The U.S. is on the precipice of a deflation crisis, one which will devastate consumers and businesses alike, publisher Mort Zuckerman writes.
“Inflation typically results from too much money chasing too few goods,” writes Zuckerman in U.S. News & World Report.
“Today, too much supply is chasing too little demand.”
Deflation is already part of the economic picture in the United States. Homeowners are trimming their total debts by $200 billion this year, and banks and businesses are paying down debt by $2.3 trillion, writes Zuckerman.
“Small-business lending will contract by at least $113 billion,” he adds.
Since the credit crisis began some back in late 2007, the credit available to consumers and the small-business sector — which employs half of America’s workforce — has pulled back by trillions of dollars. Most of that has been because of the reduction of credit lines.
“The hope that new bank reserves would be available to prop up the faltering economy has not been fulfilled,” writes Zuckerman.
To reverse the deflationary effects of this demonstrable low capacity utilization, demand growth will need to rally.
“For this, we would need a significant improvement in employment and hence spending. But the job market is even worse than the overall economy, and the prospect is that high levels of joblessness will persist beyond the end of the recession,” writes Zuckerman.
Many firms continue to cut the number of their employees and reduce discretionary costs, like advertising. This has significantly improved profit margins, even in the face of lower demand, he adds.
This is a global phenomenon. Bloomberg News is reporting that the Bank of Japan said deflation will linger for a third year there,
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