Time to Break a Lance on Deflation?

The Lancelot of economics, Alan Greenspan, was knighted by Queen Elizabeth II last week. But some top economists worry that the U.S. Federal Reserve Chairman has moved too slowly to slay the dragon they hear stirring: deflation. The term describes an economic slough of despond in which capacity exceeds demand, inflation drops below 0%, companies sit on their cash rather than investing it, prices fall and wages retreat. Workers paid low wages in inflationary times find their debt harder to repay if they get a further cut-a terrible prospect in this period of record credit-card bills. Deflation has devastated Japan since its 1980s bubble burst. “But you don’t need to be Japanese to worry about it,” says Stephen Roach, Morgan Stanley’s chief economist. Now that the American and European stock bubbles have popped, Western economies are feeling similar pressures. August inflation in the U.S. was only 1.8% and in Germany only 1%, both dangerously low. Yet central banks continue to base their policies on avoiding high inflation. They may be waking up to the risk. The Fed’s own analysts say banks must slash rates early, providing stimulus before deflation sets in; Japan’s mistake wasn’t cutting rates to zero, but waiting too long to do it. Last week two Fed members uncharacteristically dissented when the bank refused to drop rates below their 30-year low of 1.75%. But further cuts risk encouraging more debt and wasting the Fed’s ammunition. Still, some see these worries as tilting at windmills. “I hope I’m wrong,” says Roach. He’s not alone.

AGRICULTURE
Let them eat beef
It seems like good news, unless you’re a cow: 19 months after the foot-and-mouth crisis stopped exports from Britain, the first shipment of beef left Wales, bound for the gourmet market in Holland. Back in 1995 British beef was big business, with 274,000 tons, worth $810 million, shipped around the world. Then BSE, or “mad cow” disease, laid waste to the industry. The French, who imported 100,000 tons annually, banned British beef, as did almost everyone else. Even in 1999, when the E.U. ruled the meat safe, France kept its ban-despite E.U. threats of $160,000 daily fines. Then foot-and-mouth again halted exports. But their reinstatement doesn’t mean Britain’s cattle industry has recovered. New laws say no cattle over 13 months old-the lower quality that were the bulk of exports-can enter the food chain. “That is here to stay,” says a Farmers’ Union spokesman, “and we won’t see the old volumes again.” Even in the small, high-end market for young, prime beef, there’s no guarantee that consumers, especially in France, will bite.

THE BOURSE
When Mickey Gets Militant
How intense are Disney’s troubles? The company hired George Mitchell, who helped forge Northern Ireland’s Good Friday agreement, to co-chair the corporate governance committee.

Better Luck For The Irish
Allied Irish will sell Allfirst, the troubled subsidiary where the company uncovered a $691 million fraud in February, to U.S. bank M&T for $3.1 billion.

Vivendi’s Dash For Cash
The Vivendi fire sale began in earnest, as the group sold its Italian pay TV arm Telepiú; to News Corp. for €1 billion. The company confirmed it would also sell its publishing, PC games and overseas telecom units.

Gassing Up Indonesia
In one of the largest-ever investments in Indonesia, state-owned Pertamina and British Petroleum signed an $8.5 billion deal to open a gas field for China.

INDICATORS
New Course For The Bourse
Europe’s market landscape is about to be transformed. Next year Deutsche Börse will close the Neuer Markt high-tech exchange, which has fallen 96% from its peak value. Other small exchanges may follow when the E.U. announces new market regulations in November. The rules, which will favor large exchanges and could save investors €15 billion a year, will create a single E.U. market for trading securities, harmonize regulation and allow customers to buy shares directly from investment banks.

The Good, The Bad, The Ugly
The International Monetary Fund still believes the global economy is recovering, but it added to the gloom shaking markets when it released its World Economic Outlook with a host of downward revisions for expected economic growth. The IMF lowered its prediction for global growth in 2003 from 4% to 3.7%, cut the E.U.’s forecast increase from 2.9% to 2.3% and slashed the U.S. outlook nearly a point, to 2.6%.

A Brand That Won’t Quit
At least there’s still a hot market for one commodity: schadenfreude. The auction in Houston for Enron leftovers attracted 3,000 people. The most-desired item? The famous “crooked E” that adorned the energy trading company’s headquarters; it sold for $44,000.

BOTTOM LINES
“Yesterday I died. That’s bad news for me, but it’s not bad news for you.”
Warren Buffett, chairman of Berkshire Hathaway, quoting from a letter that will tell shareholders his succession plan after he dies

“We have to sell our oil. We cannot drink it.”
Saleh Mansour Al Rajhy, Saudi ambassador to South Korea, arguing that fears of runaway oil prices are overblown

“The average E.U. cow receives more than $2 a day in support from governments. That is more than the income of half the world’s population.”
Julian Filochowski, director of the Catholic Agency for Overseas Development, on farm subsidies