
Switzerland Offers Counterpoint on Deflation’s Ills - bpolania
http://www.wsj.com/articles/switzerland-offers-counterpoint-on-deflations-ills-1445189695?alg=y
======
_delirium
A complexity here is that Switzerland is a small country heavily integrated
with the Eurozone, but with its own currency that has recently risen strongly
in value. In CHF terms, yes, Swiss prices are currently deflating. But this
isn't really a domestic deflation phenomenon in the sense that a similar
decline in prices would be in a bigger economy like the USA: the role of CHF
in Switzerland isn't nearly as canonical/exclusive as the role of USD in the
USA, since so much Swiss business, even individual business, takes place in
EUR-priced marketplaces.

As the article briefly mentions, the Swiss Franc is now worth about 10% more
vis-a-vis the Euro than it was a year ago. Many things in Switzerland are
actually inflating if you care about EUR value, which many Swiss people and
businesses do: prices and wages have decreased 2% in nominal CHF values,
_while the CHF has simultaneously appreciated 10%_. Many Swiss employees
therefore in practice have a salary that represents more European buying power
than it did a year ago. That could be expected to have some effects more
similar to inflation rather than deflation, in this context.

I think the same would probably happen with any small European country. If
Denmark broke the DKK/EUR peg and let the DKK appreciate by ~10%, many things
would deflate in DKK terms to compensate.

~~~
mike_hearn
The theory that deflation is bad for an economy doesn't say "but only when
that economy is over a certain size". It is an absolute theory that claims to
apply everywhere.

I've been saying this theory is bunk for years, so it's nice to finally see
the view start to surface in mainstream publications. You only have to review
the data to discover that there's no empirical link between deflation and
depression. For instance, take this paper, written by economists at the
Minneapolis Fed:

[https://www.minneapolisfed.org/research/sr/sr331.pdf](https://www.minneapolisfed.org/research/sr/sr331.pdf)

Abstract:

 _Are deflation and depression empirically linked? No, concludes a broad
historical study of inflation and real output growth rates. Deflation and
depression do seem to have been linked during the 1930s. But in the rest of
the data for 17 countries and more than 100 years, there is virtually no
evidence of such a link._

But you don't really need data to convince yourself that the 2%-inflation-is-
best theory is nonsense. Basic common sense should be good enough. The entire
thing rests on the assumption that there's a class of investments that people
would refuse to invest in if left to their own devices, but which suddenly
become attractive only if their savings are shrivelled by a few percent a
year. Such a class of investments certainly does exist: they're called bad
investments!

~~~
mc32
So, how do we explain Japan? It's been deflationary for decades and the
economy hasn't improved in real or relative terms.

Is their deflation different, to borrow a phrase, or is CH's deflation a bit
unique?

I'd love to see a contrast btwn CH and JP in this regard. Or, how could Japan
stop worrying and love deflation, Swiss style.

~~~
saosebastiao
At its peak of the Japanese Asset Bubble, the Imperial Palace of Japan was
valued higher than _the sum of all real estate in the state of California_.
Simply put, the Japanese Asset Bubble was the worst asset bubble in the
history of asset bubbles.

In order to stabilize the collapse of the asset bubble, they have been playing
loosey-goosey with interest rates for two decades now. But in order to
stabilize the fall in asset prices using monetary policy (a blunt instrument
if there ever was one), they essentially have been inflating everything else.
So while they have nominally had deflation in aggregate, they have had
inflation levels in consumables (which is about 70% of the cost of living)
that are bordering, if not surpassed, what most economists would call
HyperInflation.

