The Basic Risk of Free Market Capitalism is Deflation.
I know this seems a heretical notion to those who suffered inflation and studied inflation in many countries of the West, during the last Century. Nevertheless, Capitalism is designed--Free Market Capitalism that is--is designed to fill demand, store wealth, and then eventually create demand. There are simply no barriers to free market capitalism's ability to satisfy basic, organic demand. Once that has been accomplished, capitalism sets about on its next task of creating demand. Demand for all sorts of products, services, and experiences that satisfy the psychological desires, of human beings.
Japan is the fate of capitalism. Satisfaction of basic organic demand was accomplished rather quickly. The next task was wealth storage in the form of aggregate savings. Finally, Japan set about the task of creating demand--until the inevitable exhaustion was reached among the populace. Japan is an intriguing portrait today. The government is in debt--but the people are not. It remains a very wealthy and stable society--with a strong social contract and a very, very high standard of living.
I grant that this little "essay" of mine on capitalism is overly simplistic and that Japan as an example is flawed because of its unique cultural features which tend to drive its economic fate (Let's recall that Economics is a social science). Nevertheless, Deflation too has made its presence felt more than several times in Western History and it tends to follow the path I have outlined--provided it is allowed to flourish under freewheeling, free-market conditions.
We live in precisely those conditions today. And, have been doing so since the Berlin Wall fell, Europe formed a common markets--and robust and free global trade became the paradigm most nations and people signed onto. And the globe is still signing on--to that paradigm.
The largest counterbalancing force however in my view is Energy--and the cost of Energy and Energy's crucial factor in the production of food. I don't think of this counterbalancing force as Malthussian (sp.) so much as just a force of enduring scarcity. I'm not convinced capitalism can actually solve this problem.
The problem for Alan Greenspan's Rate Cuts, Liquidity Pumping, and Weaker Dollar--and the Tax Cuts--and Asian Central bank's efforts to keep our interest rates low so that we can "perform" as consumers--is that this is all operating within a new, hyper, global, freewheeling capitalism that we've not actually seen before on this scale--with this level of interconnectivity. Labor is coming "on line" at a ferocious rate to a system already overloaded with spare production capacity.
The effort therefore to keep the system Levitated has been massive. This always seems to happen in late-stage Capitalism, after basic demand has been satisfied, wealth storage has occurred, and the task of creating demand becomes increasingly desperate. (For now I will avoid the poltical aspects of our wealth distribution which have abandoned any pretense to European style Social Democracy--and put us on a course to Rich/Poor extremes...)
I continue to see Inflation Panics breaking out in selected areas as we move forward--but Capitalism if not compromised by trade barriers will easily solve those those price increases. We are not only in a Deflationary Paradigm in my view but we are in the center of one of its periodic storms. |
