Sunday, May 18, 2003

Have no fear, little flock, your shepherd has spoken. US Secretary of the Treasury John Snow said on Saturday that "We're far from having a deflationary economy" in the United States. Great comfort from the man who also tells us that the US dollar's realignment is "really fairly modest" and that the massive US tax cut on unearned stock dividens will spur US economic growth. Granted the United States is a flexible economy largely immune from the rigidities of the Japanese and European system (such as pensions, health insurance and job security). That being said, the core consumer price index (CPI minus the volatile food and energy sectors) rose a mere 0.6% annualized over the first four months of 2003 -- less than one-third the inflation rate over the same period in 2002. US productivity continues to rise while wage increases fail to keep pace. With the weak economic outlook, tax cuts and interest rate cuts are more likely to find their way into the bank accounts of the rich rather than into job-creating investments which will produce goods for which there are no consumers.

Far from a deflationary economy? All the major East Asian economies save Korea (Japan, China, Hong Kong, Taiwan, Singapore) experienced outright deflation in 2002. What makes John Snow so sure the US is immune?

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