Deflation means that prices in general are falling. If this is the case, it’s better to put off buying new things for as long as possible, until they’re 100% absolutely needed. That’s because anything you buy today will be cheaper tomorrow.
After a while, non-consumption becomes a habit, and an economy stagnates.
Conversely, in an inflationary environment, everything is more expensive tomorrow than it is today. So consumers buy in advance. In addition to things they need, they may also purchase items they have no intention of consuming. They may think that keeping physical objects which they can later resell is a better way of preserving or enhancing purchasing power than keeping savings in the bank.
Japan has been in a deflationary economic funk for over a quarter century. When Shinzo Abe became Prime Minister of Japan in late 2012, he decided to attack deflation as a way of boosting economic growth. He had a plan that has become famous for its three “arrows”: a massive depreciation of the yen, large-scale government deficit spending, and corporate/regulatory reform. Each of the three should have been enough by itself to spark inflation.
The expense of the plan has been enormous, both in terms of the loss of international purchasing power of yen-denominated assets and in increased national debt.
The result after close to four years? ….as the Tokyo government reported last week, no inflation at all.
How can this be?
From its outset, I’ve believed that Abenomics would be unsuccessful. I thought the stumbling block would be corporate reform. The earliest evidence that would indicate I would be wrong would, I thought/think, take the form of an effort to remove the legislative barriers to reform that the Liberal Democrats in the Diet had installed after the deflationary crisis had already begun. So far, for all practical purposes there’s been nada. So I continue to be convinced that corporate leaders will resist any changes to the status quo, aided as they are by the Diet’s removal of any levers to force reform from the outside.
Of course, any inflation-induced oomph to consumption won’t last forever. People and institutions adjust. If nothing else, consumers run out of storage space for the extra stuff they’ve bought. They then have to throttle back their spending …or rent a storage unit …or contemplate a McMansion.
What’s surprising to me, however, is that the same reluctance to spend–although perhaps not to the same degree–is evident in both the US and in Europe. We might figure that the austerity approach of EU countries wouldn’t exactly spur consumers on. But the lack of inflation and the paucity of mall-storming or website-crashing consumption in the US after eight years of extraordinary stimulus seem to argue that the overarching economic theories about how to induce inflation are incorrect.
Demographics as the cause?