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Editorial
Last Updated: 06/09/2003
Deflation and War
Simon Stander

The 1930s throw a long shadow. Does deflation and war go together?


Deflation and War

 

In the twenties and thirties of the last century, deflation and falling trade and investment was a curse, and the horrors of the Second World War are sometimes supposed to have been built on this underlying economic base.

Now deflation, after decades of inflation in the West, is beginning to raise fears again, and, given that images of war and threats of war are becoming more and more common-place, the question is: does deflation in anyway increase the possibility of violent conflict? Does deflation in some convoluted way result in war?

Japan has suffered from deflation for some time now. Interest rates and prices are close to rock bottom in the USA, in Europe and falling sharply in Germany. In the long period of inflation in Western economies from 1940, the standard way out of falling prices, the symptom of recession, has been for the government to manipulate interest rates. Central Banks cut interest rates to stimulate growth. When, however, interest rates have fallen to nearly zero, there is nothing to cut. Consumers cannot be induced to spend more, prices fall further, unemployment rises, international trade stagnates. It is the nineteen thirties all over again, as the doom-sayers have been “predicting”, ever since the sharp fall of the DOW and on the NASDAQ in the USA.

With the situation so potentially serious, according to economists and business journalists (and farmers!), the G8 might have been expected to come up with prescriptions at its recent summit in Evian. However, Andrew Walker of the BBC reported on 4 June:“just as in the diplomatic talks, there was a flavour of ‘don’t mention the war’, with leaders disinclined to dwell on two major economic wars – deflation and the weak dollar.” While Chirac went as far as indicating that the conditions were favourable for worldwide economic growth, Greenspan back in Washington argued that the risk of "corrosive deflation" was low. But economic commentators have now firmly seized on discussing the dangers of deflation.

 

Symptom or cause

 

What is rarely made clear in the news, however, is what lies behind the deflationary pressure. The main economic argument revolves around the issue of under-consumption: if you can ensure that the consumer spends, you can head off deflation because the producer will then respond to demand. The problem with this is that it ignores the issue that the problem is generated by over-production, in particular the endemic tendency of the liberal economic system to over-produce. The real problem is that over very long periods there is an inbuilt tendency for deflation to occur. (Kondratieff was the first person  in 1936 to observe this phenomenon statistically). This tendency can be headed off to some extent by governments in the way they consume. In other words, governments are consumers, too, and they consume in two spheres: civil and military.

The relevance of deflation to war, therefore, is this. Deflation is endemic; this is caused by the tendency of the liberal economic system to overproduce; governments may consume a significant proportion of the goods and services overproduced; if those goods and services consumed are of a civil nature good may come of it; if, however, what is consumed is of a military nature only harm can come from it in the end. Nurses and teachers cost the same as soldiers and sailors; hospitals the same as tanks and artillery; hundreds of thousands of housing units the same as battlefleets (see www.costofwar.com) The West has the capacity to produce and consume vast surpluses. The problem is it produces, in large part, the wrong products. If the West wants inflation back its governments should look to produce the right goods and services, not weapons of destruction. If you have arms, you will use them eventually. If you train people to kill, they will want to kill to justify their existence.

 

For growing concern see for instance Financial Times

 

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1054965858946&p=1012571727088

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