spain. Last month, it became the first of the 16 nations that use the euro to record a negative inflation rate. The drop, though just 0.1 percent, had not happened since the government began tracking inflation in 1961, and Spanish officials have said prices could keep dropping through the summer.
Some of the decline came as volatile food prices sank; the cost of fish fell 6.2 percent, and sugar was down 5.7 percent. But even prices in normally stable sectors like drugs and medical treatments fell 0.7 percent in March, and there were slight declines in footwear, clothing and prices for household electronics.
“Alarm bells are going off,” said Lorenzo Amor, president of the Association of Autonomous Workers, which represents small businesses and self-employed people. “Economies can recover from deceleration, but it’s harder to recover from a deflationary situation. This could be a catastrophe for the Spanish economy.”
Deflation is not just a Spanish concern. Luxembourg, Portugal and Ireland have reported price drops, too. While the declines have been slight — and prices rose modestly after factoring out food and energy prices, which can fluctuate widely — other figures released this month suggest the risk of deflation is growing.
In Germany, wholesale prices dropped 8 percent in March from a year ago, the steepest fall since 1987. In Japan, wholesale prices fell 2.2 percent on an annual basis. In the United States, the Consumer Price Index fell 0.1 percent in March, year over year, the first decline of its kind since 1955, though prices rose 0.2 percent excluding food and energy.
“It doesn’t mean it will spread here to the U.S., but we need to look closely at Spain and other places to understand the dynamic,” says Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “It’s like the front line of a new virus outbreak.”
The trends have unnerved even well-established businesses. “There is such a huge lack of confidence in the politicians, in the European Union and in the banks,” said Arturo Virosque, 79, president of Valencia’s chamber of commerce and the owner of a local logistics company. Ticking off crises going back to the Spanish Civil War in his youth, he said, “this is different. It’s like an illness.”
After price cuts by competitors, Mr. Virosque’s company reduced charges for storage and transportation, and slashed its work force to about 170, from 250. “The worst thing is that we have to cut the young people,” he said, because higher severance makes it too expensive to fire older workers.
While unemployment traditionally is higher in Spain than in much of Europe, the sharp increase has many here nervous. The jobless rate for those under 25 is at a Depression-like level of 31.8 percent, the highest among the 27 nations of the European Union.
Before cutting prices in early 2009, Mr. Maestre ordered several rounds of job cuts at his company, Fermax, as sales of the intercoms collapsed with Spain’s housing bubble.
“It’s a question of survival for everybody,” he said. Still, the lower prices have not translated into higher sales. Fermax’s orders fell 25 percent in the first quarter. Prices for some intercom parts that he buys, like video screens, have also come down, but it is not enough to make up for the sales drought. “Prices have to come down more and we will have to spend less,” he said.
The effects of this downward spiral are evident at Valencia’s principal soup kitchen, in an imposing stone building constructed a century ago as an alms house. Each day, a line forms around the block by noon. The Casa de la Caridad, or House of Charity, is helping three times as many people as it did a year ago. More than 11,000 meals were served in March, and it expects to top 12,000 this month.
As the economic decline has broadened, so has the range of people seeking help. In the past, most were out-of-work immigrants or the homeless, said the center’s director, Guadalupe Ferrer. Today, “it’s more and more people like us who had a house, a respectable job, but are now unemployed.”
The employed worry that falling prices will endanger their jobs as well.
Yolanda Garcia has worked as a butcher under the arches of Valencia’s soaring Art Nouveau central market for a decade, but she’s troubled that a drop in the price of chicken, to 5.99 euros a kilo, from 6.99, has not attracted more customers to her stall.
“Of course, we’re worried the boss will have to reduce staff,” said Ms. Garcia, 38, whose husband, a construction worker, was laid off two months ago.
All this has made deflation, once a subject largely reserved for economists who studied the Great Depression, into front-page news here.
The American economy is less vulnerable to deflation, in part because of the Federal Reserve’s decision to cut interest rates to near zero and increase lending by $2 trillion. The European Central Bank has also cut rates, though more slowly, and it has resisted the lending measures adopted by the Fed and the Bank of England to prop up spending.