~~~
mc32
But how can they have wage deflation while their cost of living, not counting
housing, has experienced, as you put it, hyperinflation?

~~~
saosebastiao
Meh, I should probably clarify that I'm not an expert and I'm just
regurgitating an explanation given to me by a (Japanese) econ professor a few
years ago. I don't know how to answer your question.

------
caminante
non-paywall link: [http://on.wsj.com/1i9IjuB](http://on.wsj.com/1i9IjuB)

------
s3nnyy
I think it is great to be an employee in Switzerland, because it is the only
place where net-salaries are comparable to the Bay Area or NYC.

I live in Zurich, read my story here: "Eight reasons why I moved to
Switzerland (to work in IT)": [https://medium.com/@iwaninzurich/eight-reasons-
why-i-moved-t...](https://medium.com/@iwaninzurich/eight-reasons-why-i-moved-
to-switzerland-to-work-in-it-c7ac18af4f90)

If you are interested in coming to Switzerland, just shoot me a mail.

------
evanpw
> Although wage growth has slowed in Switzerland, it was 0.6% on an annual
> basis in the second quarter

A big part of the reason that economists think that deflation is bad is that
people are very resistant to cuts in their nominal wages (much more than to
cuts in _real_ wages, like getting no raise with positive inflation). If the
price of everything else suddenly dropped 10%, then cutting everyone's wages
10% would make them exactly as well off as they were previously, but the more
likely outcome is that wages would drop by less than 10% and unemployment
would increase.

If nominal wages are still increasing in Switzerland, maybe that's part of the
reason there haven't been many adverse consequences.

~~~
nickff
It is possible to find an infinite number of differences between Switzerland
and any other country. It is very tempting to look for reasons not to update
your beliefs in response to new data, but we must not give in to this
temptation. Bayesian logic would dictate that events in Switzerland should
cause us to be more skeptical of arguments in favor of inflation.

~~~
snowwrestler
> Bayesian logic would dictate that events in Switzerland should cause us to
> be more skeptical of arguments in favor of inflation.

Depends on prior evidence. Current thinking on inflation/deflation did not
drop into economists' heads from space yesterday. It was developed by
analyzing hundreds of years of real experience in real economies. Before we
alter our beliefs too much today, we should at least be aware of the full
scope of evidence on the topic.

~~~
mike_hearn
Unfortunately it wasn't, nice though it'd be if that were true.

Current thinking is almost entirely based on extrapolating the Great
Depression out to all economies everywhere, even when actual empirical studies
show that the extrapolation isn't valid (see the paper I posted above).

------
carlos22
Many companies in Switzerland force their workers to work longer (between 5
and 10 %) to compensate the so called "Franken Schock". As they don't have
strong regulations on working time (compared to Germany for example) this is
not a problem. They also started to pay some of their workforce in EUR instead
of CHF (this happens to new employees and especially for people crossing
boards to work there).

~~~
SeoxyS
Do you have any references on this? Would love to learn more.

~~~
carlos22
Most of the articles are in German:

[https://www.tagesschau.de/wirtschaft/schweiz-
mehrarbeit-101....](https://www.tagesschau.de/wirtschaft/schweiz-
mehrarbeit-101.html)

[http://www.swissinfo.ch/eng/strong-franc-woes_workers-to-
be-...](http://www.swissinfo.ch/eng/strong-franc-woes_workers-to-be-paid-in-
euros-due-to-strong-franc/41245550)

Its hard to get real data at this time.

------
scriptman
Everyone is scared of deflation, but is completely comfortable with the rapid
drop in the price of electronic goods over the last few decades.

I'm simplifying a bit. The traditional theories that warn against deflation
are concerned about consumers delaying spending in the hope of waiting for
even cheaper prices. This delay theoretically forces the economy to grind to a
halt. I think most people accept now that this is an unlikely outcome.

Now when Central Banks worry about deflation they are concerned that it might
trigger a fall in real incomes, while debt remains at the same level, meaning
people aren't able to pay back their debts. In our debt addicted economies,
this is a real risk.

~~~
vinceguidry
> Everyone is scared of deflation, but is completely comfortable with the
> rapid drop in the price of electronic goods over the last few decades.

Those are two absolutely different things. One stems from production,
transportation, and financial improvements across the board, the other comes
because fewer people want to buy anything.

> The traditional theories that warn against deflation are concerned about
> consumers delaying spending in the hope of waiting for even cheaper prices.
> This delay theoretically forces the economy to grind to a halt.

It's not so much about consumers delaying spending. It's what happens further
up the chain. If the holders of wealth that seed the economy figure out that
it's better for them to hold on to their assets rather than invest them, then
people lose jobs. We need them to keep investing their money.

Deflation also penalizes debt holders. The dollars you spend to pay back your
mortgage are worth more than the dollars you make now. Since most Americans
hold more debt than assets, deflation hurts common people more than it helps.

