Hello, from Xiamen University. Like most large Chinese cities, Xiamen is crowded, and summer is not its best month. This week, the city hosts the Asia Financial Management Association international conference. Away from the maddening crowd, the university campus offers respite to reflect on the frightening prospect of deflation, which can readily evolve from the impact of deep global recession and lower commodity prices. I am often asked: What’s so wrong about deflation? Falling prices (as opposed to inflation) should be positive, since it raises the purchasing power of the ringgit. That’s clearly a simplistic and very naive micro-view.
Some perspective is useful. The current US recession is past 17 months old (already the longest since World War II). It is expected to be still there in the next six months, the Fed chairman’s “green shoots” notwithstanding.2 After all, gross domestic product (GDP) in the United States had contracted in excess of 6 percent per annum in each of the past two quarters, the worst six-month performance in 50 years. To be sure, as of now, although the outlook in the United States and China seems to be better, prospects in most of the eurozone (including the United Kingdom and Germany) and in Japan have not brightened much.
The International Monetary Fund’s (IMF) update this week predicted a “long and severe recession” for Asia’s wealthier but export-oriented economies.3 Prospects for an imminent ...