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.
Like Chrysler? Amtrack?
In effect, it is like that. And the fact that your &10 is losing value means you are a victim of theft by government.
In an inflation some prices fall. The general rise is an average and is not a uniform rise of everything and some prices rise sooner and/or faster than others. Inflation makes for uncertainty which causes people to change their buying habits to try to minimize their losses to the evanescing dollar.
As imports become more expensive fewer dollars are spent for them and more dollars are spent on the available domestic goods which will drive domestic prices up. The devaluation is an injection of inordinate amounts of dollars into the system that ultimately must be spent in the American economy and will drive up the cost of everything. These things don't change in an instant. Producers delay raising their prices as their profits decline in real terms because they are afraid of losing customers, especially if they are the first to raise. Manufacturers switch to lower cost materials that might be of lesser quality and that increase in nominal price, too. That repression of inflation's effects will end at some point and prices will make up for lost ground in a visible inflation that seems radical because prices are making up in a short time for the nominal cost increases that have been moving right along.
The inflation initiated now will bite hard in a year or two, in time to trash Bush's 2nd term, a time when we should be consolidating large across-the-board political and Constitutional gains.
Consider also that the decrease in the price of oil due to expanded production and expectations of greatly expanded production will mask inflation by reducing real costs of everything that has to be transported. With stable money the oil price drop would result a wide decrease in the price level, not deflation because the resources not going to obtain oil are available as capital for the rest of the economy. Price decreases due to deflation reflect a decrease in the available money to purchase assets and there is no excess available as capital.
You must live in another galaxy. Stop by the UpperMidwest some day and observe the businesses which are operating at 50% of capacity.
The recession up here has been ongoing since 2000 or so--despite the WallSTreet Journal's "spin" that it went away in 2001.
Except ours: Enron. WorldCom. Omnidia. California.
You forgot the USCongress and the several State capitols, plus millions of local units.
Sure, but which is more socialist: Japan or the USA? America has long been known as the land of unwitting socialists.
Topic: it's right there in the national mission statement. Discuss amongst yourselves.
I would argue that it was the Yakuza who forced these loans to be made.
Also, no one has brought up the effect of low birth rates, and subsequent low demand in both Japan and Europe. The postwar generation has made its major purchases and the smaller cohort of the X-generation is just not generating demand in either of these markets.
It will also reverse once the prices run out of a market.
During the late 1980s I worked in land planning in Southern California and got cross-eyed looks from developers when I warned them of a bust. That had never happened before and no one I worked with believed me.
But I remembered the stories I was told of relatives selling their houses at a loss during the 1960s. When the cost of housing exceeds the market available to purchase it, a housing bust results. It will come again, especilly in California with its business killing politics.
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