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This excerpt was originally published in Roger Bootle’s book, The Death of Inflation — Surviving & Thriving in the Zero Era, pages 15-16, London: Nicholas Brealy Publishing Ltd, 1996.

I said above that one of the apparent advantages of a regime of steadily falling prices is that there could be greater stability of pay. In an outright deflation, however, pay rates are far from static. They fall along with prices. Indeed, the two chase each other downwards.

Nothing like this has been seen since before the Second World War, although there have been many occasions when workers have suffered substantial falls in their real incomes by accepting, or being forced to accept, increases in money earnings below the rate of inflation. Equally, in the conditions of high unemployment which became the norm in western industrial economies in the 1980s and 1990s, particular groups of workers sometimes accepted reductions in their pay even in money terms in order to try to preserve their jobs. But ever since the Second World War, the notion that the general level of earnings could fall has seemed like an idea out of the Ark.

In present conditions, when we have not even adjusted properly for low inflation, never mind a period of falling prices, a phase of falling incomes hardly bears thinking about. It could be catastrophic. Once the demon was let loose, it could be difficult to control the rate of fall and the state of expectations about the fall. With current levels of debt, outright deflation is a nightmare almost beyond imagining.

Even without falls in pay, though, the first onset of falling prices would be a shock after the continual upward movement in the last 60 years. It might well be regarded as apocalyptic by business. That is why even initially mild price deflation poses such a great danger. There is always a risk, particularly when financial structures and expectations are not geared to it, that a period of falling prices could whip up depression psychology and unleash a financial whirlwind of disaster.

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