Friday, January 30, 2009

Damnification: Global Competitive Devaluations/Wage Cuts ...

Well, we touched related issues some time ago ...

Paul Krugman puts that in the perspective of the U.S. today ...

For lazy people I qoute the Krugman, to get the basic idea:

... Jagdish Bhagwati described the conditions for “immiserizing growth” — a situation in which an expansion in an economy’s production, by driving down the price of its exports, actually reduces its real income. It was a classic demonstration that sometimes individually rational actions can make everyone (at least in one national economy) worse off — although I prefer the terminology of Edgeworth, who noticed the possibility more than a century ago, and talked of nations being “damnified” by their expansion.

I bring this up because the key feature of our current economy, I believe, is that we’re being damnified on multiple fronts.

The paradox of thrift is the best-known example: when everyone tries to save more in an economy in which interest rates are up against the zero bound, everyone’s income falls, and we’re worse off than before. The paradox of deleveraging has gotten currency, too: everyone tries to shrink their balance sheet, and the result is plunging asset prices, which leave everyone worse capitalized than before.

But there’s at least one more form of damnification that has me really worried: the paradox of deflation. An individual company or worker can preserve a business or a job by accepting a lower price; but when everyone does it, we get debt deflation — a rising real burden of debt, which weighs on the economy — and also start to have deflationary expectations built into lending and investment decisions, which further depresses the economy. And once you’re in a deflationary trap, it’s very hard to get out.

Hooooh....

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