Deflationary pressures are becoming more apparent in the United States too. “U.S. wholesale prices plunged in April at the fastest pace in more than 50 years while more than a quarter of America’s industrial base sat idle,” the May 16 Financial Times reported. The U.S. Labor Department said its producer price index fell by 1.9 percent—the sharpest drop since at least 1947.

Deflation, a general decline in prices that accompanies a crisis of “overproduction” and steep rise of unemployment, is a product of the long-term tendency of capitalist profit rates to fall, heightening price competition among rival capitals and putting enormous pressures on capacity-increasing investment and expanded production.

Due to an accelerating crisis of declining profit rates for nearly three decades, capitalists in the United States and other imperialist countries have been driven to cut costs. They have been “downsizing” or “reengineering”—terms often used in business jargon to describe cost cutting—rather than expanding productive capacity, because they can’t secure a competitive return on investments in capacity-increasing plant and equipment. This is the opposite of what most employers did from the 1950s into the 1970s.

Throughout the world capitalist system, price competition is intensifying among capitalists, as they struggle over limited markets. As a result, there is a tendency towards deflation, with the prices of many products falling. The capitalists fear a deflationary collapse like the one that marked the opening years of the Great Depression of the 1930s.

While no leading capitalist figures are predicting such a deflationary spiral now, many of their representatives are calling for pragmatic measures to head off the deflationary crisis that Japan has faced for a decade.  
 
Germany’s slump drags down Europe
The performance of Germany’s economy prompted the International Monetary Fund’s (IMF) “deflation task force” to forecast in a May 18 report a high risk of deflation in Germany in the months ahead. German economic output shrank by 0.2 percent in the first three months of 2003—the Italian by 0.1 percent, and the Dutch by 0.3 percent—making for two consecutive quarterly contractions. For Germany this dismal performance followed a growth of its gross domestic product by only 0.2 percent in 2002. The IMF concluded that “the probability of mild deflation taking hold” in Germany in the year ahead is “considerable.”

The same IMF report also pointed to an increased likelihood of deflation in Taiwan and Hong Kong, and of worsening deflation in Japan. “In the U.S.,” stated the report, “risk of deflation appears relatively low… but not minimal.”

With an economy 50 percent larger than those of France and Britain, the impact of developments in Germany is felt throughout Europe. The statistics office of the European Union reported that factory output in the 12 “eurozone” countries dropped by 1.2 percent in March, sparking a debate over the extent of the crisis and how to head it off.

Government officials in Germany tried to strike an optimistic note. “It is by definition not correct that Germany has entered [a] recession,” said the country’s finance minister Hans Eichel. Ernest Welteke, president of Germany’s central bank, added that he doesn’t “see any deflationary dangers.”

On the other hand, the big-business press in the United Kingdom began sounding the alarm that Germany’s slump could drag the rest of the eurozone into recession. Upbeat economic predictions by Berlin and European Central Bank (ECB) officials show that these people “are living in a parallel universe, one inhabited by permanently deluded optimists,” said London’s Financial Times in a May 16 editorial.

“It is precisely the ECB’s refusal to acknowledge publicly the dangers of deflation,” said the Times of London in its May 27 issue, “that leaves the eurozone—in particular Germany—at risk. The overarching lesson from Japan, whose economy has been struggling with falling prices and wages for years, is that deflation becomes more likely if policymakers are slow to realize that it is a danger.”

Some in the big-business media now argue that the remedy is to push up inflation—urging governments and banks to crank out money in various paper forms, eventually far outstripping the output of commodities that could be purchased with that money. This is a concrete indication that deflation and inflation are not mutually exclusive phenomena. Under depression conditions, workers can face a disastrous collapse of productive employment, which can soon be accompanied by a terrible price explosion.

The May 16 Financial Times, for example, suggested that a “money rain” may be needed to stave off continued price reductions and deflation. Pumping more money into the economy would provide “good reason to hope” that the European Central Bank would be successful in its new strategy of preventing inflation from dropping below 2 percent a year, the paper said.

In the middle of this, British government officials announced once again that “the time is not ripe” for the United Kingdom to adopt the euro as its currency.

As a result of these pressures, competition between the main imperialist powers—Washington, Paris, Berlin, in particular—is intensifying.

In May U.S. treasury secretary John Snow signaled a continued shift away from the Clinton administration’s “strong dollar” policy, stating that the nearly 40 percent drop in value of the dollar against the euro since 2000 was “a fairly modest realignment of currencies.”  
 
Drop of dollar against the euro
The May 18 Financial Times, however, stated that the devaluation of the dollar “will have more serious consequences for the transatlantic relationship than all the earnest diplomatic maneuvers, speeches and articles on the subject.” The dramatically reduced cost of U.S. exports compared to European commodities has battered German industry. Volkswagen, Europe’s largest car maker, reported the euro’s surge pulled its profits down by $460 million, or 67 percent, in the first quarter of this year alone.

U.S. manufactures can also use the increased cost of European imports to keep prices high in the domestic market. This is an edge the Big Three U.S. auto companies need as nearly 4 million unsold cars and trucks are backed up at assembly plants, on auto dealers’ lots, and at various overflow sites in and around Detroit.

The overproduction of cars and other commodities than can be sold at a high enough profit—what USA Today referred to as the “Death by 1,000 price cuts”—is driving the deflationary pressure in Europe, Japan, and the United States. The June 2 Business Week pointed to “the worldwide dearth of demand” that leave manufacturers “awash in capacity.” Federal Reserve Board figures released May 15 indicated that just under 75 percent of U.S. industrial capacity was being used in April, the lowest rate since 1983.

Growing competition for markets between capitalists in Europe and the United States is increasing the likelihood of trade wars. Washington, Paris, or Berlin may adopt new protectionist measures to protect their interests. The European Union is threatening to impose $4 billion in tariffs on U.S. goods if Congress doesn’t repeal tax breaks for U.S. exporters. At the same time, the Bush administration is challenging the EU’s ban on imports of genetically modified U.S. corn, soybeans, and other crops. Philip Condit, president of the aerospace giant Boeing, lamented that World Trade Organization talks that could open up markets for U.S. business “are losing momentum.”

The May 29 Wall Street Journal ridiculed concerns that an across-the-board drop in prices is in the offing in the United States. The same issue of the big-business daily, however, noted in a front-page headline that “For Many This Recovery Feels More Like a Recession.” In spite of a modest expansion of the economy, the Journal said, employers are still shedding jobs at a “furious pace”—9.2 million are unemployed in the United States today, and another 4.8 million are working part-time jobs because they can’t find full-time work. Employer speedup on the job has driven up worker productivity to the point that bosses can meet increases in demand while eliminating jobs.  
 
 
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