Is Inflation Really Good for the Economy?

Understanding how inflation affects our economy is key to grasping how our system truly works. However, the first step in this process, though, is learning more about the general nature of inflation.

Inflation occurs when the value of money begins to fall, thereby decreasing purchasing power. There are a number of ways to measure inflation in the United States, and it is worth noting that inflation is greatly different from currency devaluation. The primary symptom of inflation is a rise in prices of consumer goods.

While many would suggest that the lower the rate of inflation, the better the market is for consumers, this simply isn’t the case. In fact, you may have recently heard members of the federal government suggesting that they will use resources like the central bank to create and maintain certain levels of inflation as necessary for our economy. Former Fed Chair Greenspan even said that a fall in inflation rates would ruin our economy as a whole.

Excessive inflation, though, can be as problematic as the deflation process. The larger the system gets, the more imaginary profits are created. This creates a kind of bubble around a particular market. Thrifty spending is discouraged, debt is encouraged, and when the bubble finally comes crashing to Earth, billions are lost in investment dollars.

 9.The Great Deceleration

The emerging-market slowdown is not the beginning of a bust. But it is a turning-point for the world economy

When a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge. The same is true with emerging markets, the world economy’s 21st-century sprinters. After a decade of surging growth, in which they led a global boom and then helped pull the world economy forwards in the face of the financial crisis, the emerging giants have slowed sharply.

China will be lucky if it manages to hit its official target of 7.5% growth in 2013, a far cry from the double-digit rates that the country had come to expect in the 2000s. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Collectively, emerging markets may match last year’s pace of 5%. That sounds fast compared with the sluggish rich world, but it is the slowest emerging-economy expansion in a decade, barring 2009 when the rich world slumped.

This marks the end of the dramatic first phase of the emerging-market era, which saw such economies jump from 38% of world output to 50% (measured at purchasing-power parity, or PPP) over the past decade. Over the next ten years emerging economies will still rise, but more gradually. The immediate effect of this deceleration should be manageable. But the longer-term impact on the world economy will be profound.

In the past, periods of emerging-market boom have tended to be followed by busts (which helps explain why so few poor countries have become rich ones). But this time a broad emerging-market bust looks unlikely.

The Great Deceleration means that booming emerging economies will no longer make up for weakness in rich countries. Without a stronger recovery in America or Japan, or a revival in the euro area, the world economy is unlikely to grow much faster than today’s lacklustre pace of 3%. Things will feel rather sluggish.

Any Hope for Recovery

                                    

      Which economy has been hit hardest by the global slump? Based on industrial production, Taiwan has suffered much the biggest shock. Output fell by 32% in the 12 months to December. Several economists are now forecasting that Taiwan’s GDP will contract by 3% or more this year, which would be the steepest downturn in Taiwan’s history.

Taiwan is one of the world’s most export-dependent economies, making many high-tech gadgets for Western consumers, so it has been battered by the slump in global demand.

Falling exports have, in turn, squeezed domestic spending. Unemployment rose to a six-year high of 5% in December, and the true picture may be far bleaker.

To prop up the economy, the central bank has cut interest rates six times since September, to 1.5%.

In the longer term, improved ties with China will benefit the economy. For now, however, Taiwan’s frightful economic news is more likely to encourage households to save rather than spend.