Signs of a slowdown are spreading. Here in the US, despite all the happy talk
about rising stock prices and falling deficits and the imminent unwinding of
the Fed's debt-monetization program, today's numbers were ominous:
Producer
prices post big drop, factory activity weak
(Reuters) - U.S. producer prices recorded their largest drop in three years
in April as gasoline and food costs tumbled, pointing to weak inflation pressures
that should give the Federal Reserve latitude to keep monetary policy very
accommodative.
Separate reports on Wednesday showed an unexpected drop in U.S. factory
output last month and troubling signs of weakness in manufacturing activity
in New York state this month.
The Labor Department said its seasonally adjusted producer price index fell
0.7 percent last month, the biggest decline since February 2010. Wholesale
prices had dropped 0.6 percent in March.
A Reuters survey of economists had forecast prices received by the nation's
farms, factories and refineries dropping 0.6 percent last month.
In the 12 months through April, wholesale prices were up only 0.6 percent,
the smallest increase since July last year. Prices had increased 1.1 percent
in March.
Underscoring the tame inflation environment, wholesale prices excluding
volatile food and energy costs nudged up 0.1 percent, the smallest increase
since November.
Producer prices rose modestly in 2011 but have since been trending down. Other
stats like disposable
income are also flattening out, which implies that the slowdown is
about more than just temporarily lower oil prices.
Now the question is whether slowing inflation turns into actual deflation.
Europe is closer to this point that than the US, so not surprisingly is a little
further along in softening up its citizens for even more central bank "innovation":
ECB's
Visco: negative deposit rates would be effective
(Reuters) - Cutting the European Central Bank's deposit rate below zero
would be an effective way to help the euro
zone economy,
ECB policymaker Ignazio Visco was quoted as saying on Monday, sending the
euro lower.
Taking the deposit rate into negative territory would mean the ECB charging
commercial banks for
holding their money overnight, something ECB President Mario Draghi has said
the central bank was "technically ready" to do.
Such a move could encourage banks to
lend out money to the real economy rather
than hold it at the ECB, though it could also have a big impact on banks'
own operations and major implications for funding and bond markets.
While non-euro zone member Denmark has dabbled with negative deposit rates,
the ECB would be the first major central bank to use the measure - a policy
step it is considering to try to boost lending to businesses in the recession-mired
euro area.
Visco said the ECB was ready to deal with possible unintended consequences
of negative deposit rates.
"We all agreed in the council that we have to look with care and in that
case we may reduce the deposit rate," Visco, a member of the ECB's policymaking
Governing Council, told CNBC in an interview.
"We think that - and I personally think that, this is effective - the economy
now is capable of taking it on board. Technically, we are equipped and ready
to intervene. There may be unintended consequences - we know we may have
to work on that - and we know how to work on that," he was quoted as saying.
Some Thoughts
In a deflationary environment wages can't rise, which means tax revenues stagnate
or fall, which means personal and government debts get harder to cover. For
the people trying to maintain power, deflation is a black hole, the ultimate
nightmare.
If these guys weren't such predators you could almost feel sorry for them.
On one hand, nascent housing bubbles and roaring stock markets are signaling
an inflationary boom. On the other hand, stats like the above point towards
a deflationary tipping point. Whatever the oligarchy does from here on out,
the risk of being catastrophically wrong is both very real and growing. Like
I said, you can almost feel sorry for them.
