The Horrors of Deflation

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Fascinating (and horrifying) New York Times article on Japan's slow descent into economic miasma over the past 20 years.

An economy in the throes of persistent deflation sounds like a dystopic bizarro world where no one wants to buy anything because: why buy today something that will be cheaper tomorrow?

“A new common sense appears, in which consumers see it as irrational or even foolish to buy or borrow,” said Kazuhisa Takemura, a professor at Waseda University in Tokyo who has studied the psychology of deflation.

As a result, prices on everything are in a mad race to the bottom:

There are vending machines that sell canned drinks for 10 yen, or 12 cents; restaurants with 50-yen beer; apartments with the first month’s rent of just 100 yen, about $1.22. Even marriage ceremonies are on sale, with discount wedding halls offering weddings for $600 — less than a tenth of what ceremonies typically cost here just a decade ago.

The psychological effects, individually as well as collectively, are devastating:

[...]the most noticeable impact here has been Japan’s crisis of confidence. Just two decades ago, this was a vibrant nation filled with energy and ambition, proud to the point of arrogance and eager to create a new economic order in Asia based on the yen. Today, those high-flying ambitions have been shelved, replaced by weariness and fear of the future, and an almost stifling air of resignation. Japan seems to have pulled into a shell, content to accept its slow fade from the global stage.

[...]nearly a generation of deflation has had a much deeper effect, subconsciously coloring how the Japanese view the world. It has bred a deep pessimism about the future and a fear of taking risks that make people instinctively reluctant to spend or invest, driving down demand — and prices — even further.

The effects on business are even worse:

Deflation has also affected businesspeople by forcing them to invent new ways to survive in an economy where prices and profits only go down, not up.

[...]

“Deflation destroys the risk-taking that capitalist economies need in order to grow,” said Shumpei Takemori, an economist at Keio University in Tokyo. “Creative destruction is replaced with what is just destructive destruction.”

I can't think of a better advertisement for Ben Bernanke's upcoming Quantitative Easing, version 2.0, than this article. Come to think of it, that may have been the intention.