November’s G20 summit is certain to discuss the looming threat of global deflation. The US has already said it will be pushing Germany and other European nations to boost growth and throttle any chance of deflationary vortex.

The spectre of deflation is, if anything, even worse than hyper-inflation. Deflation sparks a vicious cycle of price-cutting. But the effect of price-cutting is a drop in consumption as people withhold buying in the hopes of further price cuts. This leads to drops in production, job losses, and a further inability to purchase goods and services and so on.

Debts fast become unrepayable, defaults rise, interest rates drop as banks try to recoup their losses, and investment falls because the risk is so high and return so low.

Polish Minister of Finance, Mateusz Szczurek. Photo: www.mf.gov.pl

Polish Minister of Finance, Mateusz Szczurek. Photo: www.mf.gov.pl

On September 4 Polish Finance Minister Mateusz Szczurek warned a group of economists in Brussels, “We are on the verge of deflation. As Europeans we should never forget that it was depression and deflation … that brought to power the totalitarian regime that devastated our continent through the world war and unspeakable atrocities 75 years ago.”

Since the 1990s Japan has suffered a deflationary cycle that has seen its economy become the world’s highest debtor – it owes more than 1 quadrillion yen ($9 trillion); a figure more than double the size of its yearly economic output.

Italy announced in August of this year a negative inflationary figure; it’s first in more than 50 years. Spain, Portugal, Greece, Cyprus and Slovakia are already seeing their economies being eaten away from deflation. France’s economy is teetering on the edge at 0.4 per cent and Germany’s at 0.8 per cent.

Unless the G20 can come up with solutions fast, economists are predicting long-term economic stagnation, and a debt crisis that will make the GFC look like lost change.

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