Translate

Wednesday, March 17, 2010

Deflation Threatens World, Not Inflation

Normally when the Financial Times prints a leader, it is explicitly banned from being copied. Today's piece from Martin Wolf, the Economics Editor, finishes with a different message - 'you may share'. Why the opening up to the blogosphere from this subscription only newspaper? Is it because the message is becoming so important, or is it merely a new marketing strategy? Or both.

Wolf points out that China and Germany, the world's top surplus countries, are both refusing to loosen demand and encourage imports into their own countries, while at the same time, demanding that deficit nations pare down their debts, and 'act responsibly'. They fail to see that their own actions are making this outcome impossible.

Wolf puts it like this -

Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening.

Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners.

That was a big part of the catastrophe of the 1930s, too.

In this battle, the surplus countries are most unlikely to win. A disruption of the eurozone would be very bad for German manufacturing. A US resort to protectionism would be very bad for China. Those whom the gods wish to destroy, they first make mad. It is not too late to look for co-operative solutions. Both sides have to seek to adjust. Forget all the self-righteous moralising. Try some plain common sense, instead.

martin.wolf@ft.com
More columns at www.ft.com/martinwolf
.Copyright The Financial Times Limited 2010. You may share
.

'You may share' is code for - make sure as many people read this as possible. Deflation is being exported to the world. You don't often see Wolf or the FT writing with such strong language. This is the start of activism. I am sure we will be reading a lot more of the same in the months and years ahead. Wolf has called the future in the strongest possible terms. But is anyone listening?

Here is 'subscription only' link to the FT. It might work.
Wolf's article.

Far be it from me to dispute the opinions of Britain's leading economic commentator, but I doubt the eurozone collapsing would worry purchasers of German goods unduly. Many are manufactured in Eastern European countries these days where wages are lower. The collapse of the Euro would enable all these currencies to fall, making European manufactures more competitive. It would help Europe to recover if the currencies fell, bar the D Mark of course.

2 comments:

Stuart Fairney said...

"countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports"

~ They could of course cut their public sector, thus reducing debt and balance of payments problems as aggregate demand drops, or they could print money via QE. there is certainly more than one outcome possible here and I fancy US inflation is sure to be exported soon enough

tapestry said...

I find that the assumption of 'QE = inflation is inevitable', is where western thinking is wrong. Japan has had QE going on for over a decade, and still suffers deflation.

Inflation/deflation is a socionomic symptom, based on social mood, not on monetary devices. The device of QE is needed because behaviour patterns have changed. It will not change those behaviour patterns, merely alleviate their effects.

Many hedge funds are borrowing heavily now with large bets of the return of inflation, in commodities and equities. This is a new instability in the making. If the bets are all wrong, HFs will shrink rapidly and crash markets. New regulations limiting hedge fund activities are being rushed out in both the US and in Europe. They are not overdue.

But once the casino is placed under some kind of control, the needs for real economic reform between countries will be next, if Wolf is right.