Written By:
Steve Pierson - Date published:
11:42 am, January 20th, 2009 - 11 comments
Categories: economy -
Tags:
Inflation, predictably, plunged in the last quarter. With the international prices of oil and other commodities coming off their record highs following the super-spike last year which pushed the world into recession, it was inevitable that inflation would be lower than it had been when those mammoth price rises were underway. This was compounded by falling domestic demand and house prices. The only question was whether there would actually have been deflation (ie a decrease in the general price level) in the three months to December. My figurative money was on that happening, but I didn’t pick such a big drop. Inflation was -0.5% in the last quarter.
Total inflation for all of 2008 was 3.4%, above the Reserve Bank’s 1-3% target range but, because that includes the quarters when oil was surging, it is of little concern now. The risk now for the world economy, and it is a risk that various economists have been discussing for years, is deflation as the global recession sees incomes fall and people batten down the hatches, increasing saving over spending.
High (ie double figure) inflation is bad because it encourages spending now over investment by rapidly decreasing the purchasing power of a dollar over time. Deflation, on the other hand, is generally regarded as much worse. It discourages spending now – you only have to leave your money under your mattress and you will be able to buy more with it tomorrow. Once an economy is in a recession and a deflationary spiral it can be very hard to break out of, as Japan has evidenced over the last decade and more. Deflation increases people’s pro-cyclical response to recession, which is to increase their savings pulling more demand out of the economy. Governments can try to counter that by increasing their own spending but Japan has tried with years and at great expense (it’s government debt is worth 170% of GDP now) with limited effect. New Zealand is in a slightly better position than most major economies because our higher interest rates mean monetary policy can still be used to try to inject life into the economy with further cuts in the official interest rate. Other countries, like the US and Japan, have already opened up the throttle to maximum by cutting their rates to near-zerowith no effect.
We are potentially entering a very scary economic situation. If deflation gets a grip on the major economies, the bleak outlook will worsen further; the recession will be deeper and longer. And whether or not deflation does take hold, whenever the global economy does manage to return to growth, the next oil shock will be waiting to clobber us again.
These are extraordinarily tough conditions for any government to face. We need the Government to have the vision to deliver a Green New Deal, investing heavily in energy efficiency along with the kinds of programme Irish outlines here, to both get the economy moving again and insulate us against further oil shocks.
“Other countries, like the US and Japan, have already opened up the throttle to maximum by cutting their rates to near-zero with no effect.”
Here’s Paul Krugman, (shrill! communist!! Bush deranged!!! nobel winner!11!11!) with a useful graphic about this:
http://krugman.blogs.nytimes.com/2009/01/17/zero-lower-bound-blogging/
Fuck Green iniitives, the world has been cooling for 7 years. This is a socialist dogma. Get used to higher energy prices whether it is oil or windmills.
[mills mill things, turbines generate electricity. You mean wind turbines, not windmills. Also, you’re talking rubbish, here are the global temperatures for past years http://en.wikipedia.org/wiki/Temperature_record_since_1880 SP]
Deflation and its consequences over time is frightening. I can just see the participants at the upcoming Goober Gab Fest preparing the ground work for corporate welfare stealthily disguised as PPP’s. Those fuckers must be rubbling their hands together in glee.
As an aside, I wonder: is there really anything that wrong with the gold standard? I know the libertarians like the idea and that very fact should put me off, but it seems to this simple soul that all this economic nonsense could never have happened if the marketeers were prevented from producing money out of thin air. If the amount of money was limited to the actual value of something tangible then we would all know that figure and when the money supply exceeded it we would all know something was amiss. Unlike today when, for most of us, the causes and implications of the impending recession are only now becoming clear.
Anyway, I’m off to the bank to get my cash out. No point in leaving it there to become worth less and less or, worse, the interest rates go negative and I have to start paying them!
I dont think you have quite made the case why deflation is so bad? [this is a political blog directed at a varied audience, it isn’t high school economics. If you want detailed arguments on why deflation is bad look it up, you’ve got the internet. SP]
As for increasing govt spending.. all you do is give examples of how it hasnt worked.
Malinvestment (ie bad spending) is what got us into this mess and I dont believe government will spend wisely (as it is all too easy to spend other peoples money on whatever pricks ones fancy)
consider this quote from notpc (who quoted it from someone else):
good article, despite being quite worrisome.
the msm really were pretty negligent in the extent to which they actively declined to inform the NZ public of the seriousness of the international situation during the election campaign. BBC, CNN, Al Jazeera would all lead their news with dedicated sections on the crisis while ours would mention it as a 4th item economic story. i think they didn’t want to risk people having second thoughts about It’s Time For a Change.
and still most kiwis i talk to don’t really appreciate the gravity of the world situation.
is it that our msm don’t understand or are they just worried they might lose ratings and advertising revenue?
Fair enough but it seems a bit of a cop out.
The deflation we are experiencing at the moment is very good from where I am sitting.
– oil price down (a market correction, bubble burst)
– house prices (same as above)
– general commodity prices (probably a correction also as the world economy was “overheated” by cheap credit from the central banks which bid up prices… ie pretty much the same problem as the house bubble)
Another example of positive deflation (o how I love thee!) just came to my mind.
Think about consumer electronics.. prices have deflated over the years because of improved technology, efficiencies and competition. This has been a real boon for the consumer.
Central bankers just want to make inflation sound good because that is their job (decreasing the buying power of the common man).
Fortunatley in some cases innovation and competition manages to overcome the inflationaly monetary policies that are in vogue with todays governments.
djp, check out the movie zeitgeist. It will give you an insight into your precious money not to mention an economics 101 lesson.
This is nothing but an act of desperation, companies are trying lots of plan to cope up with the long-term recession that now is a very dangerous to most of them. This would be a trial and error process for them. Paradoxonomics are when good situations have bad results, such as if you avoid payday loans and end up getting a bounced check fee that ends up costing you more than you would have, had you just taken out the payday loan. Deflation is a similar thing deflation within an economy is when the values of goods declines and the value of currency go up. However, there’s a big downside: with deflation comes higher unemployment, as employers are forced to let go of employees in order to cut down on operating costs because revenues have fallen. There is good news, however, and that is that the chances of the recession leading to deflation are minimal. But the Feds say things will get worse before they get better, so in the meantime, payday loans can help if you have a financial emergency.
Looks like it might well be a good move to join a Communist Party right about now. 😉
I’m torn between the Korean Workers’ Party and the Partido Comunista de Cuba myself.
As an aside, I wonder: is there really anything that wrong with the gold standard?
The problem, and you even stated it in you post, is that there isn’t enough gold in the world to adequately represent the money and there never will be. Economies, as they grow, need more money in circulation. If you can’t increase the amount of money then you are in a default deflationary position.
consider this quote from notpc (who quoted it from someone else):
Exactly. The government should never, ever, borrow money because it puts them into position where they are paying interest forever. They will never be able to pay off the loan. The best thing they could do is just print the money. Sure, they’ll need to raise taxes at some time to remove any excess money from the market but that’s not a problem.
Now, from what I can make out, the reason that deflation is a problem is because people don’t make as much profit. The same amount of money may buy more but it doesn’t add up in the books (or psychologically either).