Deflation And The "d" Word. Here We Go Again?
In U.S. economic history, there have been only two periods of sustained deflation: from 1873 to 1897 and the 1930s. Their length and severity led both to be called "depressions." There had been many downturns before 1873, but none had lasted so long and been so widespread or as calamitous -- until the even worse collapse of the 1930s. Downturns are normal to the capitalist process, and are called "recessions." The difference is not merely terminological: A recession has usully been a national contraction that reverses itself in due time; a depression originates from a weak world economy and ultimately brings it down and, unlike a recession, never does reverse, except through political intervention or, as in the case of the 1930s, world war.
As will be noted below, Japan has been in recession for about 10 years; that all the world has had a kinder fate up to now is because the USA plays such a central role in the world economy that one casualty (even one the size of Japan) does not drag others with it -- indeed, Japan itself has not sunk as far as it might because its exports to the USA have helped to sustain it. Of which, more later. Now, for only the third time, the world seems to be entering a period of deflation and, if in different form, global recession severe enough to mutate into depression. There are many reasons for thinking so; we can only skim their surface here; some of those reasons recall the 1920s, some are new to our time. The import of what follows is not that history is going to repeat itself; the many different characteristics of today's world insure that it cannot; they also provide the possibility that what lies ahead (including the lies that lie ahead) could be much worse than anything in the past.. In the past two years or so, the financial pages have brought back memories of the 1920s, most obviously the popped stock bubbles and the misdoings of CEOs. In those same years, U.S. foreign trade and current account deficits have also broken all records, and the always "strong dollar" has become much weaker, as unemployment levels continued to inch upwards. Such matters continue to be noted, but now have begun to be accompanied by the word not heard for many decades: "deflation."
Unemployment, expected to be cured has all of a sudden come to be seen as stubborn (and it will be later as close to double the announced rate). All that is acommpanied and partially caused by shrunken investment in real capital, and large-scale tax/deficit squabbles. In consequence, there is much unease in business and among consumers, as well there should be.. In a Z-commentary more than two years ago, I drew some parallels (and differences) between the U.S. economies of the 1920s and the 1990s -- both, in their time, called "new" economies. Among the parallels is that in the first stages of the movement toward the abyss of the 1930s -- recession after recession from 1927 to 1929 to 1933 -- what was to come was neither acknowledged nor understood. For present purposes it is important to clarify what is meant by "first stages": It wasn't until almost four years after the crash of 1929, that is until 1933 -- when unemployment was at 25 percent, and ALL the banks in the USA were closed against down (as in Argentina, recently) -- that either businesses or economists had any idea that the "new economy" was cracking up. On the other hand, a significant percentage of the population knew that something had gone awry, and had been doing so before the crash. The people referred to were those without jobs and/or those with jobs whose incomes were painfully low: Herman Miller (ecnomist with the U.S. Census for 30 years) showed that if we were to apply the standards of poverty measurement now in effect that at least half of the U.S. population was living below the poverty level years before 1929. (Rich Man, Poor Man /1974/) Like poverty, unemployment was not even measured in the 1920s; had it been, by present standards the jobless rate varied from 5 to 13 percent in the decade -- and both measures are substantial understatements in comparison with those of Western Europe. There were of course many important differences between then and now (some to be discussed); but one of the major similarities was that the ruling powers of business and government were/are 1) a very tightly-knit family and 2) share/d the view that economic downturns automatically reverse themselves, and that any interference by the government does more harm than good.
