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- Sep 25, 2007
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Hi all,
An article from the November 24th edition of the Globe and Mail (Comment). It explains what deflation is, how it gets started, why it is so difficult to get out of and what can be done about it. Excerpts:
When the economy spirals downward, it feeds on itself. But if we set our sights on the right prize, we can work together to prevent things from getting even worse.
Deflation refers to a sustained drop in prices caused by falling economic demand - a situation where unemployment of both people and capital soars and where the standard monetary tools that policy-makers use in response, such as interest rate cuts, stop working.
In the worst case, deflation becomes its own cause.
Most policy-makers and commentators understand that deflationary cycles are self-reinforcing. But few grasp another key characteristic: Deflationary cycles are, at their core, what social scientists call a collective action problem. And this characteristic has important implications for how we should respond.
Collective action problems come in many forms, and social scientists have developed a whole subfield of research - "game theory" - to try to understand them better. The particular collective action problem we face right now is called a "stag hunt," after a dilemma described by the 18th-century Swiss philosopher Jean-Jacques Rousseau.
The main reason deflationary cycles are so diabolically hard for policy-makers to stop is that governments can`t force people to trust each other. Instead, all they can do is inject spending directly into the economy, through increased unemployment benefits (because the jobless spend almost all the money they get) and infrastructure investment, and hope that by putting a floor under economic demand, people and companies will eventually become less fearful and start to spend again.
Governments need to move fast, because this crisis, which has taken several forms already, is about to change form again.
Soon we could see a string of sovereign defaults of poor and emerging economies that can`t meet their debt obligations.
Even worse, hundreds of millions of previously poor people from Hungary and Turkey to India and China - recent arrivals in the global middle class who`ve benefited from an economic boom fuelled by endless quantities of cheap credit - are about to see their standard of living fall of a cliff. Around the world, Western-style capitalism will be discredited, as it`s perceived to have wiped out people`s jobs and life savings.
Our global financial crisis could then morph into a global political crisis, as extremists of all stripes - neo-Nazis in Eastern Europe, hyper-nationalists in China, and Hindu fundamentalists in India - accumulate popular support and power.
http://www.theglobeandmail.com/servlet/sto...specialComment/
Keith
An article from the November 24th edition of the Globe and Mail (Comment). It explains what deflation is, how it gets started, why it is so difficult to get out of and what can be done about it. Excerpts:
When the economy spirals downward, it feeds on itself. But if we set our sights on the right prize, we can work together to prevent things from getting even worse.
Deflation refers to a sustained drop in prices caused by falling economic demand - a situation where unemployment of both people and capital soars and where the standard monetary tools that policy-makers use in response, such as interest rate cuts, stop working.
In the worst case, deflation becomes its own cause.
Most policy-makers and commentators understand that deflationary cycles are self-reinforcing. But few grasp another key characteristic: Deflationary cycles are, at their core, what social scientists call a collective action problem. And this characteristic has important implications for how we should respond.
Collective action problems come in many forms, and social scientists have developed a whole subfield of research - "game theory" - to try to understand them better. The particular collective action problem we face right now is called a "stag hunt," after a dilemma described by the 18th-century Swiss philosopher Jean-Jacques Rousseau.
The main reason deflationary cycles are so diabolically hard for policy-makers to stop is that governments can`t force people to trust each other. Instead, all they can do is inject spending directly into the economy, through increased unemployment benefits (because the jobless spend almost all the money they get) and infrastructure investment, and hope that by putting a floor under economic demand, people and companies will eventually become less fearful and start to spend again.
Governments need to move fast, because this crisis, which has taken several forms already, is about to change form again.
Soon we could see a string of sovereign defaults of poor and emerging economies that can`t meet their debt obligations.
Even worse, hundreds of millions of previously poor people from Hungary and Turkey to India and China - recent arrivals in the global middle class who`ve benefited from an economic boom fuelled by endless quantities of cheap credit - are about to see their standard of living fall of a cliff. Around the world, Western-style capitalism will be discredited, as it`s perceived to have wiped out people`s jobs and life savings.
Our global financial crisis could then morph into a global political crisis, as extremists of all stripes - neo-Nazis in Eastern Europe, hyper-nationalists in China, and Hindu fundamentalists in India - accumulate popular support and power.
http://www.theglobeandmail.com/servlet/sto...specialComment/
Keith