Living in Deflationary
Times? Hold Your Breath
By HOLMAN W. JENKINS
She may put on a brave face for the kids around the Christmas tree, but
the more historically illuminated Wall Streeter is wracked with care lest
the 1930s are repeating themselves, this time with a sinkhole on the other
side of the world. Something is coming down the chimney, and it might be
In his exhaustive 1992 book "Golden Fetters," whose title sounds like an
indictment of the gold standard, economist Barry Eichengreen traces the
global depression, as have others, to an improperly tight Federal Reserve
policy, which other nations were forced to emulate to maintain their own
fixed currency rates.
His argument does not convict the gold standard so much as the rise of
mass, interest-group politics, with which the gold standard proved
incompatible. International moneymen no longer believed countries would
keep faith with the international economy against the domestic rabble, and
so the stabilizing capital flows that made the gold standard such a charm
no longer took place.
The same democratic politics, in the wake of war, made it hard for
countries to coordinate their policies and reflate together while
maintaining their exchange rates. Instead they let their currencies float
and reflated separately. By then the damage was done: bank and business
failures, unemployment, in some countries a radicalization of the middle
We are notoriously inept at judging how much money is afloat from the
price level. Often we confuse inflation with the changes in the relative
prices of things, even labor, which has the Fed on edge right now. Wages
may well rise when supplies are tight, without it meaning the monetary
engine is running out of control.
There is also the impossible problem of accounting for shifting baskets
of consumption, and for changes in quality. A car costs more than it did,
but it isn't the same car. By the reckoning of the Boston Consulting Group,
time between repairs was rising 5% a year in the early 1990s.
Category killers like Home Depot (a revisitation of the chain stores
that were a controversy during the 1920s) have taken high-quality, cheap
merchandise to places that had neither. Much less of what we consume is
even tangible now. A TV hasn't changed much, but it delivers 120 channels
instead of six or seven.
Properly accounted for, the real cost of living may have been subtly
falling for a decade. As for companies, their prices may be sticky but
their processes have become more efficient, keeping them profitable. Owners
and bosses are forgiven the big rewards downsizing brings them as long as
new opportunities catch the displacees. In a deflationary world, the real
value of future profit dollars is higher, so the market should be willing
to pay more in current dollars; stocks should command higher multiples.
To be true, this wouldn't have to be understood in detail by the average
mutual fund investor. He just has to believe he's not losing anything now
by holding on to his money--i.e., inflation isn't eating it up. And that,
all things considered, the future will be worth living, and saving,
In the 1920s, Europe was borrowing heavily from the U.S. to pay its war
debts and war reparations, and when the U.S. went into deflation, the loans
were no longer forthcoming.
Japan and the West have been pouring money into Asia, but today the
international capital markets are more open and decentralized, and the
Asians are great savers. If they show themselves willing to liquidate bad
projects and shut or recapitalize insolvent lenders, the money will rush
back in. Already money is picking up bargains among the wrecks in Thailand.
Failure is a better deregulator than an IMF agreement. Indeed, the best way
to prolong the crisis is to keep everyone in suspense about how and when
the losses will be allocated.
All financial crises are political crises at heart, and get drawn out
because the politics turn nastier and nastier. Japan seems rudderless.
Korea frightens a lot of people. China has 100 million displaced peasants
on the hoof, many of them working on construction sites in Shanghai and
other boomtowns. If those sites go quiet, and if the authorities try to
shoo the unemployed back to the countryside, anything could happen.
Boris Yeltsin could die, and that would give the markets something to
think about. Neither China's nor Russia's economy matters much now, but
China's figures in the future profits of many big multinationals. A more
gnawing concern is that a slackening of U.S. resolve could allow the world
to become safe again for war.
No one can be sure the next sour note won't be the one that finally
snuffs out the residual confidence holding up the markets. History advises
that heroic measures are religiously to be avoided at such moments. It may
be too late to call off the IMF. But Europe might do well to reconsider an
overreaching, geopolitical project that is uncalled for except by a belated
desire to prevent the last war.
The gold standard was a spontaneous order, to which countries came of
their own volition, for their own benefit. Great Britain's role as
superintendent has been played down by recent researchers, who believe it
was precisely the distributed, nonhegemonic nature of the system that
allowed it to work so well. Looking to Europe's plans for monetary
integration on very different lines, some of us get a queasy feeling.
Its promoters are steeped in the trauma of the World War II, and not all
their conclusions are wrong. The fundamental fact of our age is not the
global marketplace, but, as it has always been, the rise of welfare,
interest-group societies. Their fractiousness is their strength, and the
only force capable of displacing that fractiousness with a dangerous
harmony is nationalism. Yet the Eurocrats may end up reviving this wolf
rather than euthanizing it by trying to force Europe into their mold.
Local politics continues to call the tune in history. In the works of
recent historians you can find a conviction that, without the paranoid,
grandiose personality of Stalin, there might not have been a Cold War. In
his latest book, John Lukacs reminds us how different our century would
have been if not for the peculiar attributes of Adolf Hitler, whose strange
influence over the most educated, literate people in Europe led them to
Personality can matter disproportionately in history, never more so than
in an age dominated by mass politics and mass communications. Confidence
came back quickly under Hitler, as Germany's falling suicide and rising
birth rates after 1933 vividly show. Left alone, bad economic times are
self-correcting. But the demagogic careers that bad times may launch can
take on a logic of their own.