The only seeming modification to that view was/is in the reliance upon monetary policy (diddling with interest rates and the supply of money): No problem; such policy is controlled by their financial world, through their Federal Reserve System and their chosen "governors." As 1929 became 1930-31-32-33, each worse than its predecessor, the biggies were singing "Prosperity is just around the corner." So it goes today, except that today it is "growth" that is just around the corner.Many who say that believe it; those who do not, but are in positions of influence or power, dare not say so in public, lest in doing so they make a bad situation worse. And in the rare instances when someone who has or has had influence or power does issue a negative statement, he is derided or ignored -- be it Stiglitz of the World Bank, or financiers such as Stephen Roach, Warren Buffet, and George Soros. So the news is, as they say, all that is fit to print. All that being said, what are the reasons to think this is a worsening situation? A good place to begin is with the word "deflation," a term not heard since the 1930s. What does it mean? To answer that, one also has to show deflation's whys and wherefores. Its basic definition is that of generally falling prices, rather than, as with inflation, generally rising prices.
But the two processes are not simply the opposites of each other -- in "reverse causation," in consequence, or in "reverse policies" for their cure. Also, inflation can be accompanied by more jobs or more unemployment; but deflation always means rising unemployment -- and, in the USA, much more so than the "official" figure. (A note on that: One is counted as unemployed only if one is known to have been seeking a job but has not found it; nor is one unemployed if one is working one hour a week -- even though he/she has had and needs a full-time job. Until very recently, the Labor Department kept no figures on such workers. Now they provide those figures: only in a footnote. When they are counted, the present 6 percent rate rises to just under 12 percent. In Western Europe the more realistic measurement is used; as is also a more meaningful measurement of poverty: anyone with less than half the median income is poor.)
The mild now gaining notice seems to be pointing toward an oncoming general deflation. Why? The main sectors of demand and supply are those having to do with consumers, businesses, foreign trade and investment, and governments (fed, state, local). They are, of course, interdependent, organically related. Consumers spend more or less depending upon their employment status, their incomes, and their debt condition. Although consumer expenditures now continue to rise, they do so always more slowly, because of rising unemployment, job fears, and already mountainous consumer debt, with every reason for all those factors to worsen. Business expenditures have been weak for two or three years in the vital area of capacity expansion and new equipment; the reason being that the how much can be produced is greater than how much can be sold profitably, both here and abroad.
Just how serious the relationships between consumer and business expenditures are may be seen in the recent behavior of the automobile industry -- the key industrial market here and elsewhere. As most will have noticed, in the past two years or so, the auto companies have reduced or eliminated the interest costs of borrowing (from them) for purchasing a car. They do that, rather than to reduce the price of the car (which would count in the deflation index) because if there is anything the giants fear it is price competition, lest it deteriorate into what they call destructive competition.. However they MUST sell more cars; so they cut the interest rates, a considerably safer move for them. If that (and similar dodges) were taken into account in the consumer price index, the rate of deflation would be more alarming. Foreign trade and investment. The USA is now and has been for decades "the consumer of last resort" for virtually all the other economies' production (from 10 to 20 percent of their GDP). As the Cold War began, so did U.S. expenses and investments abroad -- expenses due first and foremost to our military establishements in dozens of countries -- led by Germany and Japan, whose economies were much strengthened thereby: Think of the U.S. "expenses" in Germany for an average of 3-400,000 GIs, plus airbases. Meanwhile, U.S. companies were investing cheaply and profitably in those same countries. Even so, because we exported more than we imported until about1970, we had a surplus in our trade balance.
When Reagan took office in 1981, despite and because of all this, the rest of the world owed us $1 trillion; when he left office, we owed just that much to the rest of the world. And since then that trade and investment deficit has gone up by five times that -- rising recently at the rate of $500 billion a year, and always having to rise. Why? Because if "the consumer of last resort" ceases to do its job, all the other countries' present troubles will deepen -- which is what is happening. Thus it is that consumer indebtedness is mountainous, the average household owing each month more than its average disposable income; and just as mountainous is our foreign debt, now over $5 trillion and rising. U.S. consumers have been slowing their purchases because of domestic conditions -- that, put together with the falling dollar will worsen other countries' economies (as their goods cost us more, we will import less of them), without materially increasing our exports to them, because they are all already in or verging on recession.
