Deflation Threatens

A Specter goes about in Germany, the Specter of Deflation

By stutend

[This conclusion of the article “Bye Bye Employment Office, Welcome Job Center”, July 11, 2003 is translated from the German on the World Wide Web, http://germany.indymedia.org/2003/07/57084.shtml.]

…The International Monetary Fund (IMF) recently warned of a “deflationary development” and a dangerous intensification of the economic crisis in Germany. The German Institute for Economic Research joined this judgment and referred to its earlier admonitions. While a deep fear of inflation with galloping prices exists among Germans, the disastrous effects of a deflation are usually underrated. Some even believe that the falling prices occurring with this form of economic imbalance are welcome.

Deflation is characterized by a lowering of price levels on a broad front and thus by the increased purchasing power of money. The cause is a surplus of the supply of goods over the demand for goods. A deflationary gap or demand gap occurs when the growth of the money supply over a long time is less than the growth of the gross national product. If the state in such a situation raises taxes and fees and simultanously cuts its investments as presently happens, the money available to the economy becomes more scarce and demand declines more and more.

Deflation sets in motion a perilous downward spiral. Businesses have to lower prices again and again and throttle or even stop production at the end to sell their products. Workers must be dismissed and unemployment climbs. Firms that don’t gain revenue or inadequate revenue cannot blot out their credits any more. Banks collapse. Whoever still has a job must expect drastic wage cuts. Consumption declines again and again. Given the poor prospects, whoever has money postpones planned purchases in the hope for lower prices.

Deflation makes the economy shrivel. A growth of 0.75 percent for 2003 predicted by the German government is illusory. Experts regard the growth of 0.5 percent estimated by the six great economic institutes in the spring expert opinions as exaggerated. We are already moored in a recession. It is a tragedy that Germany as a member of the European currency union can no longer steer against the German Central Bank with its own independent fiscal policy.

Lower taxes and fees could trigger investments and stimulate consumption. Enormous state investments in the range of several billions are necessary for animating the business cycle. Debts accepted for an effective investment program could easily be expunged after an economic upswing. The EU stability pact that prevents adequate new indebtedness must be cancelled! The danger of inflation nowhere to be seen should be banished. Instead the catastrophe of deflation threatens.

The German government walks in the footsteps of Chancellor of the Reich Heinrich Bruning who tackled the grave economic crisis at the beginning of the thirties with rigorous savings. Wages and salaries fell, taxes increased and state investments scaled back.. Despite falling prices, the citizens didn’t spend any money. The economy was in a downspin. The number of unemployed swelled to six million. Whole regions were impoverished. Public food kitchens fed the starving. The soup kitchens of our time are the employment offices that must finance more and more needy. Their treasuries are now empty..