In its most recent issue (July 17th) Doug Henwood’s excellent Left Business Observer, now in its seventh year of publication, highlights what may come to be seen as an important turning point in current economic history. The gist of it is that Alan Greenspan and his supporters at the Federal Reserve have come to the conclusion that inflation is no longer a serious problem and the real threat today is deflation. “For all the bad press that inflation gets, deflation is generally far worse for all but the richest and best-positioned.…Greenspan and Co. might not fear an exact replay of the 1929-32 collapse, but clearly that’s the ‘it’ that central bankers don’t want ever to happen again” (to paraphrase the title of Hyman Minsky’s classic book Can ‘It’ Happen Again?).
Henwood remarks that “we haven’t had a deflation—a period of falling prices and collapsing incomes for nearly 70 years.” But, as of the end of July, we have experienced a five-consecutive month decline in producer prices which he says is “very odd” since “prices usually rise after a long upsurge. In 1989, an analogous point to 1997 in the last business cycle, inflation was running at 5 percent a year.”
Can these developments be specific to the United States? To answer this question we have collected material from recent issues of a number of business periodicals:
First, an article on an inside page of the July 21, 1997 Wall Street Journal headlined “Many Focus on Deflation, Yes, Deflation.” Here are Excerpts:
“As prices for many commodities around the globe slide, some economists predict that supply will continue to outstrip demand, despite a healthy global economy, driving prices even lower.…Gold, a traditional hedge against inflation is down 11 percent so far this year: crude oil has slumped 26 percent in the same time. Broader indexes are also dropping.”…”If you look at goods and forget about services, we’re moving toward deflation,” says Bruce Steinberg, chief economist at Merrill Lynch and Co. “In many sectors, prices are going down because there’s plenty of capacity to produce just about anything.” “Despite strong growth, there does appear to be ample supply in most, commodities,” says James Steel, an analyst for Refco, Inc. in New York who follows industrial metals and energy. “While supplies are increasing worldwide, bottlenecks in production and refining are being cleared out in the United States, applying still more downward pressure on commodity prices.”
What about Asia which has been a star performer in the global economic upsurge of recent years? Is there any indication of a turn toward deflation in that part of the world? News from South Korea and China, both major actors, suggests that such development may be in the cards. Business Week (August 4) features a report on South Korea under the headline “Quaking in Seoul. Now the banks are in trouble too.” It seems that most of the Chaebols, huge monopolistic conglomerates that dominate the country’s economy, are in deep financial trouble which is dragging the big banks down with them. “Over the next three to five years, the Korean economy will have to work off overcapacity in virtually every sector of industry” says Rhee Numuh, an economist with Dongbang Peregrine Securities. That sounds like a formula for heavy deflationary pressures.
Perhaps the most interesting case is China. Here are excerpts from a report by Mark O’Neill in the (Hong Kong) South China Morning Post of July 22, 1997:
Having brought down inflation with a three-year austerity campaign late last year, the mainland started to ease credit and money supply. The results have been unexpected.…Factory inventories have risen to record levels, thousands of workers have been laid off and the trade surplus has soared, with imports stagnant and many goods exported because they could not be sold domestically.
What confronts the mainland’s mandarins is a fundamental change in the economy and the means they must use to regulate it. An economy of shortage has become an economy of surplus.…The mandarins are now confronted by a new set of problems which their state planning textbooks have not equip them for—huge over capacity of production and flows of billions of yuan in private and company accounts over which they have limited control.…Official figures show that by the end of 1996 production of 93 percent of goods was in surplus or adequate with inventories reaching 540 billion yuan (about $501.98 billion dollars) up from 460 billion yuan a year earlier and far above reasonable levels. By 1995 two thirds of the production capacity of industrial goods was under utilized.
“At the start of this year everyone was expecting to start of a new economic cycle, with low inflation, two cuts in interest rates and a booming stock market,” the Economic Daily said on Friday, “But this has not happened. There are even signs of contraction, such as rising stock levels and higher losses of companies. What this means is serious imbalances in our economy which is hampering its development.”
What all this seems to add up to is that at least for the short run China is more of a deflationary than inflationary force in the global economy.