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At Issue

With Philip Shaw

Is American Deflation Set to Rattle Our Economy?

Tuesday, May 20, 2003

Middle-aged Canadians have a long memory of former Prime Minister Pierre Elliot Trudeau. He was an elegant man, loved by many and loathed by the same. One of his most memorable statements on the economy was how he wanted to "wrestle inflation" to the ground. It didn't quite turn out that way. I think Pierre Trudeau never did quite understand the inner workings of our Canadian economy.
Inflation is where you have a general rise in prices over time. It has become commonplace in some of the world's economies where prices rise across the board. Governments and their agents like the Bank of Canada are left balancing the money supply and interest rates to keep "inflation in check." Invariably, something gets out of balance and then all heck breaks lose.
Rarely, though, do we have the opposite happen. I'm talking about "deflation". That's where there is a general decline in prices over time. The last time it happened in Canada was during the depression. Since then, some doomsayers have been telling people the apocalypse is about to happen again. But so far, mass "deflation" hasn't happened. The doomsayers are still looking to have their day.
Hopefully that won't happen, but the strange "goings on" in the American economy are surely making the case for some "deflation." One of my favourite economics writers, Robert J. Samuleson of Newsweek magazine made a case for deflation in his May 19 article, "The Bogeyman of Deflation". In this article he points out the FOMC, the Federal Reserve's main policymaking body is quite worried about deflation in the American economy.
Samuleson lists several dangers of "deflation. (1) lower prices could squeeze corporate profits, hurt the stock market and pressure companies to fire workers and cut wages; (2) falling prices could lower overnight interest rates to near zero, making it harder for the Fed to stimulate the economy; (3) companies and farmers may default on loans, which are fixed while the prices they receive fall, and (4) consumers might delay purchases, believing future prices will be lower.
Samuelson goes on to point out that deflation hasn't always been a bad thing in economic history. Some of us remember stories of the depression where Chatham-Kent farmers went back to horses because they couldn’t afford the gas for tractors. That was a bad time. But there have been other times like recently in Japan where people "weathered the storm." With the American economy currently in the doldrums, deflation talk is not what the Canadian economy needs to hear.
Our growth rates have been buoyant, contrary to traditional trends where the Canadian economy follows American economic growth. The Canadian dollar has continued its unprecedented historical rise upward closing just above 73 cents US, last Friday. So with the Federal Reserve in the United States, openly musing about "deflation", is there something wrong with this picture?
I've got to think so. I don’t believe Canada can continue to have its cake and eat it too. If the Americans do get into a deflationary spiral, this will be a stonewall for future Canadian economic growth. American deflation means much less demand for Canadian exports. Those exports will back up right into the warehouses and industries of Chatham-Kent.
I'm sure some of you are musing the rising Canadian dollar is doing a good job of that. Just ask any Canadian greenhouse owner. This industry has seen good growth over the last few years. Greenhouse produce heads south all across Canada. The 62 cent US Canadian dollar was a huge incentive. The spectre of American deflation along with a high dollar isn't good news.
In my perch as a journalist, radio commentator and plough jockey, I'm often inundated with helpful folk who want me to give "their" cause a little publicity. Often, this means as I alluded to earlier, an economic calamity like the 1930's depression is just around the corner. Unfortunately for them, I'm the guy who doesn't believe in any "conspiracy" theories to explain our economic future. This deflation thing is a bit different. Samuelson has written about it before. Maybe the conspiracy theorists are about to have their day.
When you add up the rising dollar, "deflation speculation" and the poor growth numbers within the American economy, it's very easy to see how our Canadian economy might be on some shaky economic ground. So far, it hasn't shown up much, but you can bet it will. It's an old saying but one that still holds. Our economic growth is directly related to the health of the American economy. Even though we've been bucking that trend lately, I cannot see it lasting much longer.



Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.