Google is putting the image archive of the American magazine LIFE online. Over the next few months, this will mean access to some 10 million images, the vast majority of them never published. In the meantime, some of the best-known are already online. Add the text “source:life” to any search in Google Images to specify something from the archive. Browse pictures dating back to the 1750s, though searches max out at 200 results right now.

If you still haven’t whiled away the entire day, there’s an official Monty Python channel on YouTube. As if the site itself weren’t bad enough.

The reason for this swift and adroit response to the question of the day in Spain was that EU Economy and Finance Commissioner Joaquin Almunia (not exactly your garden-variety world authority on macroeconomic topics) had earier said that the Europe’s economies were “facing the prospect of deflation” amidst the worst financial crisis since the 1930s. In fact Fernandez Ordoñez is right, as is his want - right on a technicality. The Eurozone as a whole is almost certainly not heading straight into deflation (yet), but this begs the question which he could have been answering: what about poor little Spain?

As I reported last week, Spain’s consumer price index has now been dropping since June (see chart below), and it is very possible (I would say probable) that the index will move in negative territory throughout 2009 (and possibly by between 1 and 3 percent). True a significant part of the drop at this point is due to the drop in energy costs, but even the core-core index (excluding energy and fresh vegetables) was only up around 0.4% in October (HICP) over June, or an annual 1.2% rate, and it is my very very strong opinion that we will start to see “downwards pass through” as the recession deepens, profits melt (rather than just being squeezed) and everyone struggles hard to try and find a bottom.

According to data from the National Statistics Institute earlier this week, Spanish household spending contracted 1 percent in the third quarter of 2008 over the previous quarter, while investment contracted by 1.9%. We can only realistically expect this process to continue during 2009 and unemployment to continue to rise, creating a considerable capacity overhang which will exert a downward pressure on wages and prices (remember around one third of new employment contracts in Spain are temporary, making salary reductions comparatively straightforward, at least for one part of the labour force).

The Federal Reserve - On The Other Hand - Readies Its Plans

Meantime in the United States the Federal Reserve has been busy stressing that it will do whatever it has to do to ensure the US does not fall into a deflation trap. This view was reinforced by statements from vice-chairman Dohn Kohn yesterday (Wednesday), as US stocks fell below 8,000 on the Dow Jones Index (their lowest level so far in this financial crisis) and consumer prices fell 1% in October when compared with November. That was the largest monthly drop in at least 61 years (since the current index only goes back to 1947). Even core consumer prices, which exclude food and energy, fell by 0.1 percent month on month, and this was the first monthly drop in core prices in more than a quarter of a century.

Don Kohn stressed he did not believe deflation was the most likely outcome for the US economy, but he did say he thought it was a “less remote” possibility than he previously thought.

“Some people have argued that we should save our ammunition, that interest rate cuts aren’t effective,’’ Mr Kohn said. “I think that were we to see this possibility, that we should be very aggressive with our monetary policy, as aggressive as we can be.”

The lions share of the fall in headline inflation, of course, came from energy prices dropping 8.6 per cent. Yesterday crude oil fell to a $53.30 a barrel, its lowest since January 2007.

Treasury inflation-protected securities now indicate that investors anticpate deflation in the US, though Fed officials stressed in interpreting the data that prices were being distorted by a lack of liquidity. The five-year break-even rate, which provides an expectation of future inflation, currently suggests that investors expect annualised inflation at a minus 0.70% rate over the next five years.

It is also worth noting that it is getting much more difficult to read Fed policy intentions, at least as far as movements in the key policy rate go. Massive injections of liquidity have now driven the interbank overnight lending rate to less than half the current 1% Fed FOMC rate. The presence of this gap seems to be now shifting investors’ focus toward the amount of money in the banking system as a better gauge of Fed intentions than possible movements in the policy rate. Kohn in fact stressed that the US central bank is simultaneously reducing interest rates and expanding its balance sheet (in a process known as quantitative easing) and explicitly avoiding reliance on one strategy “in favor of another”.

