Deflation and importer economies

by Henry Park

 There is not much experience of prolonged contractionary deflation in the united $tates since World War II. This particular situation of eery similarities with the opening of the 1929 Great Depression is unprecedented. We should find it interesting how U.$. authorities will respond.

In our understanding of this situation, we do not want to overweigh any of the following data.

1. U.$. employment levels

2. The dollar

3. Commodity prices, especially oil

There is a certain sense in which the capitalists might let deflation take hold, if it were only a matter of the above three factors. Politically, I doubt that Republicans could make Democrats pay in 2010 for a huge hike in unemployment; deflation would aid the dollar and commodity prices might fall. For all these reasons there might be hesitation to stop deflation.

If the dollar rises faster than deflation cuts retail prices in the united $tates, importers might do well. We are referring to a doubly unanchored situation. If the dollar, pound or other net importer country currencies rose, it could benefit those importer businesses. That would presume other countries continue to pile up dollars for no reason, because if there were exporter inflation, it would cut into importer country business margins.

To look at this another way, there cannot be too much reality involved in a rise in the dollar. If the dollar rose because of U.$. deflation coupled with exporter inflation, then eventually the import business would stifle itself, and we hold that would be fatal. However, if the dollar rises simply because the rest of the world fetishizes the dollar and sits on them, the question is different.

Although there is no firm data on which to base an opinion of U.$. economic authorities, I believe that they would not allow prolonged and serious deflation. Specifically, I would predict that they would use old-fashioned means of printing money or inducing inflation after a certain point. That is a reason that just because U.$. so-called workers won’t seize the means of production any time soon, we cannot say that there are not other specific business environment risks in the united $tates.

Whether the length of intolerable deflation is six months, a year or three years, that’s a squeamish point. With job loss like we saw in January 2009, the pressure will be on if deflation really shows its face.

Oil-producing countries should not be fooled into thinking oil is the central commodity of the world. The supply of oil should adjust downward in line with the overall economy to maintain prices. I say that not as a matter of opposing deflation or supporting sustainable energy production, but a matter of not letting oil-producing nations bear the brunt of this capitalist crisis.

The financial manipulator countries that we call imperialist take advantage of Muslims, who by religious dictate are not allowed to engage in all the banking that the West does. Likewise, the Chinese still cultivate a non-imperialist image and claim not to be dominated by finance capital export concerns. That leaves countries like Russia, $outhern Korea, Malaysia and Brazil to concern themselves with Western financial manipulation.

The United $tates is actually the best disguised importer parasite country. To replace it, China could issue a new Tibetan currency, force banks to hold equal reserves in it to issue loans in Chinese currency and then hand out $20,000 worth of Tibetan currency per Tibetan. The Tibetan currency would stay afloat by legal manipulations and Tibetan standards of living would suddenly rise; although infrastructure would prevent the degree of immediate impact one would hope for.

Patrick Buchanan pointed out that the United $tates stuck with capitalism despite 89% losses in the stock market earlier in the century. I have doubts that would be the case a second time around. The stock market is connected up with entitlements for both rich and poor that did not exist in the 1929 Great Depression. That’s not to say I see socialism coming. Rather, if I were to pick a sign of the dominoes falling, in addition to the GNP, I would look at the stock market. Charities, hospitals, universities and care for the elderly are tied up with the stock market. The capitalist authorities might find a collapse of employment, foreign currencies and commodity prices tolerable enough. At the end of the day though, deflation means a net positive interest rate for the wrong reasons and it will come with dominoes falling as expressed in the stock market. As such, deflation will find politically powerful foes.

A warning to the oppressed nations–if the major capitalist countries induce inflation in a coordinated fashion, it will still be dollar-holders losing out disproportionately. There has been a correction of currency-holding strategies, but dollars floating around out there still dominate. Investment in currencies in countries with high inflation may be unattractive, but investments in businesses in such countries could well be a good idea. Politically, inducing inflation to cause currency-holders to lose value will likely come in forms that benefit home countries. The more other countries hold U.$. dollars, the more they bear the burden of inflationary strategies to benefit program recipients in the united $tates. If the united $tates could stand prolonged deflation, I would not make this argument.

Nor is the united $tates Japan. If the government hands out newly printed cash, Amerikans will spend it. What is significant is that Japan is the number two economy and also in bad shape. Japan’s problems add another whole dimension to the economic crisis.

On the other hand, it is also true that if the interest rate is still near zero when the authorities turn to inflation, the united $tates risks another kind of push on the dominoes. Turning to inflation when the interest rate is at zero is a message of “invest or die.” The trouble for the united $tates is again, that the investment could end up elsewhere.

Stimulus package legislation debating “Buy American” clauses founders on the same problem. The political constitutency for Keynesian stimulus is Amerikkkan, but the role that Amerika plays in the global economy is unquestioned importer. The contradiction is not between private appropriation within the united $tates and socialized production within the united $tates. The real question is whether the national bourgeoisie can envision exporting to its own people or at least taking export revenues and investing them outside the speculation-dominated economies. The imperialist countries used to provide non-Muslim banking services and bullets. Now they can’t even provide banking services.

Although so-called labor restiveness played no role in bringing about the current crisis and Obama has already passed rules making unionizing easier, there will be an argument about whether across-the-board salary cuts are the answer to falling stock markets. Some would see falling salaries as another knock on the dominoes suppressing demand when it needs to rise. Others will see cuts as good for traditional stock market reasons, if one can presume there is a bottom somewhere. If salary cuts do start to take hold, it will add fuel to the fire for real negative interest rates among opponents of deflation. Real negative interest rates are jargon-covered subsidies that say capitalism is finished, but it is possible the capitalists would turn to them as a temporary last resort. Perhaps in some countries it won’t be a matter of choice.

MIM’s assessment has been that this recession has the economic potential of going deeper than the 1929 Depression. Our readers will have noticed that we were not in the business of predicting recessions since forming in 1983. We see that as generally the task of the mushy left-wing of parasitism. This crisis we are putting in a different category because of international factors. Currently the rest of the world holds U.$. dollars in exchange for military occupations, bombing of Palestinians and imprisonment of visa violators. China, Korea, Brazil, Russia etc. could probably cook up something somewhat less stupid within their own countries.

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