China’s currency devaluation took Albert Edwards a step closer to realizing his doomsday prediction: deflation spreading from Asia to the U.S. and Europe and sending economies crashing.
Tumbling emerging-market currencies will now accelerate their declines, curbing import costs in developed nations and triggering a broad drop in prices that will undermine economic growth, according to Edwards, the top-ranked global strategist at Societe Generale SA.
According to Edwards, "this is the start of something big, something ugly.” While I would agree that t this is a big move, it is hardly the start. Deflationary pressure began building at the time of the 2007 financial emergency that morphed into a full-blown financial and economic crisis that threatened the global economy and was narrowly avoided. However, there has been no significant recovery, or anaemic one at best.
The bursting of the commodity bubble that Randy Wray and others like Jeremy Grantham predicted some time ago has taken hold with a vengeance, especially with oil still testing the bottom. Bell-weather copper is crashing, too.
The neoliberal and neoclassical preference for austerity as economic policy is creating severe drag on the economies of many developed nations, in particular the Eurozone. Political instability is also rising in the developing world.
Japan and then the Eurozone adopted QE for a variety of reasons but one effect, certainly anticipated was a weakening of the yen and the euro. Both Japan and the Eurozone typically strive to run a mercantilist policy emphasizing net exports and fiscal surpluses.
Concurrently, the USD has been rising as a safe haven, with the US not only the largest economy and most powerful nation politically, but also recovering better than most, not to mention the Fed beginning to raise the interest rate soon.
As a result, China also saw its currency rising, the renminbi being pegged to the USD. China has also been running a mercantilist policy as a new exporter and began to see its exports shrinking with yuan getting relatively more expensive.
Thus, China recent action has been defensive and should have been expected, although it seems to have caught markets by surprise.
Nevertheless, the size and influence of China as a global exporter reducing the cost of its exports by currency devaluation is going to have a further deflationary effect.
The global economy is experiencing a huge demand deficiency problem, which is especially dangerous where there is also elevated private debt or there is a balance of payments issue in USD with dollars becoming more expensive relatively.
The deflationary pressure is now being noticed. If it took China's move to call attention to it, that's a good thing. Without acknowledging the challenge, the situation is likely to "ugly," as Edwards writes.
It's long overdue to address the demand deficiency and debt overhang with fiscal remedies instead of relying on monetary policy that has shown itself to be ineffective. It's also time to confront the erroneous assumption that neoliberalism is the only alternative. As Margaret Thatcher put it, "There is no alternative."
There is an alternative, and Keynes set it forth in the midst of the Great Depression. It's past time to listen to him again.
However, we have come a long way since Keynes was writing and advising governments. Post Keynesianism and MMT have articulated those insights and taken them further. There is no time to lose in addressing real challenges with effective solutions that have been shown to work historically instead of imaginary issues with speculative cures that don't have a good track record empirically. We need to do this before things get ugly.
Bloomberg Business
Deflation Ice Age Looms After Yuan Move, Albert Edwards SaysAdam Haigh and Jason Clenfield