When Spain had its own currency, the peseta, the central bank could have simply devalued it, or cut interest rates to zero. But that is not an option in the era of the euro, when monetary policy is controlled from the European Central Bank’s headquarters in Frankfurt, said Santiago Carbó, a professor of economics at the University of Granada.
“If we enter into a deflationary period, we won’t have the monetary tools to sort it out,” Mr. Carbó said.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
"But even prices in normally stable sectors like drugs and medical treatments fell 0.7 percent in March..."
It amazes me when people take less drugs and medical treatments go down that this is somehow a bad thing. Of course they are probably thinking this means people can't afford these things so that's why their prices are dropping. Which leads to my second comment... prices dropping to make goods more affordable when will they stop thinking this is a bad thing. Once these prices drop, then those soup lines can disappear too. I noticed they mentioned there were soup lines already, it's just that they are longer. That's the way this article put it. Well, let the prices drop and people can buy a can of soup. I go to the market now and it's amazing how much a simple can of soup is. Soup used to be so cheap but over the years it has really gotten to be expensive.
Lower Prices Always!!!!!!
Always just after a boom sponsored by artificially cheap credit.
The solution is always the same: Don't do anything. Falling prices are GOOD for consumers. They can buy more with their cash. That is the best thing to get the economy rolling. Note that they did not mention the fall in energy prices.
I am still to see deflation here; in fact I am hoping for it. Sadly prices seem to have boomed since January. Fuel went up 15% (despite oil being more or less the same at a five time low and energy costs, fixed by law, going down by 1-2% over the same period), groceries are skyrocketing. I won't even mention other goods and services. Industrial production is collapsing, saving rates are at an all-time low yet consumption is still going strong. It seems like people didn't learn a thing from America and her problems.
The Spanish case is very peculiar: pretty much like the US they went crazy over the building business. Over the past ten years they have been building like there's no tomorrow. They aggressively marketed vacation and retirement houses all over Europe, especially in Germany and Britain. A friend whose family bought a vacation house down there described me a few examples of this craze. It was bound to go bad. Now there are thousands of unsold properties: local governments expected revenue (in form of property taxes from the foreign owners) so they planned big and now are caught in the crossfire. They cannot rise taxes on residents because it's politically inconvenient to say the least. They cannot get money from the builders because they are going belly up one after another. There's practically no hope of getting more money from the central government in Madrid. They have already planned building large community centers, buying statues providing more "services"... just like politicians everywhere.
Will they learn from their mistakes? Of course not: "Stupidity is repeating the same action over and over again but expecting different results each time" -Albert Einstein-.
The cost of living is falling! Oh noes! Also, if the workers cut their own prices (their wages), then there would be less umeployment. Hell, if prices fall 50% are you take a 30% paycut, you are still better off than before.
It's bothersome to me that folks misinterpret the decline in prices as a bad thing. It's one of the market's means to remove excess supply of a good/service. It should be promoted, especially if its an easy to produce product like medicine. This means the companies that supply such medicines can free up their production plants to produce other kinds of medicines which may be in short supply (and higher demand). Thus, balancing out the whole price structure for all the medicines in relative equality.
Sometimes, I have to wonder if folks ever think these things through before publishing them as 'news.'
"The power of liberty going forward is in decentralization. Not in leaders, but in decentralized activism. In a market process." -- liberty student
Daniel: The cost of living is falling! Oh noes! Also, if the workers cut their own prices (their wages), then there would be less umeployment. Hell, if prices fall 50% are you take a 30% paycut, you are still better off than before.
heaven forbid any wage ever fall!
Sadly, it's very difficult to get someone to understand that falling wages, when prices fall too, are a good thing.
If I only get payed $5 a week, but a meal at McDonalds costs only a penny or two, a weeks worth of groceries costs $1, and a top of the line computer costs only $4 what's the big deal?
Of course, we've lived through nearly 100 years of inflationary policy, so increasing prices and increasing wages seem to be the norm of how things go, for most people.
Resident Christian Anarcho-Capitalist.
