Deflation and Inflation in the World System

The Economist recently commented on the possibility of deflation after the world-wide financial crisis of 2007-2010. The major worry is deflation in the core countries and inflation in the peripheral economies of the world system. Current events demonstrate the strong dependency relationship between the core and the peripheral countries (core countries in deflation, peripheral countries booming or vice versa). Currency manipulations and tighter monetary policy in the core countries are being offered as the appropriate policy response to get the world system back on the track to unlimited growth.

History suggests, however, that none of these policies will be a panacea. When monetary conditions in the rich world are loose, emerging economies are prone to lending binges and asset bubbles. The price of avoiding deflation in the rich world today may be a bust in the emerging world tomorrow.

The NY Times is also reporting that Latin American economies are booming based on increased Asian demand for commodities (iron ore, tin and gold). Latin America has had its share of debt crises since the 1980's. We're probably witnessing the beginning of another cycle. It's a fundamental feature of the current world system and the division of labor between core and peripheral countries. Policies designed to increase short-term growth (especially in extractive industries which are subject to swings in commodity prices) will only make the next crisis that much more severe in the future.