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Strategies & Market Trends : World Outlook
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To: Don Green who wrote (982)10/16/2002 5:17:43 AM
From: GUSTAVE JAEGER  Read Replies (1) of 48876
 
Deflation threat to world economy

By Nick Beams
16 October 2002

As stock markets continue to fall and financial problems start to spread, a discussion has broken out in sections of the financial press over whether the global economy is entering an era of deflation of a kind not seen since the Great Depression.

An article in the Economist of October 10, for example, headlined "Of debt, deflation and denial" warned that the risk of falling prices was greater than at any time since the 1930s. Deflation could be a serious threat in America, Europe as well as Japan. This could prove "particularly awkward" given the increase in borrowing, especially in the United States. This is because while in an inflationary environment the borrower tends to benefit as loans are repaid in a devalued currency, under deflationary conditions debt burdens increase.

If prices continue to fall for any length of time this leads to major problems when the value of assets drops below the loans taken out to purchase them. This is the situation now facing many banks and financial institutions in Japan and is one of the main reasons why, despite bank bailout efforts, the mass of bad loans within the financial system keeps on rising. Now it seems that these problems may be starting to spread to the rest of the world.
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