Three stories from the trenches of deflation…

The discussion whether these are inflatory or deflatory times in The Netherlands is always very hard to win from a technical point of view. Endorsers of both sides look for clues in the daily stream of economic information and get enough ammunition to defend their stance against any attack from the opposite party.

In favor of the inflationista’s are:

• The 3 percent of consumer inflation in The Netherlands, as measured / calculated by the Dutch Central Bureau of Statistics;
  
• The higher taxes, penalties and levies that are applied on the Dutch citizens, as central and local governments are hoarding cash from their inhabitants to compensate for losses at other sources of income, like ground sales, corporate taxes and V.A.T-income;
  
• Generally higher costs of living for the Dutch citizens, as the Dutch government are cutting costs everywhere. This leads to: 
• reduced scholarships for students; 
• reduced subsidies for home improvement and production / usage of renewable energy; 
• a strong reduction of healthcare compensation by the government and the joint insurance companies; 
• central and local governments lowering their general service level towards companies and consumers and asking more money for equal or better service
  
• Higher prices for food, in combination with the still high prices for energy; 
• Did you also notice that higher oil and gas prices are always immediately leading to higher consumer prices, while lower oil and gas prices take their time before leading to lower consumer prices eventually?!
  
• Higher prices for planes, trains and automobiles;

Although these seem to be strong arguments for inflationary times, you will notice that all of the aforementioned price increases have been caused by either the Dutch central and local governments, or by the scarcity of food and energy. In both cases, this has little to do with the reduced purchase power of the Euro.

It is my conviction that these are not inflationary, but DEflationary times:

• Housing is getting cheaper and cheaper per day and there is no halt to this price action yet;
  
• Companies are laying off people at an ever higher rate. While excess personnel was still tolerated and maintained at the beginning of the crisis in 2009, companies are now ready to dump their ‘overcomplete’ workers as soon as possible;
  
• Service-oriented companies, whether these are hi-tech ICT and consultancy services or lo-tech cleaning and maintenance services, want the most ‘bang for their buck’ and hire people from the low wage countries inside and outside Europe. This has a strong downward effect on all salaries in these industries;
  
• Consumers have been keeping their wallets deep in their pockets in 2012, in spite of the jubilant stories upon Sinterklaas (i.e. the Dutch, original Santa Claus) and X-mas sales in The Netherlands. Year-on-year sales in December, 2012 was 4.1% lower, in spite of 2.8% higher prices, as volume declined by a staggering 6.7%;
  
• The Dutch hotels and restaurants outside the obvious tourist magnets, like Amsterdam, The Hague and the Zeeland province go through very rough times and many of those perish in their struggle for survival.
  
• People, apart from the usual suspects (millionaires and celebrities) are not doing ‘more for less’, but are just doing ‘less for less’;
   

As I said, these are deflationary times… In the following lines, I want to bring some stories from ‘the trenches of deflation’.

Infotheek computers

Today, on BNR Business Radio (www.bnr.nl), there was an interview with Jordy Kool of Infotheek Computers. This large supplier of computer appliances (PC’s, notebooks, iPads and additional products) specializes in the so-called End-of-Life (EoL) products: computer appliances that are at the end of their production and sales lifecycle.  

Infotheek sells these EoL computers in the following ‘flavours’:

• Obsolete, but new (never used); 
• Hardly used, good-as-new; 
• Used, but refurbished; 

These computers have been sold at discounts, ranging from 10% to 50%, to a wide array of customers in The Netherlands and other countries within the EU:

• Local governments;
• Hospitals;
• Healthcare institutions and homes for the elderly;
• Schools;
• Business-2-business;

Business has been booming for Infotheek lately: their sales showed an average growth over the last three years from 30% to 35% annually. Sales in 2012 rose even by 45% y-o-y to €174 mln from €117 mln.

There is one quote from this interview that I don’t want to deny you:

“The PC is dead?! No way! Of course the market for iPads and Notebooks is booming, but a lot of people still want a normal PC. These people don’t need the latest models with the latest features, but just need a plain, bread-and-butter PC at a very good price. If they get an average discount of €200 per workplace for 1000 workplaces, they save a fortune.