Analysts point to the surplus cash that banks keep on deposit at the Fed as an important gauge of the Fed’s true monetary-policy stance. These so-called excess reserves have ballooned to $363.6 billion from $2 billion in August as the Fed has added one measure to another in its emergency lending program package. Excess reserves are now bigger than the overnight lending market between banks (aka the federal funds market), but it is in this market thatthe Fed sets its key rate target. As a result of the large volume of excess liquidity it is becoming more and more difficult for Bernanke to control the federal funds rate (he recently described it to the House Financial Services Committee. as an issue he was “working on”) - and the effective federal funds rate was 0.38 percent Novber 18, and has averaged 0.29 percent since the Federal Open Market Committee cut the rate to 1 percent on October 29.

Former St. Louis Fed President William Poole has described this as a move to quantitative easing, a process which forces a large volume of reserves into the banking system with the expectation that banks will start to trade them for a higher-yielding asset. Such quantitative easing in fact formed the backbone of the Bank of Japan anti-deflation stance between 2001 and 2006 (as in the case of the Fed, it was this easing rather than the more headline catching ZIRP - zero interest rate policy - which was doing the bulk of the donkey-work), but it is worth noting that while this policy stabilised Japan’s situation temporarily, the Japanese economy never actually came out of deflation (at least as far as the core core index goes) and now once more under the grip of recession it seems almost certain to fall back even further into negative price territory. The basic problem is that the banks themselves may well fail to freely lend the excess reserves to businesses and consumers, in the process prolonging the credit freeze. That is basically the underlying story of what actually happened in Japan.

Normally, when central banks launch explicit quantitative easing strategies they abandon the interest-rate target and start purchasing assets in order to boost the money supply. This is what Bernanke calls “expanding the Fed’s balance sheet”. Typically, such activities can have two effects on an economy.

In the first place banks can decide to earn more than the nominal rate they earn at the central bank and start to lend aggressively. We have seen no signs of this happening as of yet, and measures of bank reserves are growing faster than most money supply measures. Secondly, the central bank can target some assets that are thought to have a broad impact on the economy, such as Treasuries or mortgage-backed bonds. The US Federal Reserve has already taken a half-step in that direction by purchasing the commercial paper of U.S. corporations at predefined rates. The central bank’s Commercial Paper Funding Facility held $256.1 billion as of November 12.

Basically returning to the issue at the start of this post concerning Miquel Angel Fernandez Ordoñez’s statement on deflation, we should not take everything here at face value. Communicational techniques are different between one side of the Atlantic and the other, and we might note that even Don Kohn says that he doesn’t consider deflation a “likely” outcome (he couldn’t very well say so, could he, as saying it was likely would be like saying in advance that it wasn’t very probable the Fed’s preferred policy option would work, and this he isn’t going to say, even if he has serious concerns about effectiveness).

By the same token all Fernandez Ordoñez has really told us is that the Bank of Spain forceast isn’t currently showing price falls in 2009 (and I am sure it isn’t) but only a pack of fools would draw the conclusion from that that they should have no “plan B” for deflation just in case, and while I may think many things about the current Governing Council at the ECB, a pack of fools I do not think they are. It is also worth remembering that with the present occupant of the Bank of Spain governorship it is very important that you read the fine print in what he says, since while he definitely tells the truth, and nothing but the truth, he doesn’t always tell “the whole” truth, as when he said that Spanish banks had no exposure to off-balance-sheet SIV-type securitisation (which it didn’t), which is not the same thing as saying Spanish banks have no exposure to potentially toxic instruments, since as we are now seeing they do, and I’m sure he was aware of that at the time. Prudently, he was simply keeping his fingers crossed, and saying what he had to say.

Like Chalk and Cheese, Definitely Not Two Of A Kind

So we should be aware that Señor Ordoñez is a very astute customer, which Joaquin Almunia evidently isn’t, and the difference between the two is apparent in the way the former has to rapidly jump up out of his foxhole in an attempt to undo the damage potentially done by the latter’s rather eyebrow raising “faux-pas”.

And just to ram the matter home, I will leave you with an earlier effort on the part of our much beloved Economy and Finance Commissioner to win for himself the acollade of economic illiterate of the year.

The European Union’s Economic and Monetary Affairs Commissioner Joaquin Almunia said on Monday (27 October) that while lower financing costs were needed interest rates should not fall to negative levels in real terms.

“At this moment, it would be good for the cost of financing to go down,” Almunia told a live Internet chat with readers of Spanish newspaper El Pais (www.elpais.com), adding: “We shouldn’t go back to a situation in which real interest rates are negative, as we know from experience that this leads to excess indebtedness, low perception of risk and new bubbles which always end by blowing up in our faces.” Almunia said it was hard to say how long the present bout of financial turbulence would last but he thought the uncertainty plaguing markets should have cleared with a year.

