Go to contents

Greatest Risk of Worst Deflation Since 1930s.

Posted October. 11, 2002 23:03,   


The Economist warns in its Oct. 12th print edition, that the risk of falling prices is greater than at any time since the 1930s.

Under the current circumstances of burgeoned personal and corporate debts, a deflation could bring in a long lasting stagnation.

▽ Deflation Coming Up?〓 Deflation refers to an economic situation in which the price of everything falls down. So far, unlike the situation in Japan, the price increasing rate in US and Germany has not plummeted to the minus level. But, The Economist reports, “When the real development rate is lower than the potential rate, the price keeps falling down.” It analyzes, “If US fails to improve more than 3.5% a year for the next two years to come, the pressure from falling price will keep growing up.”

Signs of deflation have already been popping up.

The inflation rate in US is 1.1%, the lowest in the past 40 years. The increasing rate of the Consumer Index remains at 1.8%. However, the indexes of 16 major items have fallen. The Industrial Index, in which the financial industry is not tallied in, has turned downward for the first time since World War II. The Economist points out, “Policy makers remain optimistic about the future. But, deflation is being realized in US and Europe as well as in Japan.”

Major European countries, in fact, have to sit on their hands, watching the deflation coming up. They have to abide by the EU provision mandating lower than 2% of the price-increasing rate in countries which use euro. The increase rate of Germany, for which food and energy sectors are excluded, is even lower than 0.6%, which is the average rate for all EU member countries.

▽ Deflation, Really Matter? = Households tighten up their spending budget => Sales volume for corporations decreases => Corporations cut down on workers’ salaries and begin to lay off => Households’ income comes down => Households tighten up their spending budget ….”

When households and corporations have more debt than income, experts tell us, deflation is more dangerous than inflation.

Since deflation means the higher value of the money, it eventually gives a birth to the effect of increasing their debt in substance. In other words, the chain reaction, which was first proffered by US economist Irving Fisher in his 1933’s thesis, could take place.

The Economist explained, “For the past several years, the competition among banks and the real estate boom have sharply increased the volume of loans to individuals and corporations. Thus, the risk of deflation is higher than ever.”

In fact, the consumer confidence in US has shrunk already.

According to the Oct. 11th report of Financial Times, the sales volume of big US stores like JC Penny, Target and Sears in September of 2002 was much lower than that of last September. Wallmart, on the other hand, has witnessed its sale increase a little. But the increase was not up to the original expectation. Bernard Consulting Group said, “It is serious. The consumer sale was lower than that in last year. Last year, the Sep. 11th attack affected the sale heavily. Consumer may not be able to regain their confidence even by the Christmas season.”

Seung-Jin Kim sarafina@donga.com