Deflation

You really have to hand this year’s Oscar for Chutzpah to the UK Chancellor George Osborne, who is trying to claim the credit for an inflation rate that has today been declared as 0.5%. The target is 2% and the Governor of the Bank of England will have to write to the Chancellor (yes, the same Chancellor) to explain how things have gone wrong.

The point is that we are in a deflationary spiral that could be the precursor to a prolonged slump.

Deflation has several negative consequences: Spending dries up as people wait for prices to fall further and this applies to individuals as well as corporations and states. This means that economic activity slows down and production is not required and therefore redundancies increase. Capacity utilisation falls and is gradually liquidated and the downward spiral continues. At the same time, debt (both individual and state) becomes more of a burden as it does not decrease as wages and prices do.

it is difficult to overstate the seriousness of this crisis. If states do not do something to spend their way out of this deflationary spiral then it will issue into a generalized recession that will rip the whole world economy into a depression.

You read it here first! Well, perhaps not first.

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One Response to Deflation

  1. Peter Thompson says:

    Also, not forgetting that if real wages remain low the income tax take stays low too, preventing any serious reduction in state debt.
    Also, if wages keep falling in real terms then it may be good for making production cheaper but it can exacerbate the transfer of wealth from labour to capital.

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