Heiner Flassbeck: Policies that Ignore Demand will Lead to Deflation and Depression

Courtesy of Jaime Falcon.

Heiner Flassbeck: Reagan and Thatcher reduced the power of labor. It went well while profits were rising due to financial bubbles. The bubbles created the illusion that workers could get rich without working – so they went on spending. But that illusion is dead. And we always knew that if households began to save demand would decline. Workers are realizing that their wages are stagnating. We have reached a critical point where the old model will fail. All companies are now competing to cut wages. This is a disaster for the economy as a whole. This leads to deflation and depression. This is what happened during the Great Depression.

We need balance in the labor markets. Monetary policy has gone as far as it can. You must stabilize the labor market. Japan is not coming out of stagnation because incomes are stagnating or falling. That means stagnating consumption. And a stagnating economy.

There is no self-stabilizing mechanism in the market. The market is killing itself. That is what happened during the Great Depression. So you need a competent government. If we don’t get competent government that understands the destabilizing nature of the market, there will not be improvement.

Unions have been dramatically weakened by mainstream economic policy. We have a chance now to change policy. Hopefully we have some enlightened economists and politicians who will change course. The global economy depends on it. Elections should be seen as a chance to more us in the right direction.

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