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Tuesday, September 16, 2014 9:50 PM

One Thing You Can Always Count On

Congratulations (of sorts) go to French prime minister Manuel Valls for being able to count sheep properly.

Valls staged a vote of confidence in French parliament even though polls show 62% of voters would like president Francois Hollande to step down now.

In spite of what the public wants, Valls was certain of the outcome in advance.

Why? Because a vote of no confidence would have triggered new elections and leftist parties would have gotten clobbered.

Count on This

One thing that is always safe to count on is politicians won't vote themselves out of office.

Sure enough, Valls wins confidence vote and vows to press on with France reform.

France’s prime minister on Tuesday vowed to continue his reformist drive as he won a crucial confidence vote to strengthen his hand in efforts to restart the country’s faltering economy.

Manuel Valls said restoring competitiveness was “indispensable” for reigniting growth yet he stopped short of touching the 35-hour working week or other closely held symbols of his Socialist party’s left.

Well then - by all means let's have reform ... as long as it does not touch anything socialists want.

Did this strengthen Valls' hand? Hardly.

This staged maneuver will upset socialists who do not want any reform at all as well as conservatives who want real reforms.

The favorable rating for Hollande is 13%, a new record low. Barring some miraculous turn around in the French economy, expect support for Valls to plunge to new lows as well.

Mike "Mish" Shedlock

12:53 PM

Counting Sheep: French Government Faces Second No Confidence Vote in Six Months

Second No Confidence Vote in Six Months

In spite of the fact the Socialist party holds a majority of just 1 in the 577-seat lower house, French prime minister Manual Valls hopes to stabilize things with a Second No Confidence Vote in Six Months.

Mr Valls could see a narrowing of his majority compared with the vote when he was first appointed prime minister at the end of March after a big socialist loss in local elections. Then he won by a margin of 306 votes to 239 against, with 26 abstentions.

“Valls is politically and economically archaic. He is taking solutions from (Tony) Blair and (Gerhard) Schroeder that don’t work any more,” Pascal Cherki, a leftwinger who abstained in the previous confidence vote in April, told RMC radio.

But the government has support from within other leftwing parties. Mr Valls is also betting that socialist rebels would not want to cause the downfall of the government, as this would trigger legislative elections and almost certain defeat for the socialists.

A win for the government would also not erase uncertainty as it will be closely followed by the presentation of the 2015 budget to parliament next month, which economists are concerned could face a delay in approval amid political upheaval.

Opinion polls underscore the sense of leadership crisis in the eurozone’s second-largest economy. One last week showed 62 per cent of electors wanted Mr Hollande to step down before his term ends in 2017.
Counting Sheep

Given that Valls needs support from other left-wing parties to survive, he would not voluntarily call for the vote unless he was pretty certain of the outcome. Surprises can happen, but I suspect Valls counted the sheep properly.

Can the vote really inspire confidence in the government as Valls hopes?

Of course not. The fact that 62% of the electorate hopes Hollande will step down as president is not very inspiring, and it's certainly nothing a vote of confidence can fix.

That such a stunt is even needed shows weakness.

Assuming the government survives the vote, the only reason will be fear of Marine Le Pen's Front National Party picking up more seats at socialist expense in a new election.

For more on Front National please see Marine Le Pen Ahead of Hollande in France Presidential Poll; Le Pen Blames EU for Crisis in Ukraine 

Looking Ahead to 2017

The next scheduled national election is in 2017. Will Hollande even survive that long? Perhaps not if socialists decide to take their lumps sooner rather than later.

Mike "Mish" Shedlock

Monday, September 15, 2014 7:42 PM

Deflationary Spiral Nonsense; Keynesian Theory vs. Practice; Eurozone Policymakers Concerned About Falling Prices

Price Deflation Hits Italy First Time in 55 Years

The Italian National Institute of Statistics (ISTAT) reports that consumer price inflation declined by 0.1% from August 2013 to August 2014.

Italian consumer prices fell 0.1 percent year-on-year in August of 2014, matching preliminary estimates. The country’s annual inflation rate touched the negative territory for the first time in nearly 55 years due to a drop in energy prices.

