Gary Shilling Discusses the Age of Deflation

In a March 20 Bloomberg article titled "Why Global Economies Face an Age of Deflation," deflationist Gary Shilling reminds us that "The last meaningful episode of deflation was in the 1930s."

He goes on to make his case for why the world faces deflation again.

Here is an edited excerpt:

In recent years, monetary and fiscal stimulus across the world have led to the assumption that serious inflation, if not hyperinflation, is on its way. I believe chronic deflation is more likely.

Deleveraging: In a normal economy, chronic deflation would already be well established. Our global economy, however, is dominated by deleveraging in the private sector and financial institutions, and is highly deflationary. These actions are overpowering the effects of stimulus programs since 2007. Even with all the government measures, the U.K. is in a recession, as is the euro area. China's gross-domestic-product growth has slowed considerably and the U.S. reported a mere 0.1 percent annual increase in real GDP for the fourth quarter of 2012.

The liquidity created by central banks is tiny compared with the destruction wrought by deleveraging financial sectors.

Declining real median household income, even in this recovery, is depressing consumer-spending power. The same is true of income polarization because high earners are less likely to spend their money than people with lower incomes.

Competitive devaluations are now a serious threat to global growth and cooperation. ... Many countries are now pursuing competitive devaluations to spur exports via a cheaper currency and to impede imports. ... When all nations competitively devalue, they all lose because foreign trade is disrupted and economic growth is depressed.

The continuing decline in purchasing power produced by shrinking real wages and real incomes is also putting downward pressure on prices. Nominal pay is dropping, too. For about a third of those who find jobs after being unemployed six months or more, the new position pays less than the last job held.

The downward pressure on compensation is connected to the rapid erosion of labor-union power. In 2012, unions lost 400,000 members, or 2.7 percent, and their representation in the labor force fell to 9.3 percent, from 9.6 percent in 2011 and more than 25 percent in the 1960s. In the private sector, unionization fell to 6.3 percent, with the sharpest declines in manufacturing and construction.

To read the entire article, click here.