DEFLATING NEWS :

Wholesale prices fall 1.2% in May (Japan Today, June 10, 2002)

Japan's domestic wholesale prices in May fell 1.2% from a year earlier for the 20th consecutive month of decline...

William Safire asked last week (or the week before) what stories we're missing now because we're so focussed on terrorism. Well, this story has been going on for some time now and not only are no journalists paying attention but Alan Greenspan doesn't seem to grasp it either. The bulk of Mr. Greenspan's career coincided with the late stages of the Cold War when the enormous expenditures America was making on its military and on Social Welfare programs combined with OPEC oil cutbacks to create a climate of persistent inflation. But as a result of this experience, he remains always poised to battle a monster that was slain almost twenty years ago now. Not only is there no inflationary pressure in the US economy, there is every reason to believe that the deflationary pressure throughout the world will continue to force prices down globally. There are several factors involved :

Population : there are less and less people in the developed world to chase goods, which makes them cheaper

Technology : we keep posting "surprising" productivity gains as businesses take ever greater advantage of computers and other technologies to accomplish tasks more efficiently.

Free Trade/Global Markets : the greater ease with which goods flow and the willingness of impoverished populations to work for little, put downward pressure on prices and wages respectively and the lower wages in turn help hold down prices.

Superabundance of Commodities : Malthus was simply wrong. We have more than enough food to feed the entire world and could provide more if prices weren't too low to make it worthwhile. We keep finding more oil, more precious metals, etc. For all the dire predictions we always hear from eugenicists, environmentalists, and the like, we never seem to actually run out of anything.

In sum, the specter of a prolonged downward spiral of deflation appears to be a far more likely problem than a surge of inflation. The Fed is fighting the last war (as it always does) and, in so doing, may be exacerbating the conditions that will lead us into the next.

Posted by Orrin Judd at June 11, 2002 12:00 AM