Year-on-year, prices of energy fell 3.6 percent in August, mainly driven by a 1.2 percent drop in cost of non-regulated energy products. Additional downward pressures came from food cost (-0.5 percent), mainly unprocessed food (-1.8 percent) and communication (-9.0 percent). Meanwhile, prices of services slowed (0.6 percent in August compared with a 0.7 percent increase in July).
Italy CPI 2000 - 2014

Eurozone Policymakers Concerned About Falling Prices

A Financial Times headline portrays falling prices as a negative thing: Deflation Takes Shine Off Sales for Italy’s Shopkeepers.
The appearance of deflation in Italy suggests a worrying spread from Spain, another peripheral eurozone economy, where it reared its head this year. Deflation is now stalking the home of Rome-born Mario Draghi, the European Central Bank president, who has sounded the alarm about the need to restore growth across the continent and has taken aggressive and unorthodox measures to do so.

Matteo Renzi, the youthful prime minister who gained power in February with an agenda of radical economic and political reform, acknowledged last week that growth would in fact be “around zero” this year.

The hope is that lower prices will start luring Italians back to the shops. But policy makers – particularly Mr Draghi and other ECB officials – do not seem to be betting on the resurgence of the Italian consumer.

They have been more focused on – and fearful of – the worst case: that the country, along with the eurozone more generally, could fall into a deflationary spiral, in which consumers hold off purchases in the expectation that prices will fall even further. Deflation would also raise the real value of Italy’s monumental €2.1tn public debt load, causing angst among investors.

“Even if you think the probability of damaging deflation is low, if it were to happen it’s a disaster,” says Erik Nielsen, global chief economist at UniCredit, the Italian bank. “The ECB was right to take out an insurance policy against it,” he adds, referring to measures including interest rate cuts the central bank took this month.
Deflationary Spiral Nonsense

The idea that falling prices are bad for the economy is ridiculous. Taking out insurance against falling prices is even more absurd.

Ask any consumer if he wants lower gas prices, lower food prices, lower hotel prices, lower computer prices, or lower prices on any consumer items and the answer will be yes.

Next, ask any consumer who needs a coat, computer, TV, or any other needed item if he would he wait a year to buy one because prices were falling.

Assuming the consumer had enough money to buy any needed item, he would buy that item now.

Thus, the entire deflationary spiral concept of consumers delaying purchases because prices are falling is ridiculous.

Keynesian Theory vs. Practice

Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it's precisely the opposite.

If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.

In general, people like bargains, and when bargains get big enough, people do not wait for even bigger bargains. Consider Christmas shopping. Most do not wait until after Christmas when bargains are even bigger than before Christmas. 

Yet, these ridiculous myths of consumers waiting because prices are falling as opposed to consumers waiting for prices they can afford have been repeated so many times that people actually believe them.

Delays For Other Reasons

People do delay purchases if they don't have a job, or the money, or they perceive prices are simply too high.

The problem is typically debt, not falling prices. If consumers have too much debt or too little income they cannot buy. If businesses have too much debt they cannot expand. If governments have too much debt, they eventually run into problems.

Assets vs. Consumer Goods

Asset prices are different. Consumers will buy houses, stocks, bonds, land, and other assets if they perceive central bank inflation will bail them out with ever-increasing asset price inflation.

Eventually prices get ridiculously stretched. Then when the greater fool stops buying, bubbles burst, asset prices fall, and then debt deflation takes over. Debts cannot be paid back, businesses cannot hire, and consumers out of a job cannot shop.

Keynesian Nonsense

Keynesian economists want government to pick up the slack when businesses fail. That's nonsense. Several decades of Keynesian and Monetarist attempts to jump start the Japanese economy with nothing to show for it but debt to the tune of 250% of GDP should be proof enough.

Falling prices are never the problem. Rather it's central-bank sponsored inflation that causes asset bubbles and promotes debt and malinvestment that is the problem.

The solution, that no central bank cares to promote, is to not sponsor assets bubbles in the first place. Once in asset bubbles, the best thing to do is let the bust play out.

Assuming Japan remains on its current path, the upcoming collapse in the Yen will provide the final proof that Keynesian economics is pure idiocy.

Mike "Mish" Shedlock

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