Deflation Talk
By NICHOLAS DAVENPORT A GOOD laugh can often be raised from the financial i news, but perhaps now it is becoming too serious to joke about. Here, on the one hand, we are advised by Dr. Per Jacobsson of the IMF that there is a threat of world de- flation—a possibility which our own do-nothing Mr.
Maudling admitted in his IMF speech—and here, on the other hand, we are invited by Sir Robert Shone and his team 01 professional economists at the NEDC to con- Sider what a growth rate of 4 per cent. per annum would mean for the main parts of the economy—consumption, imports, exports and investment. When will these well-meaning aca- demics condescend to become a little more realistic? What is the use of telling us that our exports will have to rise by £250 million a year i 'nearly double the average rate of increase in recent years—if world trade is likely to turn down in 1963? Or that we must increase our investment by £330 million a year if we do not even know how to direct capital into the right Investment to bring about an increase in ex- Ports? It is surely misleading to say that we can raise the gross national output by £1,150 million a Year and give every working man over £2 More to spend each week, if this cannot pos- sibly be realised without a new expansion in World trade and a revolution in our economic behaviour. We have been dreaming far too long. And is not Dr. Jacobsson himself dreaming when he talks of a world deflation in 1963? In Poi t of fact we have seen deflation on a world scale developing for the past eighteen months. In this period the bourses of the Western in- dustrial nations have suffered a slump in equity the reminiscent of the depression cycles of tn ,e pre-war past. By and large nearly a third has been wiped off the values of industrial shares ,nnd In many cases nearly half. What this means 1. total capital depreciation does not appear I11 the national statistics, but in Wall Street it Is estimated at the equivalent of nearly £30,000 !union, in London at £10,000 million and in
at £5,000 million. This £45,000 million decline is not, of course, a realised loss, but depreciation of security values brings a decline of
borrowing, and therefore of spending power. Moreover,
capital losses on the bourse cut the personal spending of the rich in every nation. stn have not yet seen the full effects of these S
?c1( exchange disasters. 'There is little doubt,' tpsaid the Financial Times, 'that another sharp eak in the market would have deflationary re- cussions throughout the world.' What has roused fears of a decline in world rade next year is the reappearance of the old 11(.1ical YP of deflationary forces—fall in corn- anndity prices, over-capacity in the capital goods d consumer-durable goods industries, decline Profit margins leading to industrial losses and. ...si,°wIng-down of industrial investment. As Mr. :vali'ner Marjolin, vice-president of the EEC, d' For a classical economist, faithful to the
theory of cycles, it would seem that we are at the end of a boom.' The fall in commodity prices has been going on for a long time: the index is now at its lowest since 1958. This, of course, limits the buying power of the primary pro- ducers overseas, the traditional customers of the industrial nations. Curiously enough, the first of the great commodity producers to be forced into devaluation was the most indus- trialised—Canada—due largely to the fact that its government had been pursuing unsound eco- nomic and financial policies for many years. But the correction of Canada's trading position through devaluation has brought a new defla- tionary force to bear on its neighbour, the United States. Canadian products are being dumped at cut prices in American markets. This has re- doubled fears of an American recession next year—unless a Cuban war intervenes. If a reces- sion in America coincides with the ending of the European boom, then deflation becomes ram- pant throughout the Western world.
In a speech which he made at a Washington club, Dr. Jacobsson was reported to have said: `The Western nations should act quickly to meet the threat of world-wide deflation. By the begin- ning of next year at the latest more pronounced expansionary policies will be needed in the budgets and monetary controls of these coun- tries.' There is a rumour that at the meeting next month of the OECD in Paris the American representatives will press for a policy of expan- sion internationally co-ordinated. This reads well on paper, but can be ineffective in practice. Who imagines that Western Germany will co-operate in a policy of expansion when the Finance Minister has publicly stated that he is opposed to any stimulation of the German economy? 'I would think it wrong,' said Dr. Blessing. 'in the interests of price stability if measures were already to be taken now with a view to averting any cooling-off in economic activity.' Bankers are very conservative people, said Mr. Maudling after he had tendered his plan for improving international liquidity at the IMF meeting and had felt the temperature suddenly drop. But con- servative politicians can also be very conserva- tive. When he met members of the TUC eco- nomic committee this week Mr. Maudling stressed the difficulties and dangers of generat- ing expansion independently. Reflationary measures taken in isolation, he said, could lead to further balance of payments trouble. Well, what are the reserves for? Why have we so quickly restored our £500 million borrowing rights at the IMF? And if Dr. Jacobsson himself is urging the West to adopt expansionary policies in time, how can he deny assistance to the UK if we again get into balance of payments trouble? The urgent task for the UK is to raise its output and so reduce its costs and improve its productivity before we enter the Common Market and meet with increased foreign com- petition at home. A do-nothing Chancellor who waits for his April Budget can bring on a crisis of deflation which today could be averted by the right expansionary measures.
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