Weekly international investment round up to 25 November 2008
• Can falling prices be anything but good news?
• Pre-Christmas sales and fiscal stimulus plans set to continue
Last weekend saw retailers across Europe offering massive pre-Christmas discounts to entice shoppers to part with their cash. According to figures released by accountancy firm Ernst and Young, the number of promotions on the UK high street alone has increased by 11 per cent when compared to the same period last year with popular stores such as Marks and Spencer and Debenhams tempting shoppers with prices usually reserved for the January sales period. Amazingly, it is reported that Woolworth’s entire chain of 800 high street stores can be snapped up for just a quid after it suffered a first-half pre-tax loss of over £90 million!
It is only natural for hard hit consumers to welcome such offers and other falling prices with open arms, after all we belong to a generation which has long been told inflation is the key risk to our prosperity but what about the forgotten monster in the cupboard – deflation?
While lower costs certainly appear to be a good thing such ‘reductions’ are different from ‘real deflation’ which is the darker side of falling prices. According to investorwords.com the definition of deflation is “a decline in general price levels, often caused by a reduction in the supply of money or credit.” Furthermore, it goes on to state that it can be brought about by direct contractions in spending, either in the form of a reduction in government spending or investment spending and that a side effect of deflation could see an increasing level of unemployment in an economy since the process often leads to a lower level of demand.
A good explanation of deflation is offered by the information resource ‘Inflation Data’ when it imagines an island that has only 10 equally desirable goods with only ten €1 coins in circulation, from this it can be assumed that each item will end up costing €1 each.
If the quantity of money increases to €20 on this island, without increasing the quantity of goods, their price will eventually increase to €2, this is inflation. If, however, the quantity of money decreases to €5, their price will eventually fall to 50 cents and this is what the first part of the above definition of deflation is referring to. On this particular island the money supply can be reduced for example if someone hoards half of it and refuses to spend it on anything no matter what, thus creating a reduction in spending.
Price levels are therefore not only based upon the supply and demand for any given item but also the value of the money used to pay for them – money too has its own supply and demand.
Good deflation happens when the actual quantity of goods increases (stimulating employment) thus placing pressure on prices to naturally fall while it could be said that bad deflation is caused by a decreasing supply of money and a loss of liquidity.
Investors and consumers will therefore continue to see high street stores and governments alike continue to conjure up imaginative ways to encourage money to be circulated in order to defend us all against the dreaded deflation.
Mark Lamb is Director of FPC Investment Consultants who are Independent Financial Advisers and regulated by the MFSA to provide investment services under the investment services act 1994. For further details please contact Mark Lamb, by email on [email protected] by phone on 21318008 or through FPC’s website www.fpcmalta.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek independent financial advice before making any investment decision.
