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A House of Cards

Spectre of deflation haunts global economy

For the first time since 2009 the UK rate of inflation has fallen to the Bank of England’s target of 2%. For most people, whose real incomes have been falling, a slowing in the rate at which prices increase is surely a welcome relief. But alarm bells are ringing for the capitalist economy as the spectre of deflation looms large.

Despite the pre-Xmas furore over energy prices, fruit and meat price increases slowed at the end of last year in the UK. The prices of toys and computer games fell at a faster rate last month than a year ago. Supermarkets are reducing the amount they charge for petrol and diesel.

There’s a similar story in the major economies of the United States and Europe where the threat of inflation has receded.

Conversely, in Japan, after two decades of deflationary slump, an increase in inflation has been welcomed. But this measure of the success of the attempt to shock its economy back to growth through devaluation and credit looks like being short-lived.

Whilst continuing to promote an optimistic tone on prospects for growth (what else could she do?) Christine Lagarde, managing director of the International Monetary Fund, is leading the charge against the newly emerging menace of deflation.

“The growing danger of deflation threatens to derail the global economic recovery,” she says.  “If inflation is the genie then deflation is the ogre that must be fought decisively.”

So what’s the problem?

Falling prices tend to induce their own downward spiral. People put off buying decisions as long as possible as they wait for prices to drop, reducing demand. A reduction in demand leaves markets oversupplied and prices drop further and faster.

Good for consumers, at least in the short term. But bad, very bad for producers, and especially the hedge funds who own the giant global corporations and see profits dropping like a stone if the trend continues.

So employers are forced to take action – reducing real wages which in turn further reduces demand, driving up productivity and cutting production by shutting factories, taking capital out of circulation.   

No wonder they’re worried. The long-term impact of chasing short-term profit by transferring production to “emerging economies” where labour has been relatively cheap, has had long-term unwelcome side-effects.

A newly published analysis by Marxist economist Michael Roberts digs into 50 years of data to explain why productivity growth has declined and the dynamism of global capitalism is waning as a result. Roberts begins with a report from the US Conference Board (a business research body), which says:

Emerging markets, and especially China, account for the bulk of world’s productivity growth. But the years of rapid, easy improvement appear to be over. Since these countries remain significantly less productive than mature economies in US dollar terms, the ongoing shift of economic activity away from the latter adds to the global productivity slowdown.

Now the rate of growth in China is dropping fast to an official 7.7% – a 14 year low. The slowdown is accentuated by its government’s attempts to rein in the effects of its monstrous post-2008 crash credit expansion. And that’s really bad news all round for the global economy.

A slowdown in China – which some analysts suggest has reduced real growth to as low as 3% – contributes to driving the self-feeding spiral of decline into a global depression.

Roberts sums up the analysis of the Conference Board thus:

This slowdown seems to me another signal that the world economy (or at least the advanced capitalist economies) is struggling with a depression.  It also shows that increasingly world capitalism is failing to provide dynamic growth.

With demand from emerging economies slowing, prices on the global commodities exchanges are dropping. The price of an ounce of gold – the universal measure of the value of commodities – dropped last year from $1,900 to $1,200.

Deflation has another damaging result. The real value and cost of debt actually increases. Highly indebted countries, corporations and individuals around the world had better take note. Talk of a “recovery” is not only premature but entirely ignores what’s really happening in the global economy.

Gerry Gold
Economics editor
22 January 2014

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