No! It is in deflation mode. This is irreversible for the next 100 years.
What is happening to the global economy? Some economists say that it is in recession. Others say that big recession will set in next year. Some young experts had a workshop during the World Economic Forum meet at Devos wherein they said that the world is under Slobilisation’ whatever that means. Some say there is a `slowdown.’ But all those who make such predictions are hopeful sometime shortly the so-called’ normalcy will return. Many from their community also say that they do not really understand what is happening. The truth is that only the last statement.
The reality is that the world economy today is in a deflationary mode. Economists are stuck with economic theories that conform to Supply-Demand Curve’ and Price elasticity’ theories. These theories are no more valid. New arguments confirming to sustained deflation have to evolve. Today, controlling inflation through monetary policies has no meaning. Say, even if you pump in trillion rupees into the Indian economy, it will not cause any rise in prices. Under the current circumstances, any fiscal policy management the government pursues is not going to yield the desired result. For such a situation, economists have no relevant economic theories.
Prices fall due to technology…
Now, let me explain the actual reason as to why the prices are falling, resulting in deflation. Rates are declining due to developments in international technology (IT). The extraordinary speed and acceleration with which the new technologies are emerging, and their ubiquitous nature can affect the movement of prices of goods and services only in one way, downwards. This situation has come to prevail for future until, say, the incremental reduction in cost due to technological advancement becomes zero or close to it. Such a time, in my estimation, is in the farthest horizon.
constant new inventions impacts entirely new areas
Economists argue that it was common in the past to have some disruptions in the economy whenever a new technology surfaced. This is where they have lost sight of reality. There are vast differences between those technologies that emerged earlier and the ones happening now. In the past whenever new technology emerged, it had not many variants. For example, electricity, automobile or locomotives. Whatever developments that came about after the initial inventions were purely improvements. In other words, the developments were in the efficient use of those inventions. Whereas, with modern technologies, there are constant new inventions which impact entirely new areas. Their coverage is all-pervading.
The second aspect of these technologies is the speed at which they become ubiquitous. In layman’s terms, they get commoditized in a wink.
Speed of emergence of new technologies…
The third aspect is the mindboggling speed with which newer technologies are emerging. Such frenetic pace was never seen before. I shudder to think about the changes Quantum Computing technology will bring about. If the currently available processor technology can cause such impact, one can’t guess what impact Quantum Computing processors with million times more capability will make. These kinds of developments will keep the economy deflationary for long.
This situation of deflation has not come suddenly as there were enough markers in the last decade. It is just that the experts did not see them. There have not been any `Eye-popping’ significant private investments in the previous 10 years. Globally many big companies are going bust and more are in the pipeline. Real estate business is in trouble everywhere. The millennials are not buying real estate. Why would anyone buy a property by taking a loan when the value of the property keeps dropping? The millennials are not buying automobiles and the banks are in trouble. NPAs are increasing. There is no appetite for credit. For the deflationary economy, new banking theories must evolve. The current banking process is non-workable. Millennials are not investing in capital markets. In the private sector, salaries have come down. Many more such markers, which point to the new economic system contradictory to the hitherto conventional are there.
