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PUBLISHER'S LETTER
Publisher & Editor-in-Chief
Leo Simpson, B.Bus., FAICD
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2 Silicon Chip
Deflation has been
with us for a long
time
Anyone who has tried to follow the
news of Asia and Australia’s currency
decline in the last few months must
be confused. And worried! After all,
some notable economists are now
using the dreaded “D” word; D stands
for deflation. It seems that inflation is
no longer a worry and deflation is to
be feared. Apparently, a little inflation
is good for all of us but deflation could
be really bad.
Well, I have to say it. Most of these economists are talking rubbish. They
just don’t know what is going to happen, any more than the ordinary person in the street. But I can also state that deflation has been around for a
long time and we have been living with it very happily and we expect it to
happen in the future! How can I say that?
Deflation is defined as “an abnormal decline in the level of commodity
prices, especially one that is not accompanied by an equal reduction in the
costs of production”. This is exactly the deflation that some economists are
worried about. As Asian countries struggle to export their way out of trouble, they will supposedly flood Western markets with cheap goods and so
Western economies will suffer. Well, hasn’t Asia been doing this all along?
Over the last 40 years or so, we have seen the prices of virtually all manufactured goods plummet in real terms and this applies especially to electronic
equipment of every description. The price drops have been brought about
because of the two relentless forces of increasing competition and the march
of technology. There is no reason to suppose that this will not continue at
an ever increasing rate, regardless of what happens in Asia. At the same
time, we can expect the prices that Australia obtains for its commodities
(minerals, wool, wheat, etc) to decline as well. Nothing new here.
As an aside, the fact that Asia is in trouble now indicates that the calls
for Australia to get heavily into “high technology” manufacturing would
have been to no avail. Asia has done just that and look where it is. Yes, yes,
I know that I am ignoring such things as defective Asian banking systems,
corruption, artificially low interest rates, etc. All these are peripheral issues.
The real reason that Asia is in trouble is that it has excessive production
capacity for virtually everything and all those high-tech factories eventually
have to be paid for.
However, there has to be some silver lining to all the dark clouds, hasn’t
there? If the economists are correct and Asia is to export its way out of
trouble, it has to buy raw materials from somewhere and that is most likely
to be Australia. So why is our currency on the decline?
The point is that no-one really knows. The most common phrase you hear
in economic news is “market sentiment” and that means that not much logic
is being brought to bear.
My tip, and it is as good as anyone else’s, is that Australia’s currency will
rebound. Perhaps it will do so even before this issue hits the news stands.
But whatever happens, you can bet on electronic equipment continuing to
get cheaper in real terms. So will most other mass-produced commodities.
Everything else is in the lap of the gods.
Leo Simpson
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