Bernard's Top 10: Here comes the deflation from Emerging Asia; Why money printing could make deflation worse; Why abolishing cash could solve the 0% problem; Maine's amazing lobster boom; A glorious disco mashup; Clarke and Dawe

Here’s my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to

See all previous Top 10s here.

My must read is #1 on deflation and the response. Food for hawks and doves alike.

1. Here comes the deflation – It is the question of our age: where is the inflation?

The Reserve Bank of New Zealand is confident it will come, mostly because of the recent slump in our currency. Yesterday’s QSBO showed it hasn’t come yet. In fact, a net 6% of businesses reported cutting their prices in the September quarter, despite a net 19% reporting their costs increasing.

For whatever reason, businesses just can’t seem to pass on price increases. Part of the reason may be increasing competition from others via the Internet and lower prices being exported from markets where there’s so much capacity that they’re having to cut prices just to clear their stock.

This FT piece on the deflation coming out of Emerging Asia is instructive:

Deflation, a prolonged decline in the price of products, is flowing like a draught of cold air from Asia’s powerhouse economies and casting a chill over Japan and Europe, while also endangering US efforts to sustain a recovery.

Evidence of a deepening deflationary spiral in Asia — sparked by manufacturing overcapacity, an evaporation of trade demand and anaemic productivity — is a major cause for concern. That anxiety is amplified because of the structural nature of the problem. That it is taking place just as the EU and Japan are slipping back into deflation while the US is struggling with weak corporate earnings, makes Asia’s falling prices a pivotal issue.

“There is a chance that we are moving towards global deflation,” says Alberto Gallo, head of European macro credit research at RBS, the bank. “We have overleveraged everywhere and, instead of reducing capacity, we are creating a prolonged state of industrial overcapacity that is driving down prices. China is the biggest example.”

2. China at the epicentre – James Kynge and Jonathan Wheatley go on to find China at the epicentre of this deflationary pressure. The chart below is an eye-opener too.

China has notched up 42 straight months of falling producer prices, making it the only large economy other than Japan in the 1990s to show such a persistent deflationary trend, according to Chetan Ahya, chief Asia economist at Morgan Stanley.

Overall, China’s producer prices are down a cumulative 10.8 per cent from their recent peak in 2011. The speed at which prices are dropping is a cause for alarm. As recently as August last year, the producer price index for commodities was showing only a 1.1 per cent drop; this August the decline was 12.8 per cent. Even a country such as India, with an otherwise robust economy, has slipped into producer price deflation over the past year.

Nor is Asia’s deflation solely the result of the global slide in commodity prices. Pernicious effects are also evident from the decline in the price of manufactured products and components, which fell on average by 4.4 per cent year on year in August in the region’s 10 leading economies (excluding Japan).

3. And more QE won’t work – Yet the response to this deflationary pressure in the Northern Hemisphere at least has been to cut interest rates to zero (or even below that in Sweden and Switzerland) and then to print money to buy Government bonds through Quantitative Easing.

This could actually be worsening the problem, say some.

Classic theories of deflation, including that espoused in the so-called Bernanke doctrine, state that falling producer prices result from a collapse in aggregate demand. This leads, as Mr Bernanke said in 2002, to “a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers”. This diagnosis led directly to the main US response to the threat of deflation; a reflation of demand by pumping liquidity into the economy via QE.

However, in the case of Asia’s deflation at least, it appears likely that it is an excess of supply rather than insufficient demand that is the prime factor depressing producer prices.

If this is the case, then endless bouts of QE — or “QE infinity” as Mr Gallo describes it — may be exacerbating rather than alleviating the problem of deflation by acting to prolong oversupply through providing cheap credit to companies.

“By itself, ‘QE infinity’ could be deflationary in the long run because it means that the issue of overcapacity is not resolved but dragged forward,” says Mr Gallo. “This could in turn result in both prolonged deflation and asset price bubbles at the same time.”

4. Climate change and lobsters – This Quartz piece on the boom in lobster catches off the coast of Maine is a fascinating look at what climate change might mean. Unintended consequences abound. Climate change may not be the reason, but it’s a fascinating read for anyone who thinks about fisheries management and markets.

The charts on lobsters are spectacular too. Note to self. Get out more.

5. How low can you go? – The Bank of England’s Chief Economist Andy Haldane regularly makes thought-provoking speeches and his most recent is a real doozy.

He looks at what to do about the zero lower bound (ZLB) problem where a central bank can’t stimulate the economy if interest rates are already near 0%. He looks at the prospect of helicopter money, higher inflation targets, negative interest rates and abolishing cash. Yes. You heard right. Abolishing conventional paper cash.

A more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency. This, too, has recently had its supporters (for example, Rogoff (2014)). As well as solving the ZLB problem, it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.



6. So what about bitcoin? – Haldane has a soft spot for bitcoin as one way to abolish cash. And the Bank of England is seriously working on something like it.

In its short life, Bitcoin has emerged as a monetary enigma. It divides opinion like nothing else (for example, Yermack (2013), Shin (2015)). Some countries have banned its use. Others have encouraged it. Some economists have denounced it as monetary snake oil. Others have proclaimed it a monetary cure-all for the sins of the state.

What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential. On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network.

Bitcoin’s “blockchain” technology appears to offer an imaginative solution to that distributed trust problem (Ali, Barrdear, Clews and Southgate (2014)). Whether a variant of this technology could support central bank-issued digital currency is very much an open question. So too is whether the public would accept it as a substitute for paper currency. Central bank-issued digital currency raises big logistical and behavioural questions too.

How practically would it work? What security and privacy risks would it raise? And how would public and privately-issued monies interact? These questions do not have easy answers. That is why work on central bank–issued digital currencies forms a core part of the Bank’s current research agenda

7. Become a beef farmer – This FT piece on China’s need for the land equivalent of Great Britain to produce enough meat to feed China’s growing middle classes is a cheering one for New Zealand sheep and beef farmers.

It certainly explains Shanghai Maling’s keenness to lock in New Zealand supplies through its deal with Silver Fern Farms.

The average Chinese eats about 57kg of meat a year, up by almost a quarter from 2003, when consumption totalled 46kg. This is expected to rise to 74kg in the next decade, pushing up grains and soyabean demand by 94m tonnes for livestock from the current overall usage of 650m tonnes.

This increase, in turn, will mean that an additional 15-20m hectares of agricultural land will be needed, according to the corporate finance arm of auditors PwC. The shift in diets “will place enormous burdens on an already challenged domestic food system and have significant ramifications on international trade in agriculture”, said Richard Ferguson, PwC adviser and author of the report “China’s agricultural challenges”.

Constraints of land and water availability will mean that the country will increasingly rely on imports or look to secure land overseas for agricultural production — a phenomenon that is already happening.

8. Another point of view – This piece written on October 2 by Joe Stiglitz and Adam Hersh on the TPP is an antidote to the boosterism around at the moment.

It should surprise no one that America’s international agreements produce managed rather than free trade. That is what happens when the policymaking process is closed to non-business stakeholders – not to mention the people’s elected representatives in Congress.

9. Totally a mash-up of some great movie scenes. This is just a bit of fun.

10. Totally Clarke and Dawe on the differences between Labor and the Liberal/National coalition. And some chat about broadband.