The Global Economy in Turbulent Times

CHAPTER 26 A New Hazard: Double-Dip Deflation¹

More than a year ago (May 9, 2009), I wrote “Deflation Is Not an Option,” worried as the world was then of the possible coming to pass of the worst-case scenario—“The brutal truth is: Less-worse is not recovery. The world is not out of the woods yet.”² But by late September 2009, things had begun to brighten up. The Pittsburgh G-20 Summit pronounced triumphantly that the vast global stimuli “had worked”—indeed, it rescued the world from knife’s edge in the most severe recession since the Great Depression. What a difference a year makes. In May of this year, I wrote “PIIGS Can’t Fly: The Trouble with Greece,” brought about by Greece’s insolvency spreading ripple effects all over the eurozone.³ Overall, the Greece debacle casts a long shadow over market sentiment, which has since become dormant, as of now. Many risks still remain.

Double-Dip Talk amid Unusual Uncertainty

It is amazing how fast things do change. In mid-June 2010, I wrote “Summer 2010: In for a Bumpy Ride, Even a Double-Dip?” reflecting the fragility of the evolving situation. In the face of a weakening economy, premature tightening raises the risk of a relapse into recession.⁴ Markets have since moved with greater volatility, essentially nervous about fiscal deterioration in the United States and many eurozone nations, and a darkening growth outlook outside Germany. Any upheaval there raises further the risk of a double-dip.

Indeed, Wall Street has since become ...