Courtesy of Mish.
In an email update last week, Saxo Bank chief economist Steen Jakobsen commented “Europe has a more than 50:50 chance of deflation, while the US is 25:75 against.“
Steen is talking about a general decline in prices of goods and services, which is also how central bankers use the term deflation. For now, let’s use that definition. I will tie things back to money and credit (my preferred way of discussing inflation and deflation) a bit latter.
In contrast to Steen, I believe deflation is near-certain in Europe, and strongly odds on in the U.S.
Global Supply Arbitrage
A simple statement by economist Andy Xie is what got me thinking about the prospects of deflation once again: Demand is local, supply is global.
Here is the complete context as noted in Keynes Is Dead, Abenomics Fizzles, US Fails to Reach Escape Velocity, Stimulus Fatigue
Keynes Is Dead
I have argued for many years that this round of globalization has fundamentally changed how an economy works, even for a large one like the United States. While demand is and always has been local, the supply side has become genuinely global. Both manufacturing blue-collar jobs and most white-collar jobs have become global. Today’s information technology allows a multinational company to position research, marketing, finance and managerial jobs to anywhere. Hence, when a country stimulates demand, it’s met by supply from anywhere.
Supply From Anywhere
With supply arbitrage in mind, please consider Invasion of Spanish Builders Angers France Struggling to Compete.
The earth movers digging out a sandy pit in the beach town of Biarritz could be any construction site in France. Except the builder of the 300 homes and its workers are Spanish. In the neighboring town of Anglet, a Spanish company built the concert hall inaugurated this month. A kilometer up the road, in Bayonne, a Spanish company is building a 15-lodging apartment block.
And that’s just in a small corner of southwestern France.
The losing French bidders are crying foul, saying the Spanish pay lower wages and cut corners on regulations. The Spanish, fleeing a construction slump and an unemployment rate of 26 percent at home, say they’re just using European Union rules allowing free movement of businesses and workers.
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