July 26th 2003

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Articles from this issue:

COVER STORY: Universities: battleground for next election?

EDITORIAL: Helping the disabled

SPECIAL REPORT: Ethanol: the untold story

STRAWS IN THE WIND: Star Wars / Provocative

AGRICULTURE: Murray River debate hotting up

QUEENSLAND: Values make a comeback

Will Saddam win Phase II of the war? (letter)

Anti-Western animus (letter)

Deflation causes (letter)

Australia's population challenge? (letter)

Christian victims ignored (letter)

COMMENT: Abstinence: the new trend in sex education

GOVERNMENT: Democracy needs a professional public service

COMMENT: Iraq and future US foreign policy

HONG KONG: Mass rally forces back-flip on national security law


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Deflation causes (letter)

by Alix Turner

News Weekly, July 26, 2003

Whilst Pat Bryrne is to be congratulated for tackling the issue of possible deflation, it is provocative to suggest that deflation is a novel issue. What is perhaps different about the deflationary prospect that exists at present is the sheer magnitude of it.

Arguably one of the most relevant historical precedents in this area is French experiment with central banking during the early 1700s that was principally orchestrated by Scotsman John Law.

Essentially, the traumatic deflation experienced by the French at the time was preceded by an extraordinary explosion in the availability of credit which translated into speculative prices for various classes of assets (and included a generous measure of "senseless extravagance"), especially in shares in the Mississippi Land Company.

It is very difficult to have an inflationary "bust" that has not been preceded by a period of irrationality easy credit and/or currency debasement.

Thus the prospect of deflation is necessarily linked with irresponsible or degenerate lending practices which may originate principally from within lending institutions or may involve some measure of government involvement - as was the case in John Law's day.

There can be little doubt that the French experience of those times was well known to the founding fathers of the American republic some fifty years later and influenced their resolve to prevent the establishment of a European style "central bank" within their jurisdiction.

President Thomas Jefferson famously said, "If the American people ever allow private banks to control the issue of their currency, first by inflation and then deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless in the land that their fathers conquered."

For decades America has been living beyond its means and incurring gargantuan debts in the process. What is at issue here is not that deflation is any kind of unknown trauma; it is how on earth sound economic function can be restored to that country (and the world economy at large) without experiencing the traumatic impact of a major deflationary purge to remove the accumulated excesses.

Surely they have reached the point where even more borrowing and even lower interest rates may produce some seemingly perverse backlash such interest rates being involuntarily driven up by declining bond prices.

Should this occur Jefferson's prophecy of over 200 years ago suggests that any deflationary outcome can hardly be considered to be unexpected. One of the most intellectually interesting questions arising from such an outcome is, if the American people finish up being "deprived of their property" who will the new owners be?

Alix Turner,
Wayo, NSW

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