Deflation, Swiss Bank Accounts, etc.
April 5, 2009 5:29 PM   Subscribe

What's the risk of deflation? No one knows for sure, but it cannot be ruled out--as first Japan, and now Switzerland are finding out. While Japan's troubles may sound familiar, Switzerland's situation is somewhat unique: beyond the question of its currency, the issue of tax havens has put its banks in a delicate position.
posted by ornate insect (15 comments total) 2 users marked this as a favorite
 
As someone sitting with 4 years of savings sitting in cash and bonds and no debt I welcome deflation with wide open arms.
posted by PenDevil at 5:51 PM on April 5, 2009


PenDevil--be careful what you wish for. While a deflationary spiral is not necessarily catastrophic, a least one well-connected economic historian views the risk of deflation as something to be avoided at all costs. Literally.
posted by ornate insect at 6:03 PM on April 5, 2009


I am not an economist. Why can't governments prevent deflation by printing money?
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 7:23 PM on April 5, 2009


What I find most fascinating about the deflation question is that it is one of those questions that still remains unanswered and is a rather contentious issue amongst economists and financial analysts.

Many incorrectly purchased hedges against inflation in early-mid 2008 and got seriously burned as a result (SEE: agriculture, energy, foreign currency, metals, etc.). It was argued amongst some circles towards the end of 2008 that both "decoupling" and "inflation" is dead, with the decline of the US economy causing the entire world to go down with it and with the effect of everyone piling into US Treasures and avoiding any spending (and thereby creating massive reduction in the Velocity of Money which is one of the primary drivers in the present deflationary environment). There is no doubt that on the downward slope of a depression, that decoupling and inflation is a dead and foolish argument to make.

What I'm hearing, and am beginning to give some credence towards, is some new rumblings that we may see a decoupling in getting out of the recession. China and other emerging markets may get out of the recession quicker by boosting domestic demand and spending, by effectively spending (or reducing their allocation towards) foreign reserves. A Chinese recovery combined with extensive US fiscal spending paid for with quantitative easing (printing money) may be the only way to pay for our social programs. Seeing as China is the world's manufacturer, any relative strength in China creates pressure towards the US markets and currency strength.

One of the worst trades in late 2008 was to believe in inflation and decoupling, it would be fairly interesting if it proves to be the best trade in late 2009.
posted by amuseDetachment at 7:29 PM on April 5, 2009


I am not an economist. Why can't governments prevent deflation by printing money?
In theory, they can. Right now the US and UK are doing just this, called Quantative Easing.
In practice, there are complications. Inherent in the QE process is the likelihood that even if it works perfectly, there will be more inflation than wanted as you cannot see if it is working except in historical figures like the CPI.
This worries some international investors (China) who do not want inflation to erode the value of the US treasuries they hold, and do not want the likely accompanying drop in the USD itself.
As the US needs to sell trillions of $ worth of government bonds over the next year or so, it needs to keep the buyers of these happy, which limits the degree they can inflate.
posted by bystander at 8:07 PM on April 5, 2009


Meanwhile, Canada's Finance Minister (he's not the brightest guy) is worried about inflation.
posted by KokuRyu at 8:21 PM on April 5, 2009


I am not an economist. Why can't governments prevent deflation by printing money?

Because in times of uncertainty and falling prices people will still wait for goods to get cheaper, tighten their belts and just generally not purchase anything but essentials.

Personally I've had to hold off buying a new computer because the Australian dollar has been hammered and the prices for new gear has gone sky high. I've completely cleared my debts (I only had about US$1000 revolving on the CC bill) instead and started squirreling money away. I also bought all my big gear (new TV, new monitors) right before the dollar crashing so I've really got nothing to else to buy.

I know I'm just contributing to the problem but whatever. We've been living too good on the credit card too long.
posted by Talez at 9:11 PM on April 5, 2009


panicfilter
posted by oxidizer at 2:36 AM on April 6, 2009


The issue of tax havens is an exercise in hysteria, and avoids the real problem.

We've long known that as nominal rates of taxation increase so does avoidance. This should be self evident - the crime pays more as rates increase. If there are sharp differences in tax rates between two regimes then capital will flow to where it can be deployed with less taxes, less friction. This is undisputedly true for both multinational corporations as well as individuals, although it seems as though the rights of the latter group are under attack here.

When I was working in Germany it was common for folks to drive to Luxembourg with large amounts of Deutschemarks (this was pre Euro) - why? Because they were effectively being penalised by the German government for being frugal and saving. German tax rates were confiscatory on liquid savings. At the time Luxembourg had one of the lowest tax rates in continental Europe. The people I knew weren't undertaking these day trips out of boredom; they were moving their capital to where taxes were much lower to get the most they could out of their savings, to insure their future. Whether or not they were committing crimes by not declaring these funds is secondary to individuals having the same right as corporations - to place their money where it can earn the highest return. This fundamental right seems to be ignored in the current wave of hysteria.

I find the entire UBS focus and US Government persecution of UBS staff troublesome for many reasons.

