Does the World Economy Enters Deflation?

Is the global economy goes into deflation?

Buenos Aires, Argentina April 22, 2009 The list of countries is increasing day by day. Not only does the crisis is affecting global economic growth, but also now the world's major economies are beginning to experience price deflation. While writing this article thinking that deflation will be at least a consolation to Philip, a friend of mine that since late last year, is planning a trip to the United States for the month of July this year. Is that the peso devaluation has made my friend can buy fewer dollars than expected for your trip to the north country (economic stagnation suffered by Argentina has also prevented, to obtain better pay). Surely the deflation that the U.S. economy will have my friend find friendlier prices with their hit pockets, and why not, over a large settlement will cross their path. The global economic landscape has changed several times since he abruptly the crisis began. Could provide the world's major economies were to be threatened by price deflation as just less than a year ago suffered the biggest price rises in years?

While it was hard to imagine, this situation was entirely predictable and expected. Is that episodes of deep recession like the current situations frequently generate deflation. More and more countries are or have begun to see signs of deflation. In yesterday, England (with a monthly decline in retail prices of 0.4% for the first time after almost fifty years), joined the group of countries that are experiencing symptoms of price deflation. In this group were already U.S., Germany, Spain, Switzerland, Japan and China, among major economies in the world. The list promises to increase soon, mainly to European countries. The deflation worries and to show it, take the case of Japan. The Japanese economic situation is such that industrial prices observed in March, a fall of 2.2% (its biggest drop since 2002). According to Hideyuki Araki, economist at the Resona Research Institute: "The companies are in fierce competition to reduce prices due to weak consumer?. This competition results in price reductions also means reduction in the cash flows of companies and may also lower profits (and the fall in prices can not be compensated with the increase in sales), increasing the risk of bankruptcies.

Thus, fewer companies will survive in a market that is still dwarfed by the crisis and rising unemployment.

The outlook for major economies are expected to maintain the context of deflation. To make matters worse, the fall in oil prices increases the margin for the rest of prices in the economy, continue to fall. The inability of monetary policy by major central banks has already been amply demonstrated during the present crisis. And this failure has been observed not only in the current context of deflation (and economic decline), but has also become clear during the sharp rise in international commodity prices (agricultural, mineral and energy between major), which had resulted in an increase of no less in the rate of retail inflation. Is it time to review the way in which monetary policy is conducted? Probably so. Monetary policy instrument currently used as exclusive control of the benchmark interest rate. They work very well in relatively normal economic environments or in those where economic problems are limited to national level. But the same fail flatly against a widespread crisis or when the problem exceeds the national level (as in the case of the sustained rise in the price of agricultural commodities). While the world's major central banks have complemented their policy rates interest with other measures to provide liquidity to the money market and to stimulate the credit market, they have failed to be as successful as hoped.

In this crusade for example, the Fed has made large injections of liquidity in the form of loans to financial institutions and even companies in order to support economic recovery. Probably monetary policy can do much more about that in situations the current crisis, but it can work in complementary measures to help restore the transmission channels of monetary policy to make it more effective. Undoubtedly, the governments of major economies are concerned about the symptoms of deflation that affects them. And the citizens of these countries How should we feel? The general fall in prices can in principle be welcomed by the population, but this may entail a serious risk in this context of crisis. Is that the fall in prices may mean lower profits for firms and the need for further cuts in the workforce to stay in business, which in turn impacts negatively on consumption, in a sort of vicious circle difficult to stop . There is no doubt that deflation is not good in this global recession.

And with the inability of monetary policy to reverse the situation, the alternative is to produce greater aggregate demand impulses from fiscal policy. What will the governments in this situation? If economies continue to show a downward trend in domestic prices should seriously evaluate the possibility to use best efforts to tax the poor performance of monetary policy (which in many countries are in a very low level in terms of cuts rates). The key to solving the problem of deflation and recession going to stimulate domestic demand. In the current situation, the commitment to fiscal policy appears to be more attractive relative to monetary policy. However, a more robust solution would by twisting the expectations of the private sector. In the U.S., are seeing improvements in indicators of consumer expectations: Is this the key to solving the current problems of U.S. and world economy?