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4.0 out of 5 stars A good primer on deflation, its causes, effects and remedies, 29 April 2005
This review is from: Money for Nothing: Real Wealth, Financial Fantasies and the Economy of the Future (Hardcover)
Publisher: Nicholas Brealey Publishing (2003), ISBN: 1857882822
"Money for Nothing" is a somewhat controversial book written by the (London) City economist Roger Bootle. The author is a well known doomsayer who regularly hits the headlines with predictions of impending deflation and housing price crashes, never mind stock market crashes.
I've never taken seriously any economist spouting opinions on the real estate market (always dramatic, always wrong - witness the numerous press articles and parroting real estate agents), let alone about deflation. However, I've gradually become more concerned about deflation occurring in Europe and wanted to find out more about this dire economic condition and the remedial micro and macro action. I was hoping Bootle's book would offer an introduction to the topic. It did not disappoint.
Bootle's starting point is that we are at the edge of the abyss. Inflation has shrivelled to a mere shadow of its former self, or at least a shadow of the ogre central bankers and the economic press still hold it to be, and Japan has been long mired in deflation. The latest assessment of the Japanese central bank (April 2005) suggests this will continue until at least 2007. Germany is, possibly, not far off.
An economic collapse of Western Europe is therefore no longer unthinkable. Indeed, it could be a consequence of the Dollar, Yen and Yuan dropping against the Euro as a consequence of the current imbalances in trade accounts. The resulting breakdown in (European) competitiveness could lead to calamities such as housing price crashes, stock market crashes and deflation. Bootle's analysis suggests the ECB, and its "member" banks, should initiate counterdeflationary measures resulting in massive liquidity injections into the monetary system coupled to free trade and (labour) market deregulation.
The combined effect would be to stimulate consumer expenditure globally whilst kickstarting the wealth spiral for all nations on Earth. The author then proceeds to expand on his vision of the future, a world in which developed, developing and underdeveloped nations all rise to new levels of (relative) wealth and development.
Obviously, this evolution will have its victims - notably the unskilled or uneducated in, mainly, Western Europe. Unless they get retrained, more generations of workers will be lost to our society whilst their descendants will have to reskill for new jobs created through the continuing economic development of our world. This development benefits from an increasing market (the populations of the developing and underdeveloped countries want their luxuries too, we supply them at first, they then do, we devise something better and new etc.) and rising living standard which affords our populations more spending power.
In theory, this sounds fine. In practice, this may be somewhat naïve. The model requires inter alia unfettered free international trade - a proposal requiring a strong dose of political will in times where many special interest groups ask (and obtain) favours such as protection through tariff barriers. Anti-globalisation groups, and their silent supporters in the working populations of many West European nations (e.g. José Bové in France) are but another (sizable) political obstacle
However, I feel encouraged that deflation is not necessarily the end of time for Europe. It is a major challenge, one that will have a high social cost with the concurrent social and political upheavals (riots, crime, war?), but one that can also be addressed through education, innovation and judicious politics.
The author also provides in the process advice to investors as to which goods/services will be in demand in such a scenario and will benefit from (real term) price rises - land, well located property etc. A conclusion that will, undoubtedly, surprise some readers of Mr Bootle's regular public missives.
All in all, this book provided me with a good introduction to the deflation subject and nicely complemented it by a review of the globalisation/free trade discussion related to it. I share the author's aspirations for our world, but am somewhat sceptic as to the developments leading up to this. I consider this book a worthwhile read for economists, investors and readers with Renaissance man ambitions. For the latter, the wide scope bibliography contained in the end notes to the book is worth a read.
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