Just as well really as I think we're going to need all the crass materialism we can muster to see us through the next 18-24 months. Unfortunately it's beginning to look like Irish consumers have gotten fiscal rectitude just when they need to be a bit more flaithulach. One measure of how consumers are behaving is the supply of money in the economy. And the worrying thing is the extraordinary contraction in the M1 money supply in Ireland since April this year - a contraction that seems to be accelerating, as illustrated in the chart.
M1 equals the total amount of currency in circulation combined with overnight deposits in banks - see table A3 in the Central Bank's monthly statistical bulletin. In October, M1 had shrunk by nearly 12% since a year previously. The worry here is that we may be entering a rapid period of deflation. It's all down to basic monetary economics, as explained here:
MV=PQ: Money (the quantity of money) x V (velocity, the number of times it changes hands within a time period) = P (the price of goods and services) x Q (the quantity of goods and services exchanged in the time period).The evidence from a number of economies is that consumers are holding onto their money rather than spending it: resulting in price (P) reductions (hence the sales in every shop in Ireland), and even in reductions in the amount of goods purchased (Q).
From that simple equation it's easy to see that if M stays even, then should V decline either prices must fall (deflation) or the quantity of goods exchanged in the economy must decline (recession) or both. In fact, even if M rises, should V fall by a more than offsetting amount, then either P or Q or both still must fall.
The worry now is that falling interest rates will not have the desired effect if the consumer strike continues. Although zero inflation or even deflation was the economic norm right up to the end of the 19th century, the expansion of consumer credit now means that deflation is more of a threat to the economy simply because it means that the real value of debt rises rather than falls, as it otherwise would when there is continuous inflation. Given that the Irish have the highest level of personal debt in Europe this is most definitely not good news.
Nor is deflation unique to Ireland: there is already substantial international evidence of deflation in different economies and sectors, some due to falling commodity prices but the rest is a response to striking consumers. However, not all economists think deflation is a bad thing - especially those from the Austrian School of economics. Here's a different perspective:
Deflation is not inherently bad, and that it is therefore far from being obvious that a wise monetary policy should seek to prevent it, or dampen its effects, at any price. Deflation creates a great number of losers, and many of these losers are perfectly innocent people who have just not been wise enough to anticipate the event. But deflation also creates many winners, and it also punishes many "political entrepreneurs" who had thrived on their intimate connections to those who control the production of fiat money.Hairshirt economics for sure. Either way, I think we're all going to be paying a lot more attention to monetary measures in the months ahead. The Credit Crunch may have made us all Keynesians; I suspect that deflation is going to make us all Friedmanites.
Deflation puts a break--at the very least a temporary break--on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch. It dampens the growth of the welfare state, if it does not lead to its outright implosion. In short, deflation is at least potentially a great liberating force. It not only brings the inflated monetary system back to rock bottom, it brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers.