Well, none of the food prices fell!! All the price fall in Japan was probably in energy, commodities etc (which was a global phenomenon). If you look at Japanese CPI data, it was barely negative for 2 years or so. I'm not sure, how you can call that price deflation. Ofcourse, the credit off take was negative for a very long time (credit deflation). So, all the printed credit went into bonds (JGB). So, my guess is that next credit deflation in Japan will really be like 1929 depression.
BTW, there is lot of thinking (especially Mish camp) that in 1929 there was price deflation. But I quote the nobel laurate Hayek who said deflation was only secondary!! And he said it in 1931 right when "deflation" was supposed to have happened. Also, below is the quote by Hayek that recession will be marked by fall in manufacturing/higher order goods (even though lot of people today think that US is service and consumer oriented economy and manufacturing does NOT matter). And the inflation will surface going forward!! Unlike Mish expectation, that prices have started falling, I believe it will start soaring now because of consumption preventing the growth of higher order goods. To give you an example, Why would a tire manufacturer make tires for twice the price for mining equipment when GM China agrees to pay 3% rise in tire prices for the cars sold in China? For the tire companies, consumer oriented tires are soo much more profitable than twice the price rise supported by mining companies!!! Not only that, because there is not really much take in oil, the canadian oil sands companies are selling the oil tar sands land!! All explained below by the great Hayek:
safehaven.com
The main objections to these theories - I cannot go into details here…- seem to me to be three in number. Firstly, that the original increase in investment can be maintained only so long as it is more profitable to increase the output of capital goods than to bid up the prices of the factors of production in the effort to satisfy the increased demand for consumers' goods. Secondly, that the increase in the demand for consumers' goods, if not offset by a new increase in the amount of money available for investment purposes, so far from giving a new stimulus to investment, will, on the contrary, lead to a decrease in investment because of its effect on the prices of the factors of production. Thirdly, that the very fact that processes of investment have begun but have become unprofitable as a result of the rise in the price of factors and must, therefore, be discontinued, is, of itself, a sufficient cause to produce a decrease of general activity and employment (in short, a depression) without any new monetary cause (deflation). In so far as deflation is brought about - as it may well be - by this change in the prospects of investment, it is a secondary or induced phenomenon caused by the more fundamental, real, dis-equilibrium which cannot be removed by new inflation, but only by the slow and painful process of readjustment of the structure of production
Indeed, it is the experience of all depressions and especially of the present one, that the sales of consumption goods are maintained until long after the crisis; industries making consumption goods are the only ones which are prosperous and even able to absorb, and return profits on, new capital during the depression. The decrease in consumption comes only as a result of unemployment in the heavy industries, and since it was the increased demand for the products of the industries making goods for consumption which made the production of investment goods unprofitable, by driving up the prices of the factors of production, it is only by such a decline that equilibrium can be restored."
"I do not deny that, during the process, a tendency towards deflation will regularly arise; this will particularly be the case when the crisis leads to frequent failures and so increases the risks of lending. It may become very serious if attempts artificially to 'maintain purchasing power' delay the process of readjustment - as has probably been the case during the present crisis. This deflation is, however, a secondary phenomenon in the sense that it is caused by the instability in the real situation; the tendency will persist so long as the real causes are not removed. Any attempt to combat the crisis by credit expansion will, therefore, not only be merely the treatment of symptoms as causes, but may also prolong the depression by delaying the inevitable real adjustments. It is not difficult to understand, in light of these considerations, why the easy-money policy which was adopted immediately after the crash of 1929 was of no effect.
It is, unfortunately, to these secondary complications that Mr. Keynes, in common with many other contemporary economists, directs most attention. |
