The Structural Crisis Behind the Panic About World Deflation

Not so long ago, the pundits and the investors saw the “emerging markets” – a euphemism for China, India, Brazil, and some others – as the rescuers of the world-economy. They were the ones that would sustain growth, and therefore capital accumulation, when the United States, the European Union, and Japan were all faltering in their previous and traditional role as the mainstays of the world capitalist system.

So it is quite striking when, in the last two weeks of January, the Wall Street Journal (WSJ), Main St, the Financial Times (FT), Bloomberg, the New York Times (NYT) and the International Monetary Fund (IMF) all sound the alarm about the “collapse” of these same emerging markets, worrying in particular about deflation, which might be “contagious.” It sounds like barely contained panic to me.

First, a word about deflation. A “calm” market is one in which nominal prices do not go down, and only creep up slowly. This enables sellers and buyers to predict with reasonable confidence what decisions are optimal for them. World markets have not been calm in this sense for some while. Many analysts date the decline of such calm from the 2008 turn in U.S. mortgage markets. I myself see the decline of such calm as beginning in the period 1967-1973 and continuing ever since.

The market is not calm if there is either significant deflation or significant inflation. These are really the same thing in their impact on real employment figures and therefore on world effective demand for production of all sorts. Whether real world employment goes down for one or the other reason, there is both acute real suffering for the vast majority of the world’s population and a vast increase in uncertainty, which tends to freeze further productive investment, which leads to more suffering and more freezing. It is a vicious circle.

To be sure, some large capitalists are able to take advantage of the situation through canny financial manipulations involving speculation. Their problem is that they are taking a big gamble – either massive appreciation of their assets or bankruptcy. Still, at the very least these manipulators have a chance to gain massively. The majority of the world’s population are fairly sure to lose, often massively.

What is in these panic reports? Michael Arnold in the WSJ asks, “Will selloff push emerging market central banks to raise rates?” He says that the turmoil was caused by “disappointing growth figures” for China and Argentina’s devaluation of its currency. Arnold particularly worries about India and Indonesia, which have “large debt loads and heavy dependence on foreign lending,” and therefore are moving to curb inflation. He mentions Turkey as another problem zone.

Hal M. Bundrick in Main St emphasizes contagion. He cites both shifting U.S. monetary policy and concerns for the Chinese economy plus political turmoil in Turkey, Argentina, and Ukraine as “hastening the decline.” He cites a Russian banker about the fall of the ruble and an atmosphere “close to panic.” He says this panic is “crossing over from emerging to developed [markets] in terms of sentiments.”

Gavyn Davies in FT headlines his story, “Will the emerging world derail the global recovery?” He says that emerging currencies have been “in free fall.” He too sees Chinese slowdown as the key issue, in particular via its impact on “supplier economies” (that is, countries that sell primary products to China) – in particular Brazil, Russia, and South Africa. He says the “pain of a credit bubble” is not only China’s problem but that of Turkey, India, and Indonesia. If the Chinese decrease in growth goes much further, it would threaten “renewed global recession.” Ending on a mildly optimistic note, he immediately takes it back by saying that his simulations (the basis of his mild optimism) are based on old patterns that may no longer hold.

Ralph Atkins in FT talks of “the spectre of deflation.” Deflation, even if positive in the short term, is “definitely negative for equities” over the longer run. His particular worry seems to be the euro zone. Having cited the reasons of others to see the brighter side, he ends by saying, “the spectre of deflation wore its invisibility cloak.”

And none less that Christine Lagarde, managing director of the IMF, told the assembled Establishment figures at the World Economic Forum in Davos that there is a global market threat as the United States cuts back its cash stimulus. There is a “new risk on the horizon and it needs to be closely watched.” She cites the “spillover effects…in emerging markets.”

That same week, Bloomberg had an editorial that began, “Emerging-market economies had a brutal week.” They see the emerging markets as too tied to the U.S. dollar and therefore “unduly sensitive to fluctuations – real or imagined – in U.S. monetary policy.” So they preach to the U.S. Fed not to “taper too soon” and predictably to the emerging countries to “improve their policies.”

And not least, Landon Thomas in the NYT informs us that the latest buzzword on Wall Street, replacing BRICS, is “the Fragile Five.” This list includes three BRICS members (Brazil, India, South Africa), plus Turkey and Indonesia. It leaves off both China and Russia, whose geopolitical clout seems to weigh heavily on the scales.

Everyone seems to proffer good advice, sure that it will somehow palliate the situation. Few seem to be ready to admit that global effective demand is the real problem. But one senses that, just below the surface, they understand this. This is why they panic, because then their whole emphasis on “growth” – a cardinal faith – is undermined. In that case, the crisis becomes not cyclical but structural, to which one has to respond not with palliation but with inventing a new system. This is the famous bifurcation in which there are two possible outcomes – one better and one worse than the existing system, one in which we are all involved as players.