Deflation is now accepted as the biggest threat to Western economies, especially hugely indebted nations, like the U.S. and Britain.
Inflation, which was recently the major enemy, has swiftly retreated, as widely predicted.
Many experts are belatedly waking up to the gravity of the situation. In the UK, former Chancellor of the Exchequer, Ken Clarke, has dismissed comparisons with the 1970s, ’80s and ’90s, likening current conditions explicitly with 1929/30.
Normally cautious Bank of England Governor, Mervyn King, forecasts a 2 percent contraction in the British economy next year, with interest rates falling rapidly to nought percent for the first time in history.
Deflation is now the enemy we must all factor in to our expectations in the near-to-medium terms, even in the dependably buoyant American economy. The Japanese “lost decade” of the 1990s may be set to play out across the world.
Why then is deflation necessarily worse than inflation?
In an era of massive indebtedness, both private and public, deflation increases the burden. As incomes decline, debts remain the same — at levels signed for in better times. It’s the exact opposite of the apparent wealth created during periods of rapidly rising house prices.
Professor Peter Spencer of York University says, “It is going to be absolute murder in Britain if inflation turns negative. The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule.”
Another symptom of deflation is that consumers wait for lower prices before shopping, causing job-losses in Main Street and yet more bad economic news.
So what can be done either to pre-empt or cure the curse of falling prices across the board?
Curiously, Keynesianism which, in its misunderstood version is disastrous in normal times, does hold out some hope in depressive conditions. Expect central banks to start printing money soon and dropping it from helicopters, if they haven’t started already. Want to buy some rising stock? Buy helicopter shares. [This is not financial advice.]
If you’re one of those noble souls who saved assiduously during the asset bubbles, you will just have to stand by and watch the profligate oafs who caused the problem clean up, while your own responsible hoard of value drains away.
It’s just not fair, but it will probably have to happen “for the greater good”.
Sorry folks there’s a depression in the sea air
The world needs Up-To-A-Pointism
The Kraken Wakes
Depression looms like a yawning abyss