I moved to San Diego, California, in August 2008, and even then I remember the job market being fairly strong in Madrid (I didn't have a job, but I lived off rent—I'm lucky to be born in a family with quite a bit of property). It's incredible that Spain has one of thie highest unemployment rates in Europe now. In any case, I know that my cost of living was lower then than it is currently in the United States, and I'm perplexed at why they are afraid of falling prices. Televisión Española always had segments on people complaining about inflating prices. Now, they're complaining about falling prices.
I'm not sure what cutting zeroes off the peseta would do, if it's still unprofitable for a business to pay a worker at a price floor for his or her labor. It's not time for Spain's national bank to cut zeroes, or trigger inflation, but for the Spanish economy to begin a steady liberalization of the market.
Unfortunately, Jesus Huerta de Soto has not written a book in Spanish for the "layman" (don't ask the average Spaniard to read Money, Bank Credit and Economic Cycles—hell, I just ordered it).
Kakugo:Over the past ten years they have been building like there's no tomorrow. They aggressively marketed vacation and retirement houses all over Europe, especially in Germany and Britain. A friend whose family bought a vacation house down there described me a few examples of this craze. It was bound to go bad. Now there are thousands of unsold properties: local governments expected revenue (in form of property taxes from the foreign owners) so they planned big and now are caught in the crossfire.
Outside of Madrid there was a new town being built that my uncle and I called the "ghost town". Only Phase I was ever built, but the majority of those flats were never sold. There were, IIRC, another four phases of construction that were supposed to take place, even by mid-2008
What about Austrians like Gabriel Calzada? Is their work also too advanced for a layman?
Freedom of markets is positively correlated with the degree of evolution in any society...
Well, the King of Spain has a picture of him holding Human Action.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
GilesStratton: Well, the King of Spain has a picture of him holding Human Action.
Source/link?
Jon Irenicus:What about Austrians like Gabriel Calzada? Is their work also too advanced for a layman?
At least, not widely available, or not made interesting enough for it to be "mainstream".
Jesus Huerta de Soto: AEN: You have given the Mises Institute a picture of King Juan Carlos holding a book by Mises. Is he a Misesian? de SOTO: I wouldn't say that, but he likes free markets and understands that we have radical opinions on the subject. Every year we invite him to a fair that commemorates new books, and he is kind enough to come. Considering that he didn't study at the University of Chicago, he is more pro-Austrian than one might expect. You never know what individuals or types of groups are going to be attracted to the Austrian School.
AEN: You have given the Mises Institute a picture of King Juan Carlos holding a book by Mises. Is he a Misesian?
de SOTO: I wouldn't say that, but he likes free markets and understands that we have radical opinions on the subject. Every year we invite him to a fair that commemorates new books, and he is kind enough to come. Considering that he didn't study at the University of Chicago, he is more pro-Austrian than one might expect. You never know what individuals or types of groups are going to be attracted to the Austrian School.
Source
Jonathan, my friend's family has property in the Gerona area in Catalunya and they can pretty much see the building excesses (well explained on Mises.org) of the Costa Brava from a vantage point.
As for the "books for the layman" topic I find difficult to understand somebody could have problems reading Mises or Rothbard but again we are dealing with the fruits of public education and mass disinformation. Give Unmasking the Sacred Lies or The Anti-Capitalist Mentality to any "ordinary" person and he/she will be confused and probably angered by the truths therein.
Kakugo:Jonathan, my friend's family has property in the Gerona area in Catalunya and they can pretty much see the building excesses (well explained on Mises.org) of the Costa Brava from a vantage point.
Yea, just about everywhere, although even by early 2008 it was obvious that the construction market was dying. I sold 1/3 of a plot of pines to a lumberjack, and he told me that his business was going down because the decrease in demand for lumber for construction (in Spain most construction is not done with wood, but with cement and bricks, but wood is used a lot for decoration in the chalets).
Are those books translated into Spanish? Even then, it's not just about understanding, but it's presenting the topic as one of interest. Reading is not a strong point in any country, for the majority of the population (high school standards reading, even), and it's not only because people are poor readers, it's because they simply don't want to read. There's not much with motivates someone to read de Soto's book unless they have to, or they're genuinely interested in the topic.