Fear itself the only thing to fear


  • Letters
  • Sunday, 05 Jan 2003

In his inaugural address on March 4, 1933, when the United States was mired in the Great Depression, President Franklin Roosevelt told the nation: “The only thing we have to fear is fear itself.”  

He went on to appeal to the people not to flinch from the tribulations they faced. 

That was 70 years ago. Today, the world once again seems about to step onto the “road to fear,” which may lead the world economy from deflation to depression. 

In its year-end economic estimate, the World Bank warned that there was a great risk of global economic stagnation. 

The bank cited the following as risk factors that threaten major industrialised countries: deteriorating consumer sentiment, feeble stock markets, increase in non-performing loans and distrust in corporate management.  

In addition to these factors, uncertainty about the stability of Japan’s financial system was cited. 

Under these circumstances, global economic growth will be at the 2% level, much lower than the predicted longer-term trend, the bank said. 

In its latest report, the Asian Development Bank called on countries to take precautions against the possibility of a global deflation as serious as during the Depression triggered in 1929. 

The remote factors said to have caused the Great Depression were the fast-moving globalisation of about 1870 and long-term deflation. 

Along with the Western powers’ colonial expansion and the ensuing flow of cheap raw materials, a transatlantic cable was laid, international steamer lanes were inaugurated, and rail networks expanded rapidly.  

All of these developments gave impetus to the globalisation trend. 

As the freer flow of capital, information, goods and people more closely linked the world’s economies, costs of raw materials, transport and production dropped, causing a deflationary trend that lasted for about 30 years. 

Similar developments have been observed in the world economy since the 1990s. 

Following the collapse of the Cold War structure of East-West confrontation, low-cost products from China and former Communist bloc states have flooded the world market, creating a glut. 

Due to rapid progress in information and telecommunications networks, the cost of information and telecommunications has plunged, creating a potential for deflationary pressure that overlaps the World Bank’s risk factors. 

In Asia, the Japanese economy, which also is suffering the after-effects of the bursting of the bubble economy, has sunk into long-term deflation, while deflationary trends have started spreading in China, Hong Kong, Taiwan and Singapore, too. 

The United States also has seen its producer price index hovering low for more than a year, while in Europe, the German economy is particularly sluggish. 

Meanwhile, the prevailing view holds that an impending US-led strike against Iraq would end quickly, with the possible rise in petroleum prices lasting only briefly. 

Depending on its outcome, however, an attack could wreak major damage on the fragile world economy. 

Fears also linger that the ailing Japanese economy, hit by a growing deflationary trend and escalating bad loans, may trigger a global crisis. 

To avert such a crisis, Japan, a “front-runner” among deflationary economies, also needs to take the lead in economic-stimulus measures, both on the fiscal and monetary fronts. 

The government must take bold, comprehensive measures, including the effective and immediate implementation of both the 2002 supplementary budget and fiscal 2003 budget, which should be rewritten, if necessary. 

Other necessary measures are expanded purchase of long-term government bonds by the Bank of Japan and a correction in the over-appreciated yen through Japan’s purchase of foreign bonds. 

There are limits to the effectiveness of actions taken by one country alone. 

International cooperation on economic measures to fend off global deflation is urgently needed, among not only the major industrialised nations like Japan, the United States and those in Europe, but also China, which has been rapidly gaining economic clout, especially since it joined the World Trade Organization. 

Each of these countries must set inflation targets and implement comprehensive stimulus measures, including fiscal, taxation and monetary steps, simultaneously and intensively. 

In addition to monetary relaxation, the United States, under the leadership of President George W. Bush’s new economic task force, is preparing a stimulus measure featuring additional tax cuts, such as a tax break on investment. 

Meanwhile, the European Union is studying the possibility of easing a regulation governing fiscal discipline among member nations to allow them to take economy-boosting fiscal measures. These measures also must be implemented quickly. 

China has been accused of exporting deflation when it ships out vast quantities of low-priced products produced by cheap labour, on the basis of the US dollar-pegged yuan’s exchange rate, which is far below its effective value. 

Along with adjusting excess production, one of China’s highest priorities should be the appreciation of the yuan, whose fixed rate to the US dollar has remained unchanged since 1994. 

Shortly after taking office, Roosevelt launched the New Deal, which helped the US economy get on a recovery track, at least temporarily. 

Yet it took more than a decade for the Depression-hit US economy to recover to its 1929 level. The recovery came after World War II broke out, flooding the United States with orders for armaments and munitions. 

Rebuilding an economy that has fallen into the depression trap is an enormous task. Such a necessity should be staved off at all costs. 

Now is the time to learn history’s lessons. – Asia News Network/ Yomiuri Shimbun  

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