DEFLATIONARY SCENARIO
The protracted war against deflation or negative inflation, as euphemistically called, is being lost in many of the large economies of the world. In this intensely connected world of ours, what appears in one economy swiftly manifests itself in others, in a manner that is similar, nuanced or perverted. As of today, the economic debate; what is inflation or deflation has not been conclusively settled. For some (monetarist school) inflation is nothing more than an increase in the money supply. Be that as it may, our interest is not to engage in esoteric theoretical discussion of the above two (inflation/deflation). It is to heuristically point out the effect or pros and cons of the two scenarios, particularly as they impact on the life of the humble beast (the naïve global human mass).
In an inflationary environment, which has been the main stay of the world economic system for over half a century, the challenge (from the point of view of ordinary mortals) has always been to find ways to help keep up with persistence price escalations. In all economies of the world, expectations have always been and to some extent still are; inflation will rage on unabated. In mature economies a rate of 2-5% is/was considered healthy. In developing countries inflation was frequently higher, particularly in the decades of the 1970s & 80s. In the 1980s inflation actually morphed into hyperinflation in the periphery and semi periphery. Overall, the global system is/ was quite fixated on the perennial prevalence of inflationary environment. Almost without exception, all economic and business decisions/planning were predicated on this assumption, to say nothing about the drastic influence, psychological or otherwise, the phenomenon had on the gullible beast! Remember the common fallacy: real estate prices will never go down!
If truth be told, the modern world system has existed more in a deflationary environment than in an inflationary one. Of course deflationary environment should not be confused with a deflationary depression, which took place in the 1930s. Well balanced and market driven economies should not be afraid of deflation. For a start, a deflationary environment brings caution to an economic system. Misallocation of resources or rampant malinvestment by all and sundry (read incompetent), can hardly take place in a world where excessive money printing is not allowed. Counting on inflation to reduce or even wipe out debt incurred as a result of short-term speculative investments or other not so productive activities is an unavailable option in a deflationary environment. That is why the prevailing economic regime doesn’t like deflation one bit!
Before the massive intervention of central banks to prop up asset prices (after the collapse of real estate bubble of 2007, leading to the financial crisis), the real global economic (not financial) situation was ripe and ready to wipe out systemic excesses from the system. Here is what could have happened all over. ‘At the height of the boom in 2006, two-bedroom houses of no more than 700sq ft on Oxmantown Road in Stoneybatter were routinely commanding prices in excess of €400,000. After the market collapsed, they lost at least 60 per cent of their perceived value. And in June 2010, at what might come to be viewed as the bottom of the market, a house on the street sold for €148,000. It was one of very few transactions recorded in the area.
In Japan, ordinary citizens have been experiencing vivid deflation since 1990. The deflationary situation was the result of excesses/imbalances built-in in the go-go days of reconstruction (after WWII). Arguing the obvious; cheap credit, (as if real money doesn’t matter), astronomically inflated real estates prices (in the eighties the Imperial ground in Japan was valued more than the whole state of California!) Today and taking into consideration real pricing (minus inflation, etc.) the value of real estate in Japan has declined by over 80%! Share prices have also crushed by over 70%. The Japanese are also facing another deflationary episode in their long history, the contraction of their population. It seems the Japanese are earnestly avoiding the procreation business, with grave attendant consequences! Also don’t forget, sophisticated robotic production processes, cheap electronic gadgetry, etc. are, in the long run, all deflationary. Can such a scenario repeat itself in other countries, including developing ones?