~~~
tsotha
>If the holders of wealth that seed the economy figure out that it's better
for them to hold on to their assets rather than invest them, then people lose
jobs.

That's the theory, but I'm skeptical. If the economy is healthy they'll have
investment opportunities that compensate adequately for risk and they'll still
invest.

Conversely, in an inflationary environment people with savings may invest
their money, but they may also buy fixed assets like gold or real estate. That
doesn't help the economy very much.

>Deflation also penalizes debt holders.

And inflation hurts savers. I don't see a benefit to prioritizing the
interests of debtors over savers.

~~~
vinceguidry
> If the economy is healthy they'll have investment opportunities that
> compensate adequately for risk and they'll still invest.

A healthy economy will, in most cases, exhibit inflation. For most economies,
it would take a concerted act by a central bank to force deflation in a
normal, growing economy. People are making more, spending more. The government
has to print more money to keep up, otherwise it will fall short of people's
needs. Only in special circumstances does this not hold up.

> I don't see a benefit to prioritizing the interests of debtors over savers.

There's a huge benefit. We want to encourage economic activity over
inactivity. Money in circulation is the very definition of economic activity.
Money saved is the very definition of economic inactivity. Nobody borrows
money unless they want to spend it, it makes no sense to borrow it just so you
can keep it in the bank or under a mattress. Money borrowed is money invested.

~~~
tsotha
>A healthy economy will, in most cases, exhibit inflation.

A healthy economy will exhibit _monetary_ inflation as it grows. But there's
no reason for it to exhibit price inflation.

>The government has to print more money to keep up, otherwise it will fall
short of people's needs.

That's a circular argument. It's not like people in a deflationary environment
don't have any money - they have less money, but that money is worth more.

>There's a huge benefit. We want to encourage economic activity over
inactivity.

Sure. I'm just not convinced getting people to go into debt really does that.
Oh, it does in the short run. But once your debts start to pile up not only do
you have to pay for the things you've already purchased, but you have to pay
interest. If, instead of borrowing money, you'd just bought things as you
could afford them, you would end up spending more.

>Money borrowed is money invested.

No, money borrowed is money _spent_. Sometimes that's investment. Sometimes
it's not. If I borrow money to buy a bed made in China, that's not helping the
US economy very much.

The idea deflation is bad for an economy doesn't hold up to historical
scrutiny. The US grew strongly in the 19th century (far more strongly than
today), and during that time it experienced long periods of growth accompanied
by low deflation. People still have to buy food, pay the rent, buy clothes,
etc even when the currency is deflating.

------
tim333
It's a question of what's causing the deflation. If prices fall because
spending has collapsed, people lose their jobs, businesses go bust. This is
what happened in the 1930s depression and it's bad. If prices fall because the
currency is strong making imports cheaper as in the Swiss case then that's not
such a problem.

------
roymurdock
Deflation is a largely misunderstood bogeyman in economics. Ultimately,
central banks are scared of deflation because they lose power over
conventional stimulus tools once the interest rates, and consequently
inflation, reach zero, or move into negative territory due to market forces
outside of the central bank's control.

Why does the Fed see a 2% yearly inflation target as good?

 _The Committee judges that inflation at the rate of 2 percent, as measured by
the annual change in the price index for personal consumption expenditures, is
most consistent over the longer run with the Federal Reserve 's statutory
mandate. Communicating this inflation goal clearly to the public helps keep
longer-term inflation expectations firmly anchored, thereby fostering price
stability and moderate long-term interest rates and enhancing the Committee’s
ability to promote maximum employment in the face of significant economic
disturbances._

