Economist Magazine Takes Dim View of Global Economic Prospects
Points to deflation as major culprit
by Lucas Everidge
The Economist summarized in its June 28th Special Report that the American
fed interest rate cut will not be the ingredient to revive the ailing
world economy.
 The
main culprit in economic woes is the spectre of deflation, a situation
where consumers and businesses would have less money to pay their debts.
In fact, households have done little to repair the debt on their balance
sheets, unlike their business counterparts. They quote a Merrill Lynch
study that shows people have simply borrowed against the rising value
of their homes. "The ratio of debt to household income has risen
to 111%, up from 102% in 2001."
They note that businesses have corrected on the whole better during
the recessions, however economists assume that profits will continue
to rise - an element that will prove difficult if deflation hits.
They discuss the issue of the weaker American dollar. "Devaluation
will merely serve to export deflationary pressure to economies that already
look vulnerable." Germany is already weathering a recession, and
the big unknown is whether the European Central Bank will lower interest
rates in Germany. Some forecasters believe that for the dollar to achieve
a proper correction, the euro could hit US$1.40 by the end of the 2003.
They look at Japan as a lesson in navigating these economic waters.
They note that cutting monetary policy through lowering interest rates
will not solve the world economy's ills. They are far more concerned
with reducing US private-sector debt.
(This summarizes the special report Breaking the Deflationary Spell
from the Economist (06/28/2003). This article, along with 26,000 others
are available to magazine subscribers. Subscribe
here.
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