The dollar began its decline against the Euro as year 2000 ended; it has declined more than 30 percent since then: 20 percent in the past year. To which must be added: Almost all economies' currencies are valued separately from the dollar -- except those in East and Southeast Asia; they are "linked" to the dollar, and thus move with it: No small "except" In that China is one of those countries, that is no small exception. That means a) that those Asian exports will also be cheaper than those of Europe's exports, already true before the dollar's fall; it also means that the US will import even more of Asia's (especially China's) goods than ever, auguring more trouble for U.S. manufacturers -- of everything from clothing to computers. Nor can the USA do anything about it with tariffs or bans, because (to quote the NYT of 5-22-03) "American and Japanese factories operate the same factories in China that produce the deflation in the first place.... America and Japan have little choice but to shop there for imports." Japan's exports to the U.S. are already falling. In sum, there are always fewer jobs in the relevant industries in both the USA and Europe, as China -- only a few years ago way down the list of world economies, has now taken Germany's place as # 3.
"Round and 'round the world economies' relationships go" -- and up and down. But surely the omnipotent U.S. government can pull a rabbit out of the hat? This government is more likely to pull a hat out of a rabbit. Government The reference here will be mostly to the federal government, with only a bit to say about our local and state governments and those of other countries. The US government is back in the 1920s in terms of economic policy, its guiding principle that of President Coolidge: "The business of government is business." Today, add a small adjective: BIG business --specifically its Holy Family of oil, cars, and weapons and its nephews and nieces, The Filthy Rich.
Given the emerging fiscal policies of the Bush administration -- massive tax reductions for the top 10 percent -- especially the top one -- percent, with falling contributions to the 50 states' social expenditures, and $400+ billion in miltary expenditures -- with, consequently a tidal wave of federal deficits resulting from expenditures that will (do) little to stimulate the economy -- all that and more of the same mean a federal government which will exacerbate, not resolve, our economic problems: They will enrich the few (including the P. and the V.P.) by vastly reducing the progressivity of the income tax while raising the retrogressive indirect taxes of 80 percent of the population (sales taxes, the social security tax, etc) while deepening our already scandalous social neglect. Sensibly done, government deficits stimulate the economy: The deficit arises because it spends more than it taxes; when that spending is on productive social projects (schools, public transportation, health care, and the like), more jobs are creeated and, thus higher incomes and, thus, the basis for higher taxes to reduce the deficits over time.
Not this gang. This government lowers the income tax rates of the rich and of corporatons, of dividends and capital gains (almost all for the rich), while raising its military and security expenditures. With expenditures not falling while taxes do, that means that the indirect taxes of the rest of us must go up. The beneficiaries of the tax reductions (one percent get about half of all of them) are unable to spend much more than they do; those whose taxes rise -- i.e., most of us -- will have to pay more in taxes and be unable to spend as much as we have, especially if we don't have a job: About 3 million jobs have been lost since Bush took office -- and that number, as noted above, does not include those who have given up looking, or those who are working only part-time. Until very recently, as noted above, we could only guess at how many fit those unhappy categories: Now we know it is 11 percent of us, at least -- as it is in Germany and France and Italy, which measures the way we ought to, and in Japan, if it measured as it should). That's ; just a bit more than we had in 1939. But will not those military expenditures stimulate the economy? Not much, other things being equal. Other things, as just noted are not equal, and although $400 billion is way too much, it is a small percentage of a $10 trillion+ economy. Also, the industries getting most of those $$$ are few and very high-tech, so a tiny percentage of the workforce is involved. Moreover, non-military governmental expenditures have two to three times the job stimulus of any military expenditures -- to say nothing of the greater role they play in terms of grave social needs they could serve. What are deflation's consequences? They are mixed: It sounds nice to think that the prices of your food and clothing and other commodities you need or want will go down; but, and quite apart from the fact that the prices of many (if also a minority) goods and services will stay the same or rise, one must consider that, given the limitations of contemporary fiscal policy, with Bush's policies the economy will almost certainly continue its slide toward an ever worsening recession.
