Re: Deflation: It Threatens the United States--and the World

["Schulte-baeuminghaus" <schulte.baeuminghaus@xxxxxxxxx>]

The only way out of this deep and potentially long-lasting crisis is the
remedy proposed within VOW eighteen months ago:

A Marshall-Plan-like public investment program, stimulating private
investment - real fixed-capital private investment - around the world.
If governments won't get in there and do it, we - private people, good,
direct democrats - must get in there and formulate the programs for them.
Everyone must be involved: the developed, so-called rich countries and the
developing, so-called poor countries.
We have the great opportunity to solve the short-term crisis of world
recession/depression and, at the same time, to solve the long-term problem
of chronic poverty all around the world.
Let me just say that some countries are already planning and beginning to
implement public-investment rescues, although not on the
Marshall-Plan-universal scale that is needed.
The thinking of the Government of China is already well-advanced.
The Government of Italy is busying itself with formulating a large public
infrastructure program.
Perhaps it's only wishful thinking, but, if we could get the reconstruction
of Iraq going on an honest multilateral basis, with sound planning and
solid, professional implementation by the best-qualified firms, perhaps that
could provide a model for more universal cooperation to resolve our problems
of recession and chronic poverty throughout the world.
That should be our goal and our highest priority. We should reject the
temptations of power, violence and imperialism in favour of the real
benefits of a world at peace, whose people are working together for the good
of all.
An impossible ideal?
Perhaps.
But worth working for.
And, if we work together, we could put it together.


James Cumes
http://VictoryOverWant.org
http://crystaldreamspub.com/bios/authors/A-E/cumes_j.htm


----- Original Message -----
From: "Jozef Imrich" <chezimrich@xxxxxxxxxxx>
To: <VOW@xxxxxxxxxx>
Sent: Thursday, June 19, 2003 12:40 PM
Subject: Deflation: It Threatens the United States--and the World


VOW predicted this via James Cumes long time ago....


Deflation: It Threatens the United States--and the World

by William Greider


At the risk of sounding like Chicken Little, I am going to describe the
economic situation in plain English. The United States is flirting with
a low-grade depression, one that may last for years unless the
government takes decisive action to overcome it. This would most likely
be depression with a small d, not the financial collapse and "grapes of
wrath" devastation Americans experienced during the Great Depression of
the 1930s. But the potential consequences, especially for the less
affluent and the young, would be severe enough--a long interlude of
sputtering stagnation, years of tepid growth and stubbornly high
unemployment, punctuated occasionally with a renewed recession.
Depression means an economy that is stuck in a ditch and cannot get out,
unable to regain its normal energies for expansion. Japan,
second-largest economy in the world, has been in this condition for
roughly twelve years, following the collapse of its own financial
bubble. If the same fate has befallen the United States, the globalized
economy is imperiled, too, since America's market for imports and its
huge trade deficits keep the global trading system afloat.

Most authorities, I should add, do not regard any of this as likely. The
great difficulty for policy-makers is that this doesn't much feel like a
crisis--not yet anyway, for most Americans. So where's the urgency to
undertake radical remedies? Some of Wall Street's best forecasters, for
instance, are predicting 4 percent US growth in the second half of 2003.
But Japan experienced false recoveries, too. Nobody knows what will
unfold if nothing is done, but the consequences of waiting to find out
could be horrendous for the broad ranks of Americans. When the US
economy corrects for its excesses, it is always the innocents who are
led to the slaughter first. Even if the odds are only one in four that
the worst will happen (as the Dallas Federal Reserve Bank president
recently estimated), it seems reckless to gamble. Taking strong measures
now would be messy and disruptive to regular order (maybe wasteful if
they aren't needed), but in the present circumstances that would seem
more prudent than a false optimism that lamely repeats that the "good
times" are right around the corner.

A depression can be read as a "market signal" of a dysfunctional economy
that requires fundamental restructuring. Japan learned this the hard
way. In this case, such a signal may be flashing the need for deep
changes both in the American economic system and the world's. Surely it
is not too soon for Americans to ask themselves what might be out of
whack and how to correct things--starting with their own much-celebrated
economy.

I asked a financial economist at a major US hedge fund where the United
States appears to be at this point. "We are in the second or third year
of what Japan has gone through," he surmised. How much longer might this
go on? "Another ten years," he said, "if you think about Japan, another
ten years."

