Deflation

Inflation is bad. Deflation is worse.

In our lifetime, we have known only inflation. There were miserable times when the inflation rate ran at double digits, eroding the purchasing power of those who depend on fixed wages.

But inflation keeps consumers busy. Racing against the upward trend in prices, they purchase sooner rather than later. That keeps the domestic economy humming.

Deflation is debilitating. It encourages consumers to postpone spending. They will tend to hold on to their money now at the prospect of prices going down later.

Deflation freezes the market. In the face of bearish consumers, manufacturers will not invest in new capacity. If the bearishness is severe, they will cut back on jobs. With less people employed, consumer demand plunges.

The prospect of deflation pushes governments into interminable stimulus programs. The bizarre phenomenon of negative interest rates happens. Depositors will have to pay banks to hold their money instead of the other way around. The banks, in turn, deal with the problem of holding cash no one wants to borrow.

Deflation is a real problem for Japan. It has kept what was once a dynamic industrial power into many years of stagnation. Prolonged stagnation expresses in many other ways, including a falling birth rate.

Core consumer prices in Japan fell 0.9 percent in November on a year-on-year basis. This marks the fourth straight month of falling prices and the fastest rate so far.

Although deflation is a lingering problem in this economy, it appears to have been aggravated by the pandemic. With consumers staying home, domestic spending declines.

For years, former prime minister Abe Shinzo tried to shake his country’s economic lethargy by means of nearly continuous stimulus packages. The continuous stimulus came to be called “Abenomics.” All those efforts seemed for naught as a peril of deflation again threatens the Japanese economy.

Falling consumer prices put great pressure on the Bank of Japan to continue is massive stimulus measures. The Cabinet recently approved a third supplementary budget to fund a $708-billion stimulus package. Tokyo is putting in a record $1.03-trillion budget for the next fiscal year to arrest the trend towards deflation.

But fiscal and monetary measures will amount to little if consumer confidence is not restored. The surge in COVID-19 infections in Japan will stand in the way of building consumer confidence.

The Philippines is nowhere near deflation. But the long trend of falling imports indicates our manufacturers are not building up capacity and our retailers are not expecting booming consumer demand.

Although the dynamics differ from one economy to the other, the general trend suggests economic scarring will be wider than we might care to imagine.

Rey David, 78

Much of the little I know about banking, I learned from former DBP president Reynaldo G. David. He passed away in the early hours of Dec. 13. Today, at 1 p.m. we will hold a virtual memorial service to honor him.

I first met Rey when he was appointed to run the state banking institution in 2004. Small and lightly built, he did not seem to match the weighty reputation that preceded him. But his eyes and his wry smile betray a mind that did not seem to require rest. He always saw possibilities that escaped the rest of us.

Rey was a hard-driving executive. I saw grown men and women break down and cry because they failed to meet his expectations. But behind that façade was a man with a soft heart and an irrepressible sense of humor.

When he was DBP president, the bank’s profitability grew by leaps and bounds. The national government was happy because that translated into increased dividends for the Treasury. The employees were happy because Rey saw to it the profitability translated into better pay.

With more capital, especially after we issued corporate notes, the bank was able to lend more. That helped the economy immensely, especially as DBP undertook the nautical highways program that upgraded the country’s logistics system.

Rey saw far into the future. He saw DBP evolving into an infrastructure bank, helping modernize our economy’s antiquated backbone and helping disperse progress to the islands. If there was anyone who could imagine the deals that needed to be cut to make this a working reality, it will have to be him.

I traveled extensively with Rey. We went to every corner of the country to meet with clients and look into the local economies. We went abroad to do roadshows for the corporate notes the bank offered investors.

Once, on the road from Rome to Milan, Rey asked my advice about where to eat lunch. I thought we should get off the highway, lose ourselves in the country roads and find some family-run restaurant somewhere. We did that and found a small eatery where we were the only guests. The restaurant served delicious rabbit dishes. Rey never stopped thanking me for the advice –the only one he ever took from me.

After lunch, we strayed into a small medieval village on a hilltop. The village was celebrating some sort of feast and offered free cheeses and wines on rough wooden tables. This was a happy day.

That day, I thought, was most instructive of the man Rey was. He never feared venturing out to the unfamiliar. He was comfortable with friends. He lived life well. Every day was an adventure.

All of us privileged to have worked with this man learned so much. His was a penetrating mind that pushed the limits of what was possible.