As we have been warning here for the past year, deflation is now the major, persistent threat to Western economies.

The recent sectorized twitches of inflation that clouded many minds and drove policymakers for months, is decidedly off the agenda.

In the UK, big beasts are waking up to the gravity of the situation. Former Chancellor of the Exchequer, Ken Clarke, has dismissed comparisons with the 1970s, ’80s and ’90s, likening current conditions explicitly with 1929/30.

Economically-literate writers, like William Rees-Mogg in The Times (London), have jettisoned terms like downturn and recession and now use “depression” as their label of choice.

Normally cautious Bank of England Governor, Mervyn King, forecasts a 2 percent contraction in the British economy next year, with interest rates falling rapidly to nought percent for the first time in history.

Deflation is now the enemy we must all factor into our expectations in the near-to-medium terms. So why is deflation necessarily worse than inflation — a learned fellow said this morning, “Three percent inflation is heaven compared to deflation.”?

In an era of massive indebtedness, both private and public, deflation increases the burden. As incomes decline, private debts remain the same — at levels signed for in better times. It’s the exact opposite of the apparent wealth created during periods of rapidly rising house prices.

Professor Peter Spencer of York University says, “It is going to be absolute murder in Britain if inflation turns negative. The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule.”

Another symptom of deflation is that consumers wait for lower prices before shopping, causing job-losses in the High Street and yet more bad economic news. Japan’s “lost decade” of the 1990s is the technically-perfect example of this psychology of fear taking hold. It is still suffering.

So what can be done either to pre-empt or cure the curse of falling prices across the board?

Curiously, Keynesianism which, in its widely misinterpreted version is disastrous in normal times, does hold out some hope in depressive conditions. Expect central banks to start printing money soon and dropping it from helicopters, if they haven’t begun already. Want to buy some rising stock? Buy helicopter shares. [This is not financial advice.]

If you’re one of those noble souls who saved assiduously during the asset bubbles, you will just have to stand by and watch the profligate oafs who caused the problem clean up, while your own responsible hoard of value drains away.

It’s just not fair, but it will probably have to happen “for the greater good”.

You have only one consolation: you can give the politicians who presided over the madness a good kicking at the next electoral opportunity.

And in the UK, that means Gordon Brown. He’s the one with the faux halo.

John Evans

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