Many are predicting that global rate cuts, even to zero, will do little or nothing to pull us out of imminent deflation. In fact, Japan's benchmark has shown that in its specific case this has been, and indeed is being, the case. And it should be borne in mind that Japanese deflation has taken place in an environment of global expansionary economies. In other words, it has been a persistent deflationary island in a global inflationary sea. This will certainly make a difference with respect to what can happen in a globalised deflation and depression (with the emerging countries' permission), where it will be even more difficult to emerge from the depression without growth benchmarks throughout the West. So if selling money at 0% has proved incapable of pulling Japan out of recession when it had the rest of the world on its side, growing and inflating strongly, it seems even more difficult to grow in a global recessionary environment. Yet some wonder how Japan's economy would be today if the yen rate had remained at the same level as the $ or €? We will never know... or we will.
Turning to the West, evidently current monetary policy is extrapolating the Japanese strategy to the rest of today's recessionary world, with the $ rate already below 0.25% and the € rate already at 2% and falling. At this point several scenarios could be expected:
- That the near 0% cost of money reactivates world economies towards higher consumption, inflation and eventually positive growth. This scenario would of course be a long way off, and the main difference with respect to the Japanese failure would be the global recession. Common sense would tell us that if Japan has not succeeded in an expansionary environment, the West will be even less likely to succeed in this global multi-crisis depression. However, it is true that we are repeating the same failed strategy but in a different scenario. Worse. But even so, there is hope that some imponderable or butterfly effect could lead to a better outcome than the Japanese evolution.
- That lending money for almost 0% not only fails to revive economies, but also harms and deepens deflation. Some theories are already out there (I recommend reading Marc Vidal) who argue that a lower cost of money will do little or nothing to improve consumption, while it will bring down costs. This lowering of costs will be passed on to selling prices, thus contributing to a further deepening of deflation. Thus, we would enter a dangerous vicious circle, which could only be stopped by a very strong constant growth in consumption (as a consequence of lower prices/recovery of purchasing power) and excessive public inflation. Note that in this scenario the post-deflation scenario would also be extremely complicated.
In addition we don't seem to be in a position to do so either to implement other strategies that, at present, we are not even able to theorise with any criteria. There is little described, empirical and referenced basis for deflationary developments, margins for manoeuvre and policies to be followed to correct a depression. There are no consensual resources, despite the fact that we have theorised at length about it. Nobody taught us to live in deflation. Capitalism was invented to grow, to overheat and correct excesses cyclically. With the misalignments we have seen in the last century. But a post credit-abuse liquidity trap multi-crisis in a globalised world goes beyond the macroeconomic fiction of the textbooks. the most imaginative eminences. A kind of Double-dip recession has come and no one knows how it happened.