That is here in the USA; but there is no longer just a USA, economically. As we slide, others will slip and slide at least as much; down and down, is the most likely effect -- and remember that #2 Japan has been in recession for at least ten years and counting, and #3 Germany has been stuck on a slowly falling freight elevator for 2-3 years (joined now by France and Italy and Holland and Belgium and Sweden and....).
That's where we stand. Some of the differences between the 1920s and now have been treated above.. Now some others that are relevant. Not least among them is that ALL the countries of Europe were in economic distress or crisis most of the 1920s; NONE of the countries in the world had any idea of what a sane set of fiscal policies (taxing and spending) might be; let alone any inclination to pursue a sensible path by good luck.
Much was learned between 1930 and 1945, and some of it was applied systematically in most of the European and U.S. economies as the 50s and 60s unrolled. Now, however, Europe's economic policies are ruled over by the European Union.
Those rules were imported from the USA of the 1920s as updated by the Reagan adminisration, and even more explicit than ours.: For example, any country whose annual budget deficit is in excess of three percent of its GDP, MUST lower its social expenditures until.... Until what? Until the arithmetic is OK, even though that wuld likely mean that the socioeconomy is pushed toward the abyss. It was Germany that insisted on that rule; it is Germany that now is well in excess of the 3 percent, and which (along with others) is trying to wiggle out of the rule -- with tsk tsks coming from the wisemen of the USA.
Then this last fearful note. The world economy today is the most fragile in history; because it is more dominated by finance than ever before; and the financial world is more dominated by speculation than ever could have been dreamed of in a non-computerized world. One big bubble has popped in the past two years; just as one big one popped in October 1929. The bottom was still to occur, three years later. In a recession, the downward shifts in income and jobs are measured in percentages ranging from two to ten percent. Compare that with what happened between 1929 and 1933 in the USA: Industrial production fell by 50 percent; average income fell by about 40 percent; farmers' income fell by 50 percent; those without jobs went up sixfold, from 1.5 million to 12.8 million. The depression left no sector of the economy standing upright, nor any country's economy. Each nation had its own crisis, and all had a share of a worldwide crisis. It did not come to an end until World War II came to an end -- if then. In Europe alone, 60 million people had died, most of them civilians -- through "collateral" and intended "damage.".
A global economic crisis of the dimensions of the 1930s might conceivably be averted; and might not be. Predictions about such developments cannot be made with any certainty. But even a depression of lesser degree than that of the 1930s could, in this world, make for catastrophe(s) even worse than what ended in 1945. To the economic fragility of the world economy it is necessary to add today's existent and emerging political fragilities, whether in Africa, Asia, the Middle East, or Latin America -- or, for that matter, in Eastern Europe and even in parts of Western Europe (as manifested in rising quasi-fascist movements). If all that is put in a focus that includes the strong rightward tendencies and realities, in socioeconomic as well as foreign policy/military tendencies, it is not excessive to believe that an economic crisis is more likely to be used for dangerous political purposes than for what could be constructive and enlightened socioeconomically, at home or abroad. Unfortunately, we have little need to speculate, given what the Bush administration has already done: A preemptive war in Iraq, with the plans for other such wars well underway, along with a go-it-alone foreign policy, whether as regards the environment, peace, justice or... the economy. That, taken together with a set of greedy, stupid, and harmful domestic policies, mixed in with serious moves toward the suppression of dissent (or even discussion), and a relentless media campaign that seems to know no shame, and it is entirely too possible that in retrospect the 1930s and World War III could come to seem, a few years from now, the way we are able to view World War One: terrible, but not so bad, in comparison with the permanent wars abroad, processes lurching toward "compassionate fascism" at home. We have a lot of work to do..