Deflation Causes Worries in the EU

In the European Union, there is a new worry—deflation. The economic concern has been inflation in many countries—such as Argentina (about 25 percent according to private economists) and Venezuela (52 percent in 2013). With the United States economy being flooded with liquidity from “quantitative easing” by the U.S. Federal Reserve—along with massive fiscal deficits—many analysts in the United States are concerned that inflation could spike up in the U.S. as well. But in the European Union, the concerns are quite the opposite.

Deflation occurs when prices and economic activity decline, appearing when demand for goods and services contracts, reducing prices. This in turn slows down the economy, further reducing demand. Deflation can be very hard to deal with using monetary policy, because central banks can only lower interest rates just so far. Short-term rates in the U.S. and the EU are near zero as it is.

The Wall Street Journal reported in a December 6, 2014 article by Stephen Fidler, “Anxieties are rising in the euro zone that deflation—the phenomenon of persistent falling prices across the economy that blighted the lives of millions in the 1930s—may be starting to take root as it did in Japan in the mid-1990s” (Page A2). Price levels are actually falling in Greece, Latvia and Cyprus and “…inflation is stubbornly low, under 1% on average across the 18-nation bloc, despite the money that the European Central Bank has been pumping into the economy with the aim of spurring investment and growth, actions that often push up inflation… if the average is below 1%, more economies using the euro are at risk of deflation” (ibid). As usual, the German economy is faring better than most of the rest the EU, having an inflation rate of 1.6 percent, helping pull up the EU average.

The trend is down, down, down for price levels in the EU.

The prospects are not encouraging. “Even the Bundesbank concedes that if deflation sets in, growth is almost impossible. People and companies hold off from spending, believing that prices will fall further, causing demand for goods and services to fall. Wages and salaries hold up initially, but slumping corporate profits eventually force companies to cut output and wages, hold off investment and lay off workers. Falling income and rising unemployment pushes demand lower, setting off a self-reinforcing downward economic spiral. Banks, meanwhile, are enfeebled as losses on loan portfolios grow” (ibid).

“For borrowers, deflation is a double whammy… Creditors benefit, and debtors lose out… Those already suffering most of the pain will be asked to bear more. Or they won’t be able or willing to bear more—and will default on their debts… There are plenty of reasons to worry” (ibid).

Economic growth occurs when new economic activity creates new wealth. But the God of Abraham, Isaac and Jacob has a different view than the world’s economists have on how this process occurs. He warned Israel (and all peoples), “Beware that you do not forget the Lord your God by not keeping His commandments… then you say in your heart, ‘My power and the might of my hand have gained me this wealth.’ And you shall remember the Lord your God, for it is He who gives you power to get wealth” (Deuteronomy 8:11, 17–18).

But do the Europeans believe that? Do the Americans? God said that a great crisis will come on the U.S. and Europe that will lead to the economic collapse if the U.S. and the rise of a great authoritarian leader in a ten nation alliance in Europe. Christ told His disciples and us as well, “And what I say to you, I say to all: Watch!” (Mark 13:37). In world events, a good thing to watch is the financial news!

If matters like these concern you, let us recommend that you read the article “The Tipping Point,” to see more about what the Bible says is going to happen. Also, order the free booklet, Prophecy Fulfilled: God’s Hand in World Affairs for the big picture, today!