2002 September 24 Tuesday
Stephen Roach on the threat of deflation

Writing this time in the Op-Ed section of The New York Times the Morgan Stanley chief economist Stephen Roach argues that deflation is our greatest economic peril:

America is already on the brink of deflation. Our broadest price gauge, the G.D.P. price index, recorded just a 1 percent annualized increase in the second quarter of 2002. That's the lowest inflation rate in 48 years. Prices of goods and structures covering nearly half the economy are already contracting at an annual rate of 0.6 percent. Only in services, where price statistics are notoriously unreliable, are prices still rising.

The hows and whys of America's deflationary perils will long be debated. Two sources seem most likely. First, the bubble-induced boom of business capital spending led to an overhang of new information technologies and other forms of capital equipment in the late 1990's. The result was excess supply, a textbook recipe for lower prices.

Also at work are the unmistakable effects of globalization. The modern-day American economy now has a record exposure to global competition. In the second quarter of 2002, America imported a third as many goods as it produced, well in excess of the 20 percent ratio prevailing at the onset of the last recovery in the early 1990's.

I think this threat is real. It is hard to pop asset price bubbles without a wrenching readjustment. So far we have only popped the equity and venture capital bubble. The real estate bubble is still there. Capital surpluses, combined with a large consumer debt overhang, place the US economy at considerable risk. Japan, the second largest economy in the world, continues to be stuck with a stagnant deflationary economy. The EU area is not doing well. South America's troubles are, if anything, getting worse.

Share |      By Randall Parker at 2002 September 24 05:35 PM  Economics Political


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