Essentially two things are being confused here. Negative interest rates (such as those Spain had between 2002 and 2006, you know, the ones that lead to the current crisis) are highly undesireable during the upswing in a business cycle, since you are simply giving more stimulus to economies which are already stretched to capacity - and negative rates may thus produce “bubbles”, as they obviously did in both Ireland and Spain - but they are of course highly desireable during a downturn, and especially during recessions, since they can stimulate slumping economies. And of course, we are all currently heading into one of the most important recessions since WWII, or hadn’t our “machine-reader” commissioner noticed?

I mean, as I say, basically the man is a total economic illiterate, and indeed his policy pronouncements more often than not lead me to feel what the Spanish would call “verguenza ajena” for any club of economists who would entertain him as a member, or indeed group of Commissioners who get stuck with him fielding the economics portfolio. And what better proof of all of this could there be? Well, take a sneak peak at the above chart, and you will see that Spain once more had negative interest rates after the end of 2007 - ie at just the time when Almunia was speaking - as, of course, the textbook recommends it should. As I said, a complete pack of fools is something the ECB Governing Council aren’t. But, and here we come full circle, as inflation is falling interest rates get near to turning positive again (once more giving Spain a dose of “restrictive” monetary policy) and the problem is going to be how we maintain negative rates as Spain enters deflation. We had all better join Fernandez Ordoñez in keeping our fingers crossed and hope that our ECB Council Members prove to be just as inventive as Messrs Benanke and Kohn at the Federal Reserve, and equally astute as those Honourable Gentlemen over at the Bank of Japan.

The “misinterpretation” - that lead to a 15 cents, or 7.3 percent, drop to 1.85 euros of Unicredit shares in trading today in Milan - was the result of a report from Moscow-based Interfax to the effect that UniCredit was about to sign an agreement with Russia’s central bank to get compensation for losses on interbank operations. The source for the Interfax story was UniCredit Russia Chief Executive Officer Mikhail Alekseyev. But as Marcello Berni points out Alekseyev was referring to possible support the Russian central bank has offered to financial institutions in case of losses on the interbank market, and it should not be read as meaning that such losses had already been incurred, only that Unicredit have hat-tipped the central bank to be readying the money up just in case they do.

The real roots of this problem are to be found in the fact that Unicredit has very substantial exposure to losses in a number of key Central and East European countries, and the Italian government, which already has a debt to GDP ratio of over 100%, is in no position - especially with an economy which looks set to shrink all the way through from here to 2011 - to offer much in the way of cash to support the bank. As I point out in this post, Austria (which is a much smaller country than Italy, but which has similar East European exposure) has already lined up an initial 100 billion euros to support its banks, while the Italian government has remained hesitant to be specific about anything, but seems to be talking about support which only amounts to something like 20 billion euros. So we are left with the rather undignifying spectacle of the leaders of the eurozone’s third largest economy having to rely on Muammar Abu Minyar al-Gaddafi and Vladimir Putin for vital support to keep one of Italy’s leading banks alive.

Unicredit used to also be Italy’s leading bank by market value, but since their stock has now declined by 59 percent in the last six months, and the company’s market value stands at 24.7 billion euros ($31.3 billion), it now lies behind Italian rival Intesa Sanpaolo SpA. I repeat, as far as I can see Unicredit currently constitutes the greatest systemic risk to the eurozone banking system, and people somewhere ought to be thinking very carefully about just what the plan ‘B’ is going to be if all this goes horribly wrong.

What counts in this new world order is the multiplicity of empires and civilisations, not the dominance of one. What matters is the political stability and economic growth that they can create at a regional level, not for one or other of them to rule the whole world. In a nutshell, this is not about nostalgia for a return to the European empires of old but rather the birth of new types of political organisations, established by open and free societies, competing with each other at a global level, building bridges rather than walls, but each retaining its regional roots and customs.

