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With the world in the grip of the worst financial crisis since The Great Depression, one should definitely consider pertinent issues relating to the broad economy, in addition to evaluating one's personal wealth. Though much of what had transpired so far could not be reliably predicted, and the way forward looks uncertain and murky, there have been several topics which have been highlighted in the media and in financial circles in recent months so as to warrant significant attention. Most of these topics cover issues ranging from the bursting of the US Housing Bubble as well as the ruthless and relentless disintegration of once vaunted financial institutions in America and Britain. Another issue which immediately comes to mind may not sound like a big deal at first but has many important ramifications: Deflation.
Deflation is defined as a persistent slide in prices over an extended period of time, and is the exact opposite to inflation, in which purchasing power in eroded. In the case of deflation, purchasing power of the dollar is increased over time as the prices of goods and services become lower, and consumers enjoy lower costs and expenses as everything from transport costs to electricity tariffs are lowered. Sounds like a very joyous occasion and a reason to celebrate right ? However, there are many dark aspects of deflation which have been put forward by economists to explain why deflation is anything but good for the economy, and the most pertinent example is that of Japan in the 1990's (also termed as the "lost decade").
To immediately illustrate my point, Japan had undergone the bursting of their real estate bubble in the late 1980's, and subsequently their stock market (the Nikkei) crashed from a high to its present level of around 7,000+ (a 25-year low). What was more damaging was not the immediate fallout from the real estate and equities crash, but that of persistent deflation lasting about 10+ years which caused many companies to fail and pushed the savings rate of Japanese up, thus exacting a heavy toll on the economy. Government efforts to inject liquidity and put cash in the hands of the final consumer did little to halt the slide of prices, and this had a detrimental effect on the Japanese Economy which spluttered along like a terminally ill patient on life support for more than a decade !
Let's examine the process of what I term the "Deflationary Spiral" and explore why it is so damaging to economies, and what can be done to prevent a similar occurrence in Singapore. *Note: This scenario is unlikely to occur in the USA at present due to the massive injection of liquidity through the printing of US dollars, thus raising the prospects of devaluation of the US Dollar and increasing inflation in the years to come as the purchasing power of the US Dollar drops. Read more...[caption id="attachment_1350" align="alignright" width="150" caption=" "][/caption]
With the world in the grip of the worst financial crisis since The Great Depression, one should definitely consider pertinent issues relating to the broad economy, in addition to evaluating one's personal wealth. Though much of what had transpired so far could not be reliably predicted, and the way forward looks uncertain and murky, there have been several topics which have been highlighted in the media and in financial circles in recent months so as to warrant significant attention. Most of these topics cover issues ranging from the bursting of the US Housing Bubble as well as the ruthless and relentless disintegration of once vaunted financial institutions in America and Britain. Another issue which immediately comes to mind may not sound like a big deal at first but has many important ramifications: Deflation.
Deflation is defined as a persistent slide in prices over an extended period of time, and is the exact opposite to inflation, in which purchasing power in eroded. In the case of deflation, purchasing power of the dollar is increased over time as the prices of goods and services become lower, and consumers enjoy lower costs and expenses as everything from transport costs to electricity tariffs are lowered. Sounds like a very joyous occasion and a reason to celebrate right ? However, there are many dark aspects of deflation which have been put forward by economists to explain why deflation is anything but good for the economy, and the most pertinent example is that of Japan in the 1990's (also termed as the "lost decade").
To immediately illustrate my point, Japan had undergone the bursting of their real estate bubble in the late 1980's, and subsequently their stock market (the Nikkei) crashed from a high to its present level of around 7,000+ (a 25-year low). What was more damaging was not the immediate fallout from the real estate and equities crash, but that of persistent deflation lasting about 10+ years which caused many companies to fail and pushed the savings rate of Japanese up, thus exacting a heavy toll on the economy. Government efforts to inject liquidity and put cash in the hands of the final consumer did little to halt the slide of prices, and this had a detrimental effect on the Japanese Economy which spluttered along like a terminally ill patient on life support for more than a decade !
Let's examine the process of what I term the "Deflationary Spiral" and explore why it is so damaging to economies, and what can be done to prevent a similar occurrence in Singapore. *Note: This scenario is unlikely to occur in the USA at present due to the massive injection of liquidity through the printing of US dollars, thus raising the prospects of devaluation of the US Dollar and increasing inflation in the years to come as the purchasing power of the US Dollar drops. Read more...
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With the world in the grip of the worst financial crisis since The Great Depression, one should definitely consider pertinent issues relating to the broad economy, in addition to evaluating one's personal wealth. Though much of what had transpired so far could not be reliably predicted, and the way forward looks uncertain and murky, there have been several topics which have been highlighted in the media and in financial circles in recent months so as to warrant significant attention. Most of these topics cover issues ranging from the bursting of the US Housing Bubble as well as the ruthless and relentless disintegration of once vaunted financial institutions in America and Britain. Another issue which immediately comes to mind may not sound like a big deal at first but has many important ramifications: Deflation.
Deflation is defined as a persistent slide in prices over an extended period of time, and is the exact opposite to inflation, in which purchasing power in eroded. In the case of deflation, purchasing power of the dollar is increased over time as the prices of goods and services become lower, and consumers enjoy lower costs and expenses as everything from transport costs to electricity tariffs are lowered. Sounds like a very joyous occasion and a reason to celebrate right ? However, there are many dark aspects of deflation which have been put forward by economists to explain why deflation is anything but good for the economy, and the most pertinent example is that of Japan in the 1990's (also termed as the "lost decade").
To immediately illustrate my point, Japan had undergone the bursting of their real estate bubble in the late 1980's, and subsequently their stock market (the Nikkei) crashed from a high to its present level of around 7,000+ (a 25-year low). What was more damaging was not the immediate fallout from the real estate and equities crash, but that of persistent deflation lasting about 10+ years which caused many companies to fail and pushed the savings rate of Japanese up, thus exacting a heavy toll on the economy. Government efforts to inject liquidity and put cash in the hands of the final consumer did little to halt the slide of prices, and this had a detrimental effect on the Japanese Economy which spluttered along like a terminally ill patient on life support for more than a decade !
Let's examine the process of what I term the "Deflationary Spiral" and explore why it is so damaging to economies, and what can be done to prevent a similar occurrence in Singapore. *Note: This scenario is unlikely to occur in the USA at present due to the massive injection of liquidity through the printing of US dollars, thus raising the prospects of devaluation of the US Dollar and increasing inflation in the years to come as the purchasing power of the US Dollar drops. Read more...
