Excess
capacity coupled with increasing competition, globalization,
privatization, and deregulation - led to ferocious price wars and to
consistently declining prices.
Quoted by "The Economist", Dresdner Kleinwort Wasserstein noted that
America's industry is already in the throes of deflation. The implicit
price deflator of the non-financial business sector has been -0.6
percent in the year to the end of the second quarter of 2002. Germany
faces the same predicament. As oil prices surge, their inflationary
shock will give way to a deflationary and recessionary aftershock.
Depending on one's point of view, this is a self-reinforcing virtuous -
or vicious cycle. Consumers learn to expect lower prices - i.e.,
inflationary expectations fall and, with them, inflation itself.
The intervention of central banks only hastened the process and now it
threatens to render benign structural disinflation - malignantly
deflationary.
Should the USA reflate its way out of either an impending double dip
recession or deflationary anodyne growth?
It is universally accepted that inflation leads to the misallocation of
economic resources by distorting the price signal. Confronted with a
general rise in prices, people get confused.
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