Some folks at that bank clearly broke American law by aiding and abetting the evasion of US taxes. However much larger numbers of staff never broke a US law and were never party to any plans to do so but yet their liberty is in jeopardy. I have friends at UBS and internal memoes are advising against any travel to The United States, even for folks that aren't part of the wealth management division. This seems a dangerous precedent.

It should go without saying, but much of what the United States does isn't wildly popular in many parts of the world. Something like this could easily backfire, with Americans finding themselves detained by foreign entities who are upset about some activities of their employers.

Finally, the Washington Post article seems all over the place. It starts out by decrying tax havens but then finishes up with "The current crisis also has made investors more nervous about risk, and authorities say the lack of transparency in tax havens is making foreigners more nervous about depositing their money there." I must be missing the point - won't the problem resolve itself then?

Keep in mind that many tax havens don't have any other business or development opportunities available to them other than financial services. They tend to have very, very rigorous laws in place protecting the rights of depositors, and regulatory systems that in many cases mandate higher capital ratios than most G7 countries.

I know folks who have money in various domiciles across continental Europe, and haven't heard of anyone "nervous" about depositing funds into a Luxembourg based bank. In fact while I was working for Deutsche Bank it was widely known our most profitable branch (by several orders of magnitude no less!) was based in Luxembourg.
posted by Mutant at 3:11 AM on April 6, 2009 [1 favorite]


As someone sitting with 4 years of savings sitting in cash and bonds and no debt I welcome deflation with wide open arms.

I know the feeling. I appreciate the danger of a deflationary spiral, but it's hard to root for inflation when you're debt free and sitting on savings. My cunning plan is to buy a house just before inflation really takes off. How will I know when that is going to happen? I'm counting on a combination of luck and divine intervention.
posted by diogenes at 6:54 AM on April 6, 2009


Can't find the link (Asia Times, I had thought- possibly FT?), but I was reading recently the suggestion that China's intermediate plan is to quietly use its dollar reserves to lock in commodities while they are cheap, dabble in (more) treasuries simply to keep the dollar more or less stable, and with luck, be out of the game when the dollar collapses.

Here's hoping PenDevil, diogenes, and I can get our nice houses before inflation or hyperinflation raise their ugly heads.
posted by IndigoJones at 6:51 PM on April 6, 2009


This is a question? In the place I come from, consultants are doing 20-30% more free work up front, cutting their fees 30-40%, and competing against 50-60% more consultants who are all chasing the same thing. Deflation is here now.
posted by wallstreet1929 at 8:33 PM on April 6, 2009


Just to respond to Mutant's comment about leveling the playing field for individual tax evasion with corporate tax avoidance.
Carting your money across border to evade tax is illegal. For reasons that aren't very honourable, corporations can do this without breaking laws, but that doesn't make it legal for an individual to do the same. The fix isn't to allow individuals to escape taxation, but to make a fairer system.
Corporations benefit as much as real people from the taxes collected where they operate, in terms of the benefits the state provides for their workforce and customer base. Real people obviously benefit too.
I'd like to see a revision of the rules that forced all tax paying entities to comply with the tax regimes where they make their incomes.
At the moment, real people have migration restrictions in place that hinder their ability to operate in tax havens, and I'm not really sure why corporations should be any different.
I was looking at a machine tools company in the US Fortune 500 today that is domiciled in the Caymans. Clearly their main source of income is linked to the $5b+ in revenue they booked in the US, but presumably they recognise most of their profits in the Caymans for tax reasons.
Why not eliminate payroll, income and corporate taxes and move to a sales tax or consumption tax to capture this value so the regions where the economic value is added see the tax benefit?
I'm personally OK with the idea of Ebay or similar incorporating wherever they like as long as the taxes are paid where they do business in a way that reflects their income in that area.
The real question is how to apply a progressive tax regime in such a model. Maybe a variant of a Tobin tax needs to be considered? We certainly haven't had the political will to look at it before, but maybe now.
I'm not 100% sure how a deflation post got me posting about international taxation, but there you are ;-)
posted by bystander at 6:04 AM on April 7, 2009


And for the record, I'll state I expect significantly above desirable inflation will be the result of current QE policies. I'm not suggesting a Weimar or Zimbabwean style event, as I think it will be driven by the USA which can manage its currency to avoid that (because T-bills are issued in USD), but I can't see how the great influx of liquidity can happen without it ultimately leading to significant inflation (5%+ annual).
I suspect that it will take the form of stagflation, with increased commodity prices, especially energy and food, biting against pretty stagnant wages, leading to an overall decline in living standards. Those parts of the economy still able to push for wage increases due to a strong union will get them, but many will be left behind.
The net result being most people will be poorer, due to either reduced capital values of investments (including houses) or stagnant wages while the price of goods goes up.
Mind you, the UK is looking wonky, and may be the G7 member that cops it worst (oops, I initially wrote OECD till I saw Iceland, Ireland and Mexico were in the OECD, and who don't need any predictive powers to say they are screwed).
All this, of course, impacts the developing world hardest.
posted by bystander at 6:53 AM on April 7, 2009


Finally, the Washington Post article seems all over the place.

I guess that's what happens when you gut your business coverage.
posted by Pollomacho at 7:08 AM on April 7, 2009


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