The financial crisis is acting as a sort of ‘particle accelerator’, speeding us on our way to a new multipolar society. This is abundantly clear in the economic sphere, but politically and militarily too great powers in the making are beginning to sit up and make their presence felt. Russia and China particularly, but India as well, let no opportunity pass to show the world that they are a force to be reckoned with. The question is, though, whether Europe will be able, or willing, to play a part in this multipolar concert. ‘Able’ it most certainly should be, but ‘willing’ is another matter. Europe continues to suffer from cold feet. (…) Yet the way ahead for Europe is only too clear. If it wishes to play a role in tomorrow’s multipolar world and survive the ‘new age of empires’, its only option is to take a bold and decisive new step in the integration process. Seen in this light, the current financial crisis is not a disaster but rather a golden opportunity for the future. What is needed now is for our political leaders to overcome their cold feet and take the plunge.

According to a techcrunch review by Erick Schonfeld, Happenr is a new search engine, operated by a Belgian company, that currently collects information about events in Germany, Ireland, Belgium and the continent’s most important cities by scouring tourism, town, and cultural websites. While the review author sceptically remarks that “event databases are a dime a dozen,” he also mentions that “Happenr thinks there is still room for a comprehensive events search engine in Europe, and it believes it has a better way of indexing events automatically.”

Well, see for yourself. I for one actually found something I might do later on.

The French junior minister for human rights said, “On this morning, we all want to be American so we can take a bite of this dream unfolding before our eyes.” When was the last time you heard someone from France say they wanted to be American and take a bite of something of ours? Ponder that for a moment.

The world expects us to elect pompous yahoos and instead we have us a 47-year-old prince from the prairie who cheerfully ran the race, and when his opponents threw sand at him, he just smiled back…

I just can’t imagine anybody cooler. Look at a photo of the latest pooh-bah conference - the hausfrau Merkel, the big glum Scotsman, that goofball Berlusconi, Putin with his B-movie bad-boy scowl, and Sarkozy, who looks like a district manager for Avis - you put Barack in that bunch and he will shine…

Even if you worship in the church of Fox, everyone you meet overseas is going to ask you about Obama and you may as well say you voted for him because, my friends, he is your line of credit over there. No need anymore to try to look Canadian.

Okay, some gushing here. And I’m not sure the American backpacker should pick off that maple leaf patch just yet.

On the other hand, “district manager for Avis” — ouch.

In other news, it’s cold and grey in central Germany this evening. How are things where you are?

The slowdown in inflation over the last few months is evident in the chart below.

“Headline figures reflect energy and food price falls. The most interesting thing is the substantial drop in core inflation, which is a very clear sign of a more fundamental slowdown in the overall economy,” said Daniel Antonucci, economist at Merrill Lynch.

But this slowdown in annual inflation isn’t the important point, the big news, and the part most analysts seem to be missing, is that the price index peaked in June (as can be seen in the chart below, and whether you measure on the Spain general index or the EU HICP), since which time it has been falling, and from now on (barring the slight possibly of a minor “blip”) it looks like it is going to be downhill all the way. From all the indications we have at present we should be ready for quite a sharp fall in Spanish prices in 2009 (possibly 2-3 percentage points).

The reasons why we should expect a fall are evident, we are heading for a global recession in 2009, energy and commodity prices will all be y-o-y negative, house prices, rents, factory gate prices etc etc, all look set to fall as profits get squeezed, and wage and salary earnings - if not direct base salaries - also fall. As the headline in newspaper the woman sitting opposite me in the metro this morning was reading said “Rebajas Hasta El Pan” (The “sales discounts” even reach bread).

GDP is about to start shrinking fast:

While unemployment is rising at this point almost exponentially:

I would say that the practical economics of this situation are now obvious, but for some more general theoretical explanation of why we should now expect to see deflation raising its ugly head across one economy after another see Claus Vistesen’s “The Global Economy – Is Deflation the Next Macro Story?” post. And for more details on the current macro economic background you could try my Spain’s Services PMI Contracts At Record Rate In October

Not everywhere, of course. Fighting continued in revolutionary Germany and Russia, in the remains of the Austro-Hungarian and Ottoman Empires, and in other places whose history I don’t know well enough to cite here.

Death and destruction were meted out on a scale that is still difficult to fathom. On the columns of the memorial at Thiepval are carved the names of more than 70,000 Allied soldiers who fell in the area between July and November 1916, and who have no known grave. I was pointed to the photo by Teresa Nielsen Hayden, whose excellent posts on successive Armistice Days are moving, full of informative links and followed by astute commentary.

Though the events themselves are passing from living memory, the world shaped by the war is still all around us.

Update: Two more from TNH, 2002 and 2008.