Very vague and hand-wavey, but basically just saying that they like to have a
2% cushion between expected inflation and the traditional 0% floor, beyond
which lies the spooooooky land of deflation. This 2% gives them room to raise
and lower the federal funds rate (short term interest rate) to their heart's
content without setting off any deflationary fire alarms in the economy. If
you're really interested, here's a good overview from Bernanke (2003) on how
and why the practice got started in the 1970s. [2]

Ok, let's see what our favorite Austrian economist, Friedrich von Hayek has to
say about inflation targeting: "any form of inflation, even mild inflations,
ultimately produce the recurring depressions and unemployment which have been
a justified grievance against the free enterprise system and must be prevented
if a free society is to survive." [1]

He argues that inflation distorts signals such as price and profit. This leads
to the misallocation of resources to firms that look good on paper, but that
could actually be failing to produce meaningful and sustainable economic
returns:

 _The initial general stimulus which an increase of the quantity of money
provides is chiefly due to the fact that prices and therefore profits turn out
to be higher than expected. Every venture succeeds, including even some which
ought to fail. But this can last only so long as the continuous rise of prices
is not generally expected. Once people learn to count on it, even a continued
rise of prices at the same rate will no longer exert the stimulus that it gave
at first._

One might argue that we are seeing QE inflation, not in the direct economy,
but in the investment market - property, stocks, bonds, anything traded not
for short-term consumption, but for capital gains. I don't have the data, so I
don't know.

Ultimately, it doesn't matter if we have small amounts of inflation or
deflation, or if we have no change in the money supply at all. _Expectations_
are what matters - if the markets know that inflation will be 10% next year
with 100% certainty, they will plan accordingly and prices/wages will rise
accordingly (not perfectly as there will be some friction/lag, but better than
if nobody knows what to expect inflation-wise). The problem occurs when nobody
knows what the hell is going on in the market, and they keep waiting for the
Fed to raise interest rates to get back to 2%, but are losing faith because
the Fed has kept rates at 0% for 6 years (!) now. It's all about unexpected
shocks and how quickly the economy can adjust to new information.

Deflation is not to be feared if it is expected, announced, and executed by a
central bank. It _is_ to be feared when the central bank is fighting valiantly
to bring about a favorable economic background in which they can raise
interest rates without slowing down the recovery/growth of the economy. That's
when you know they've lost control, that everything is not ok in the financial
markets, and when panic takes over.

[1] [https://mises.org/library/denationalisation-money-
argument-r...](https://mises.org/library/denationalisation-money-argument-
refined)

[2]
[http://www.federalreserve.gov/Boarddocs/speeches/2003/200303...](http://www.federalreserve.gov/Boarddocs/speeches/2003/20030325/default.htm)

~~~
evanpw
Here is another quote from Hayek: "I agree with Milton Friedman that once the
Crash had occurred, the Federal Reserve System pursued a silly deflationary
policy. I am not only against inflation but I am also against deflation. So,
once again, a badly programmed monetary policy prolonged the depression."

~~~
nickff
Eugene Fama once countered Freidman by pointing out the fact that (according
to Friedman's data) the US banks had massive free reserves during the great
depression, but they were not making loans, thus it is not clear that the
Federal Reserve had anything to do with the deflation (or could have done
anything about it). According to Fama (as the conversation was in private),
Friedman neither refuted the argument, nor did he admit he was wrong.[1]

[1]
[http://www.econtalk.org/archives/2012/01/fama_on_finance.htm...](http://www.econtalk.org/archives/2012/01/fama_on_finance.html)

------
scribu
The article is behind a paywall, unless you access it via a Google search.

~~~
binaryanomaly
Yep, always wonder why folks post these at all, here...

~~~
morgante
Because it's an interesting article which is trivially easy to access.

~~~
GalacticDomin8r
trivially easy to access == clicking a link and reading expected article.

hyperbole == most things which contain the word 'trivially'.

I'd bet a dollar most of us have better things to do than find a way around a
paywall.

