“Axis” Brings the Evil Prospect of Deflation to World Economies

Apr 21, 2003

China, the Internet and Wal-Mart: a powerful new economic axis “fueling a global
surge in cutthroat competition, driving down prices worldwide”. That proposition,
put forth in the April 28 issue of Newsweek by writer Karen Lowry Miller, begins
by drawing connections between these disparate elements in ways perhaps only
a conspiracy theorist could love. Explains Miller, “Wal-Mart became No. 1 by
exploiting Internet technology to cut costs and to sell mountains of cheap goods,
often made in China”.

“Those who hate anything big and global will hate this axis, too. Those who
embrace free markets will celebrate the cutthroats, since they contributed mightily
to a spectacular rise of productivity in the 1990s and helped smother inflation.
Now, however, no big national economy is strong, all too many factories are
underemployed, and one has to wonder whether price pressures are heightening
the opposite risk: deflation”.

Miller goes on to position Wal-Mart’s staggering efficiencies of scale, the
Internet’s price-comparison capabilities, and Chinese cheap manufacturing as
the main instigators of downward pricing, putting the threat worldwide deflation
on economists’ radar screens for the first time in decades.

“The United States, which has been haunted by the nightmare of deflation since
its stock and Internet bubbles started popping in early 2000, is particularly
vulnerable now that growth has slowed; core inflation is less than 2 percent.
Cary Leahey, a Deutsche Bank economist in New York, gives deflation a 1-in-20
chance of striking the United States, up from 1-in-50 in 2001. ‘You could build
a case for deflation as the dark side of the productivity miracle,’ he warns”.

Moderator’s Comment: Do you agree that this triumvirate
could be responsible for spurring global deflation? How great is the risk?

The author’s big picture view of the world economy is
enlightening to a certain degree, but the risks still seem relatively small,
as described by the economists she interviewed. “Paul Donovan, global economist
with UBS Warburg, puts the probability of global deflation at 15 percent.” Much
higher than normal, I’d imagine, but I would tend to trust the natural tendencies
of world markets to compensate and ward off deflation over time. Sure, its going
to be painful as the tectonic plates of business practices shift, but…hey,
you can’t stand in the way of evolution, unless you want to wind up the Dodo
bird of your marketplace. [Rick
Moss – Moderator

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