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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Karen E Hoof who wrote (15573)	8/10/1998 11:07:00 AM
From: Alex	Read Replies (1) \| Respond to of 116779

Falling prices mean tough times Deflation could replace inflation as the world's economic bogeyman, warns VICTOR KEEGAN. <Picture><Picture><Picture><Picture: ----------><Picture>from <Picture: The Press> <Picture: o >Deflation was a frequent occurrence before World War 2, and was associated with severe recessions. It is now on the way back. People all over the world regularly complain about inflation. Moaning about rising prices is, after all, an essential part of our daily ritual, like complaining about the weather. But if there's one thing worse than living with inflation, it's trying to live without it. Economists are becoming seriously worried that deflation -- falling prices -- may become rampant around the world. When prices start falling people often postpone their purchases in order to take advantage of lower prices later. That is a logical thing for an individual to do. But it could be catastrophic for an economy. Why? Because it leads on to a slump in consumer demand, followed by increased unemployment and lower investment. This raises the spectre of being sucked into a downward spiral of lower prices and increasing joblessness. It is enough to make you appreciate the hidden attractions of inflation, which, after all, gives us the illusion we are earning more -- enabling us to buy things before the price goes up. Deflation was a frequent occurrence before World War 2, and was associated with severe recessions. But far from being banished, it is now on the way back, and governments are unsure about what to do. Japan's economy is the most exposed: land and share prices have been falling there for most of the last decade, and now retail prices have joined the downward slide. In the six months to April consumer prices in Japan -- the world's second biggest economy -- actually fell by 0.5 per cent. But Japan is not alone. In China, consumer prices have fallen by 1.3 per cent in the last year. They have also started to fall in Sweden and Luxembourg. In the United States prices are rising by under 1.5 per cent a year. One of the main reasons why the Federal Reserve hasn't raised interest rates yet is its fear that the economy might be sucked into a deflationary spiral. As Japan knows only too well, once you get near deflation it turns into quicksand, sucking you under unless you can pull yourself out. This is easier said than done in Japan, where interest rates are now so low -- around 1 per cent -- that they can't be lowered any further. So traditional monetary policy weapons are almost useless. Interest rates can't fall further than zero. But if they remain at or a little above zero while inflation itself becomes negative, then the real rate of interest -- that is, adjusting for inflation -- starts rising. High real interest rates of this kind mean that monetary policy is contractionary when, in order to get the economy moving again, it ought to be expansionary. In Japan they have found that fiscal policy doesn't work very well either, because people are so apprehensive about the future that they simply save any tax cuts given to them. This is why American economists at opposite ends of the spectrum -- from Milton Friedman, the monetarist, to Paul Krugman, the Keynesian -- have been urging Japan to do what is normally considered heretical: to print more money in order to engineer a sustained rise in inflation -- and thus stabilise the economy. This can't happen too soon, because deflation can be contagious. If it happens in Japan, China may not be far behind, because its prices have to stay competitive with Japan. The disease could easily spread to the rest of the world, because governments everywhere are adopting fierce monetary policies to bring inflation as close to zero as they can, to maintain their competitiveness. But it is only a short distance from low inflation to falling prices. It takes only one short step to fall off a cliff. The world had better be on its guard.fuat--Observer press.co.nz