Singapore, Friday June 18 2010
One of the expected consequences of strong economic growth is inflation. You would then assume that inflation would be tame when the growth is anemic.
An economic depression would lead to deflation. Other causes as in the case with Japan, property prices fell after the bubble burst and caused a decade of deflation.
In the USA and Europe, the present growth is tentative at best and the fear is of a double dip recession after the recent great recession. A double dip might lead to a full-blown depression. You would expect that to lead to deflation.
Sure, printing more money would lead to inflation, and that would counter the deflationary pressures if the affected governments see a double dip on the way. So why did the Japanese government not print yen to get out of the deflation?
The simple answer is that doing that would bring on other problems. If there were a run on the currency, the “other problems” would cause more harm than deflationary pressures. Think Zimbabwe.
Stoically, the many Japanese governments, or more accurately, the civil servants, simply refused to do that and that is why you have “many” changes of government because they are seen to be unable to address the “poor economic growth” issue.
You might correctly argue that the USA and the UK governments printed money (quantitatively eased) in the recent great recession. They apparently are getting away with it, so far.
Some would argue that they were “responsible” in their easing and it was a limited and controlled easing. Obviously, it will all spiral out of control if we were to see a double dip that might lead to a depression and they decide to print more and more.
What is happening in China now, at the moment, is the, as far as I can see, increases in wage demands. It seems like it will spiral out of control, as it would seem most bizarre for a communist government not to support the workers.
Because it is not democratic, the communist regime would face unimaginable consequences, if they are seen to be abandoning the (to put it in the words of the Swedish chairperson of British Petroleum) “small” people.
Property price increases leading to wage increases which lead to more property price increases, which lead to prices of everything else to increase, which lead to wage increases…. how can the communist regime stop it?
Wage increases in China. How can you stop that in a country, when if you cannot take industrial action, you, one by one, jump off the roof of the factory (in the case of Foxcon) to press your case.
So what does this all mean? When will it start to affect the markets? So what will happen to the commodity, financial, stock, foreign exchange markets? That is something you have to discuss with your personal financial advisor.
Make sure you have a good one that makes you money, protect your wealth, instead of losing it all for you.