Posted on 05/25/2003 6:44:43 PM PDT by DeaconBenjamin
IMAGINE a world in which house prices have ceased to rise. Instead, the housing market bubble has burst and there is a quiet, insistent downward drift in prices.
Suppose that interest rates have fallen so low there is no longer any point in holding a bank or building society account. The charges and fees more than wipe out any interest credited.
Consider an economy where prices are falling steadily, relentlessly, every year, and where the public has lost confidence in making a major purchase. Imagine what it is like in a world where saving has ceased to have logic, and where people keep money in a safe deposit box - or even, as in Japan, in the fridge.
Welcome to the world of deflation: a condition in which prices are in a state of continuous and seemingly unending decline.This is the enervating malaise that has gripped Japan for years. Few ever thought it would cast its shadow over other economies. But now it looks to be rolling silently, insidiously, unstoppably westwards, like a muffling, engulfing fog.
This is the prospect that has become the top concern of the world’s central bankers and economic policymakers. For more than 30 years, the cornerstone of policy was the fight against inflation. Now the worry is a slide into deflationary sclerosis.
And the example of Japan worries the world: 15 years on from the asset bust, prices are still falling, few trust the banks with their savings, deposit rates have dropped to just 0.01 per cent, the economy is barely growing and millions of Japanese households keep their money in safe deposit boxes or in gold bars.
Just a few years ago, the consensus among economists was that this was a deflation unique and exclusive to Japan, and that it could not spread here. Now they are not so sure.
In America, the Federal Reserve is running out of ammunition to revive the US economy by way of interest rate cuts. In Germany, which has just reported a fall in first-quarter GDP, there is a growing sense of entrapment and helplessness.
Earlier this week, the International Monetary Fund said Europe’s largest economy faced a "considerable" risk of "mild deflation". For the country’s four million unemployed, there is nothing "mild" about it. Germany’s output is no higher than it was in the first quarter of 2001 - and with no sign of a pick-up.
Adding substantially to its problems has been the strength of the euro - or more accurately, the weakness of the dollar, under the guise of what the US administration in Orwell-speak persists in describing as a "strong dollar" policy. In fact, the dollar has fallen 30 per cent on its level a year ago and looks set to fall further. While this will give a big boost to US exporters and thus to a general recovery across the US, it is not without huge risk - an accelerating exodus of global investors out of dollar assets.
And it is causing huge problems for the eurozone, Germany in particular, which relies on exports for a third of its GDP. Eurozone politicians still see the euro rally in macho terms, slow to realise how America is effectively getting Europe to pay for the Iraq war. And European Central Bank officials, loath to admit of any problem, continue to insist in their make-believe world that the strong euro is "consistent with economic fundamentals" and "a sign of confidence in the European economy and the monetary policy of the ECB".
But across the Group of Seven major industrial economies there is now something close to policy panic. The worry is over a creeping and generalised stagnation that could have profoundly adverse effects on employment and living standards across America and Europe.
For more than 30 years the central concern of economic policy across the G7 was inflation. Now there is growing pressure for central banks for a reverse thrust of the engines and a co-ordinated policy of stimulus to check incipient deflation before it takes hold.
In an extraordinary pronouncement earlier this month, Alan Greenspan, chairman of the Federal Reserve, said that "the probability of an unwelcome substantial fall in inflation" now exceeds that of a pick-up in inflation. This shift of perceived risk marks a fundamental change. But it poses huge problems for a generation of policymakers who have no experience whatever of how to deal with deflation.
Meanwhile, the policy dilemmas are growing. The yield on 30-year US government bonds fell to a new all-time low this week and there is pressure for a further cut in interest rates, already down to a 41-year low of 1.25 per cent.
On Tuesday, Greenspan said he was still unsure that a recovery in the underlying economy is under way. Behind the scenes, Fed officials are locked in an "extensive" study of what happened in Japan and the lessons to be learnt. The problem for Greenspan is that with few rate shots left in the locker, he has to make sure that any future cuts will have an effect. For there are many already asking why it is that a 13th cut in rates should succeed where the previous 12 since 9/11 have so signally failed.
The US economist Robert Samuelson says the US economy is gripped by a "new stagnation": not quite in free-fall, but not quite in recovery, either. Since late 2000, annual US economic growth has averaged about 1.5 per cent compared with an average of 4 per cent in the 1996-2000 period. Some 2.1 million jobs are reckoned to have vanished.
What makes Japan so worrying is the absence of any evident solution. There was much hope in the early Nineties that financial reform and fiscal stimulus would lever the economy back to growth. But despite more than 100 "stimulus packages" and almost £200 billion being pumped into the economy, prices continue to fall - and the economy to languish. Since 1992, Japan’s annual growth has averaged just 1 per cent. The average through the Eighties was 3.8 per cent. As for the stock market, it hit a new low earlier this month, down 80 per cent from its late Eighties peak. Unemployment has climbed, as has government debt, civil servants are facing pay cuts, department stores have been closed or mothballed - and sales of safe deposit boxes are booming as households give the fragile banking system a wide berth.
In Britain, deflation still seems a far-off prospect. House prices continue to rise, albeit at a more modest rate, and core inflation is still running at 3 per cent. But the economy is showing little growth and there is a strong expectation that interest rates will be cut next month to 3.5 per cent - and possibly down to 3.25 per cent by the year-end.
It is not deflation in the strict sense. But it would be another sign that we have moved into a new era, with different dynamics - and risks.
We should expect a triple hit of rate cuts over the next few weeks - in America and Europe as well as the UK. Let’s hope they work. For if they fail to spark a recovery, we could truly be in serious trouble.
Meanwhile, if we want to stay competitive, we'd better let the education system quickly self destruct, or fix it. Love team Bush, but they are way oversold on Public Ed. V's wife.
All those concerns seem kind of silly now. But that said, I wish Japan the best and I hope they recover from this economic malaise. They've been a damn good ally to us over the years. More so than Germany and France and even Canada, for that matter.
The deficit will have to be covered by issuing bonds, the bonds will sell better with higher interest. With higher interest, real estate loans will be more expensive. More of the cost of real estate will be in interest, less on the principal. Real estate principal cost will have to be reduced or real estate purchases will be reduced, fewer customers. Those who pay cash will be pleased.
The Fed is partially defaulting on the Federal debt by shoveling dollars into the economy so that the dollars that go to repay the debt are worth less than the dollars that were borrowed. That is the classic manner for governments determined to cheat their creditors.
Because the price of oil which affects directly most of the prices of goods in the world is coming down the inflation will not be noticeed for a while. Prices of oil affected goods will not soar with the inflation and the price of oil will not go down so far as it should given the increased supply and confidence. When the oil price hits bottom in a couple of months prices will commence that inflation rise, including the price of oil. If the arabs try to stem the leakage by switching to Euro pricing the general price rise will be soon and steep, at least until Europe retaliats by devaluing the Euro.
Banks were forced to make loans to insolvent companies.
Socialism and Communism always fail but,there is no other system that allows criminals can ply their trade.
Banks were forced to make loans to insolvent companies.
Socialism and Communism always fail but,there is no other system that allows criminals can ply their trade.
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