Deflation Risks
For so many years, the question has always been “is inflation contained?” Well, it may be that we should be worrying about the opposite problem. Deflation is not as well understood as inflation, but economists do not like the prospect as it is typically associated with economic depressions – because it reflects a drop in demand for goods and services. Paul Vieira’s article yesterday in the National Post (part of a series on the G20 summit) talks about some of the risks modern economies are currently running into.
It’s a quite interesting piece, in which Vieira talks about why deflation (not to be confused with disinflation, which is just slowed-down inflation) could be the “sleeper issue” in the G20, even though it is not officially on the agenda.
It seems the trouble has to deal with governments’ differing responses to a bad economy. Take Canada and the US, for example. Canada is currently pushing fiscal discipline as the answer to bad economic conditions, whereas the US is contemplating yet another round of spending to stimulate economic conditions. The specter of deflation is not currently an issue in Europe, where depreciation in the currency has raised prices. Still, austerity measures needed in smaller European economies could easily push prices in Europe to decline. Japan has been battling deflation for a decade, and the United States may well already be starting to deal with its effects.
If you look at the issue of money supply, if there is more money available, it should be worth less that if there is not a lot. That’s why everyone was worried about inflation when governments began spending stimulus dollars. However, Vieira makes this observation:
It has been two years since such extraordinary measures were introduced and inflation has barely budged in the developed world, save for Canada.
So, is the money supply becoming smaller in spite of governments’ interventions? Perhaps it is. The housing bust alone wiped out enormous amounts of money from the larger economy and caused, among other things mortgage rates to go wonky. The G20 meeting promises to be interesting as the various governments’ viewpoints, instincts and preferred courses of actions meet and clash.