The good news, so to speak, is that the Federal Reserve is on the case.
At least Fed Chairman Alan Greenspan and colleagues now acknowledge that
the gravest danger lurking in this situation is a general deflation of
prices, and they promise to make sure that doesn't happen. For many
months, Greenspan and other governors dismissed the growing anxieties
expressed in financial circles by describing the chances of deflation as
"extremely small" and "quite unlikely." After the indexes for wholesale
and consumer prices both fell in April, the Fed dropped those reassuring
phrases. The chairman instead announced that pre-emptive actions may be
needed to head off the threat. Declining prices, if they persist
generally, create a vicious spiral of negatives--falling profits, more
closed factories, shrinking employment and incomes, accompanied by waves
of failing debtors, both corporations and families. In short, a far
larger calamity than stagnation.

Though Greenspan doesn't say so in plain English, Fed governors
recognize the corrective action that may be required of monetary policy:
Pump up the money supply and deliberately induce rising prices--that is,
foster a renewal of inflation, their old scourge. Rising prices provide
an essential lubricant for any sustained recovery because a dose of
inflation helps businesses get well and takes some of the depressive
pressures off wages and debtors of every kind. The central bankers,
however, are facing a very awkward moment. After twenty years of
relentlessly reducing the inflation rate to near zero and winning great
praise for their triumph, the governors are naturally reluctant to
announce that the "disease" they conquered has become the "cure."

But at least the Fed is thinking about doing something. Washington's
elected politicians, by contrast, continue to act as if this is just a
temporary downturn in the normal business cycle, an opportunity to score
political points with measures that show folks they care. Neither
Republicans nor Democrats seem to grasp the enormity of what the economy
is facing. Their ignorance matters. Without a full and contentious
public airing of the cause-and-effect implications, there is no way to
develop the political foundation for undertaking large and controversial
measures. If Washington responds tentatively with cautious
half-measures, as Japan's government did for many years, then the
results for us may look a lot like Japan.

Basically, what's under way is a brutal unwinding of the delusional
optimism that reigned during the 1990s--excesses like the hyperinflation
in financial assets and the swollen ambitions that led investors and
companies to wildly overvalue their prospects for future returns. The
stock-market bubble was the most obvious expression of excess, but not
the most serious dimension. In an era of Internet fantasies and
collective self-delusion, business sectors (and their financiers)
overinvested on a grand scale and generally used borrowed money to do
so. That is, they built too many factories, shopping centers and office
buildings--creating more productive capacity than the marketplace could
possibly absorb. Consumers indulged in their own version of wishful
thinking, borrowing heavily to keep on buying, hoping the "good times"
would last long enough to bail them out.

This legacy of accumulated excesses lies across the American economy
like a heavy wet blanket--overcapacity in production, overpriced
financial investments, mountainous debt burdens for corporations and
households, and thus a deepening reluctance to invest or to consume.
Personal debt is now at an extraordinary 130 percent of disposable
income, up by nearly one-third since the mid-1990s. Manufacturing is
operating at only 72.5 percent of its productive capacity, greater
idleness than during the 1990-91 recession and approaching the severity
of the 1982 recession. For producers of semiconductors and related
electronic components, capacity utilization has fallen to 65 percent. In
telecom equipment, it is at 50 percent. That's why there is so little
new investment. What company is foolish enough to build new plants when
so many existing ones are shuttered? And who would lend them the
capital? If consumers run out of capacity to borrow more or can no
longer refinance home mortgages, the collapse of aggregate demand will
become far worse.

The US economy is unlikely to recover its full vigor until this dead
weight from the past is substantially reduced. In the meantime, the
struggle of companies (and other countries) to dump their excess
production by selling cheap, while also shrinking jobs and workweeks,
threatens to make things still worse, eventually tipping into a general
deflation of prices. The broader meaning of deflation, however, is that
assets of almost every kind, from financial investments and real estate
to manufactured goods and commodities, are being revalued
downward--slowly, steadily correcting for the falsely optimistic asset
valuations achieved during the boom years. The overvaluations, though
most dramatic in Japan and the United States, were transmitted worldwide
through trade and the hyped-up energies of global investing. In this
sense, deflation is already under way and started five or six years ago
with the violent financial collapses that swept across developing
nations in Asia and that continue to stalk weakening economies on other
continents. China, given its burgeoning low-wage output, is now the
world's main deflationary engine. Its exports are underpricing Japan's
and taking market share away from other poor countries, thus forcing
rival producers to lower prices still further (China now has the largest
trade surplus with the United States, surpassing Japan). When too many
goods are chasing too few buyers, the main game is to make sure someone
else gets stuck with the unsold surpluses.
http://www.commondreams.org/views03/0617-10.htm " target="_blank"> The
mountainous debt burdens
The VOW Roundtable
connect : contribute : create

http://www.onlineopinion.com.au/2002/feb02/cumes.htm
http://www.authorsden.com/jozefimrich

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