For the first time since 2009 the UK rate of inflation has
fallen to the Bank of England’s target of 2%. For most people, whose real
incomes have been falling, a slowing in the rate at which prices increase is
surely a welcome relief. But alarm bells are ringing for the capitalist economy as
the spectre of deflation looms large.
Despite the pre-Xmas furore over energy prices, fruit and
meat price increases slowed at the end of last year in the UK. The prices of
toys and computer games fell at a faster rate last month than a year ago.
Supermarkets are reducing the amount they charge for petrol and diesel.
There’s a similar story in the major economies of the United
States and Europe where the threat of inflation has receded.
Conversely, in Japan, after two decades of deflationary
slump, an increase in inflation has been welcomed. But this measure of the
success of the attempt to shock its economy back to growth through devaluation
and credit looks like being short-lived.
Whilst continuing to promote an optimistic tone on prospects
for growth (what else could she do?) Christine Lagarde, managing director of
the International Monetary Fund, is leading the charge against the newly
emerging menace of deflation.
“The growing danger of deflation threatens to
derail the global economic recovery,” she says.
“If inflation is the genie then deflation is the ogre that must be
fought decisively.”
So what’s the problem?
Falling prices tend to induce their own downward spiral.
People put off buying decisions as long as possible as they wait for prices to
drop, reducing demand. A reduction in demand leaves markets oversupplied and
prices drop further and faster.
Good for consumers, at least in the short term. But bad,
very bad for producers, and especially the hedge funds who own the giant global
corporations and see profits dropping like a stone if the trend continues.
So employers are forced to take action – reducing real wages
which in turn further reduces demand, driving up productivity and cutting
production by shutting factories, taking capital out of circulation.
No wonder they’re worried. The long-term impact of chasing
short-term profit by transferring production to “emerging economies” where
labour has been relatively cheap, has had long-term unwelcome side-effects.
A newly published
analysis by Marxist economist Michael Roberts digs into 50 years of data to
explain why productivity growth has declined and the dynamism of global
capitalism is waning as a result.
Roberts begins with a report from the US Conference Board (a
business research body), which says: “Emerging markets, and especially China,
account for the bulk of world’s productivity growth. But the years of
rapid, easy improvement appear to be over. Since these countries remain
significantly less productive than mature economies in US dollar terms, the
ongoing shift of economic activity away from the latter adds to the global
productivity slowdown.”
Now the rate of growth in China is dropping fast to an
official 7.7% - a 14 year low. The slowdown is accentuated by its government’s
attempts to rein in the effects of its monstrous post-2008 crash credit
expansion. And that’s really bad news all round for the global economy.
A slowdown in China – which some analysts suggest has
reduced real growth to as low as 3% - contributes to driving the self-feeding
spiral of decline into a global depression.
Roberts sums up the analysis of the Conference Board thus: “This
slowdown seems to me another signal that the world economy (or at least the
advanced capitalist economies) is struggling with a depression. It also
shows that increasingly world capitalism is failing to provide dynamic growth.”
With demand from emerging economies slowing, prices on the
global commodities exchanges are dropping. The price of an ounce of gold – the
universal measure of the value of commodities – dropped last year from $1,900
to $1,200.
Deflation has another damaging result. The real value and
cost of debt actually increases. Highly indebted countries, corporations and
individuals around the world had better take note. Talk of a “recovery” is not
only premature but entirely ignores what’s really happening in the global
economy.
Gerry Gold
Economics editor
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