~~~
morgante
It takes about 3 seconds to Google the article title, far less than it takes
to write incessant complaints about people charging for content.

~~~
caminante
I think the nuance is that the WSJ offers a non-paywall link in its interface
-- which the WSJ encourages folks to use. Not all paywall sites offer this
functionality.

These comments help make the poster aware. If the poster is aware and still
doesn't use the non-paywall link, then that's wasting everyone's time.

------
sauronlord
"Deflation death spiral" "Hoarding"

Any else notice how harsh the language is yet there is not one actual case of
it occurring in the wild?

Looks to me like the powerful are doing a good job at keeping inflation above
0%

Even 0.1% (tenth of a percent) is disastrous for a currency over 500 years.

You know why we're told ( and we are told, since there are no actual
experiments performed on this matter)... it's because the system of extracting
value from the unsuspecting consumer/middle-class/non-investor is based on the
assumption that having money means you should automatically get more of it in
the form of interest.

People still have to eat, cloth their children and get a roof over their
heads. Many people are not in a situation to "hoard": they are struggling to
merely stay afloat.

The target should be 0% ( or very close to 0% like 0.01%) inflation. But that
would mean investors would actually have to provide greater and greater value
to the world.

~~~
evanpw
> Looks to me like the powerful are doing a good job at keeping inflation
> above 0%

I've seen the opposite argument much more often: the rich and powerful are
pressuring central banks to keep inflation too low to help with unemployment,
because higher inflation hurts savers and helps borrowers. I don't buy the
conspiracy theory in either direction, but the pro-inflation direction
especially doesn't make sense to me.

~~~
tsotha
What you're missing is people with first access to new money are the ones who
benefit the most in an inflationary environment. In a fractional reserve
system that's the banks. Banks generally benefit from higher inflation up
until the point where it's high enough to damage the economy.

It should come as no surprise that banks spend so much to influence public
opinion and the political process.

~~~
evanpw
That doesn't make very much sense to me. It's not as if the "new dollars" are
worth $1.02, while the "old dollars" are worth $1.00. Some people talk about
"Cantillon Effects" in the context of QE, but it's a pretty fringe idea. The
first-order effect is: banks are owed an amount of money denominated in
nominal terms, and inflation will decrease the value of those debts. And even
if this theory _was_ true, inflation has been historically low (and below
central-bank targets) for quite a few years, so whoever is pushing for higher
inflation isn't very good at it.

~~~
tsotha
>That doesn't make very much sense to me. It's not as if the "new dollars" are
worth $1.02, while the "old dollars" are worth $1.00.

It's very much like that, actually, except it's more like the new dollars are
worth $1.00 and the old ones are now worth $0.98. The important factor is
time. Suppose we live on an island and have a currency we'll call a "foo".
There are 100 foos in circulation. Tax collection isn't what it should be, so
the president of the island borrows ten foos from the central bank (which,
like the fed, just updates the computer to create them) and uses them to pay
the presidential guard.

When he spends those ten extra foos, the president is getting the current
purchasing power of the foo. It will take some time for the value of each foo
to adjust down to take into account there are now 110 foos instead of just
100. Two weeks from now everything priced in foos will have risen 10%, but
since the economy didn't "know" about the extra foos the president was able to
spend them at full value.

>The first-order effect is: banks are owed an amount of money denominated in
nominal terms, and inflation will decrease the value of those debts.

That's true, but the bank isn't going to loan you money without taking
inflation into account. That's why loan interest rates go up when inflation
goes up.

Also, the bank is borrowing the money they're loaning to you, and after they
make the loan they're going to sell it off to a GSE or market investors. So
someone else is ultimately holding the bag if there's inflation.

>And even if this theory was true, inflation has been historically low (and
below central-bank targets) for quite a few years, so whoever is pushing for
higher inflation isn't very good at it.

Well, yes. The problem is two-fold. The first part is in a fractional reserve
system the money supply depends on qualified candidates willing to borrow. In
the midst of a recession there just aren't as many of them - people without
jobs aren't buying houses, and businesses aren't expanding. So less new money
is created.

The second part is loan defaults destroy money. If you get enough defaults
you're going to get deflation.

It's not like the banks didn't get their money's worth, though, as the
government used every trick in the book to add money to the economy. At one
point in time the government was borrowing forty cents of every dollar it
spent, and the Fed was injecting more directly though QE.

