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What We Read Today 28 December 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

Causes and consequences of China’s contagious case of deflation (George Magnus, Financial Times)  Yes China and deflation.  GEI News has been following this for 2 1/2 years - producer prices have fallen by 10% over the past three years with the annual change negative for 33 consecutive months.  Consumer prices have followed with inflation shrinking to 1.4% annual gain for the CPI (Consumer Price Index) in November 2014.  The deflation is structural, driven by over-capacity in manufacturing and property development, accompanied by one of the world's highest debt to GDP ratios.

The situation fits the pattern that the Great Depression era economist Irving Fisher called debt deflation, the contraction of economic activity resulting from the liquidation of debt and the resulting decline in the money supply (yes Fisher recognized that debt was money).  Presumably monetary policy actions, or increase in fiscal deficits so that government debt replaces some of the liquidated private debt, can mitigate the general decline in prices (and therefore production) as well as falling private wealth - but this remains a matter of debate among economic "philosophers" to this day.  The debate is encouraged by the fact that no "pure" execution of any of the competing "philosophies" has ever been conducted to support or refute any of the theories.

In recent times the debt deflation theory of depressions (or recessions) has been developed further by a few economists, including Richard Koo (who calls the condition "balance sheet recessions") and Steve Keen who preserves the original Fisher designation.

Trading Economics has a graphical summary of the year-over-year deflation in China:


GEI News has had 26 reports on the developing deflation story in China, starting 30 months ago with China: Economic Numbers Weaken, Inflation Slows. Does Deflation Await? (GEI News, 09 June 2012)

In the GEI News series the question was asked if deflation in other parts of the world could be spreading to China.  In the FT article George Magnus argues that the real risk now is that Chinese deflation will spread to the rest of the world.  He writes:

The consequences of China’s deflation problems are ubiquitous and spilling into the rest of the world. Slower economic growth and a steady decline in the economy’s commodity intensity is already affecting commodity producers from Perth to Peru, with negative multiplier effects arising from lower revenues and reduced capital spending by resource companies. Moreover, as Chinese companies cut prices to clear excess supply, global competitive pressures intensify, forcing foreign manufacturers to do so too. 

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Discussion behind the wall today addresses the state of higher education in the U.S. and the needs of the economy for educational system output over the next decade.

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