A couple of weeks ago, this blog predicted that we might see
simultaneous recession and inflation.
It might be an idea if some kind person printed that
article, kept it in a drawer for about five years, and then sent it to the
Royal Swedish Academy of Sciences, P O Box 50005, Stockholm: they are the nice people
who dole out the Nobel Prizes
for Economics. We reckon our prescience should be generally acknowledged about
Meanwhile, a hard-working entrepreneur might well ask, “All
very interesting, Professor, but what’s that got to do with me?”
The hard truth is that deflation is bad for
business, inflation is
very bad for business, and a possible combination of the two makes the economic
disaster we have seen so far look like a house-warming party.
To start with the most obvious, deflation means less money.
1 Deflation means less money from customers.
That means lower sales.
2 Deflation means less money for business. At
the same time, credit dries up and new investors become scarce.
does not necessarily mean lower costs. The great injustice in all this is
that, even if prices in general start falling, they are not necessarily the
prices business wants to fall – taxes are actually going up, some key commodity
prices are increasing with scarcity, and do not count on any employees who ask
for pay rises in line with inflation to start demanding pay cuts in line with
4 Deflation means loans get more expensive.
Each year you have less and less money with which to pay off any loans, but the
loans themselves are not magically shrinking. They have the very genuine effect
of seeming to get more and more expensive. Whereas inflation erodes the real cost
of a loan, deflation increases it.