Some companies and institutions will be using these PC’s for no less than five to seven years, so ‘obsolescence’ is not an issue. The fact that the PC 'as a concept' has been written off by large companies, like Intel, and by various pundits, is an opportunity for us”.

Only a few years ago, it would be unthinkable that governments and companies would buy outdated or refurbished, second-hand computers. The fact that it is increasingly popular, also among commercial companies, is a strong deflationary signal.

Lower salaries for workers in the financial industry

Last Monday, 11 February 2013, the rookie chairman of the Euro-group and Dutch finance minister Jeroen Dijsselbloem held an impassioned elucidation upon the ‘excess salaries’ in the finance industry, and to be more precise ‘the banks’.

The bottom line of his speech was: ‘It cannot be true that an industry that needed so much state support in the recent past and that is still on a state drip, as we speak, pays these kinds of excess salaries to its workers?!”

Dijsselbloem pleaded to break open the current collective labour agreements (CAO’s) for the banking industry. These CAO’s contain the standard wage scales for worker remuneration and other perks (secondary terms of labour, pension payments, discounts on bank products and mortgages etc.) for the banking industry, that have been negotiated between employers and employees’ representatives. 

In his speech, Dijsselbloem was not only referring to the high-risk, high-salary, high-bonus workers of the banking industry, but to ALL workers in the banking industry: from the catering-lady to a junior-accountant at the ‘intensive customer management’ department and a third-level manager of 'commercial banking'.

I condemn this speech by Finance Minister Jeroen Dijsselbloem for four reasons:

• Normal workers in the banking industry are well-paid, but not overpaid, in my humble opinion. Most workers earn a decent salary for hard hours of knowledge-intensive and strenuous labour in a highly-demanding environment. Judging all workers in the banking industry for the excesses of a ‘happy few’ is unwise and unfair;
  
• Many jobs in the banking industry are already on the line (see the next paragraph) and many more will follow shortly in my opinion. The remaining workers will have to do more work than before, as they have to pick up some work from their former colleagues too. Paying them less salary for much more work would be offensive and not fair;
  
  
• Wage restraint and its ugly brother wage reduction are one of the decisive factors, which are keeping the domestic consumption in The Netherlands in a near-comatose state. People that have an outlook towards reduced wages and (strongly) diminished purchase power, just spend less money. It’s as simple as that…
  
• The Finance Minister held this speech, knowing very well that he doesn’t have any jurisdiction concerning these current CAO’s, as these are bilateral agreements between employers (organizations) and the employees. He used / abused his position as Finance Minister (and ‘owner’ of the two large banks ABN Amro and SNS Bank) to stir up the discussion on banking salaries.

Still, speeches like these stick in the ears of the large employers and might be used in future negotiations with the labour unions (“the finance minister was also pleading for wage restraint”). This circumstance turned this speech in a deflationary signal.

Additional job losses at ING Bank

ING Groep NV (ING), a company that is very dear to me, announced today another round of mass lay-offs, coming on top of earlier mass lay-offs. This time 1400 jobs / FTE’s  (full-time equivalent) within ‘domestic banking’ (Dutch branch of ING consumer banking) will be lost (the nett loss will be 1150 FTE’s):

• 1000 employees of ING Bank will lose their job;
• 400 external employees with longterm contracts will lose their job;
• However, 250 new jobs will be created, due to changes in strategy;

The explanation from CEO Jan Hommen of ING Groep NV has been that the reduced amount of customer-visits to domestic bank shops and the reduced demand for certain bankshop services forced the bank to lay off these workers.

How truthful this explanation might be, there is also the circumstance that the Dutch banks are still nowhere near meeting the Basel III demands. Most of these lay offs are just to reduce expenses; whatever the executives tell you about it.

Also within the ICT department of the ING Bank, which I know very well, a few hundreds of jobs are on the line: last year, all 2000+ workers of this department heard that they had to apply for a slightly different, future job. This meant that nobody within this department was certain anymore that he could keep his current job. 

From May 1st of 2013, a ‘leaner and meaner’ ICT organization must adapt to another way of working. In reality, this will probably mean that at least 10% to 20% of these jobs will be lost. While these particular lay-offs are shrouded in good intentions and new strategies too, austerity is also here the elephant in the room.

Again, a signal from a deflationary world…