BT wants its staff to take a long, long break, on cut-down wages. Great if you are single with few commitments and fancy a few months in Thailand; not so good if you’re married, mortgaged up to the hilt, have kids, or suffer from negative equity.


BA wants its staff to follow the generous offer made by its chief exec Willie Walsh and agree to cuts in salaries.


Wage deflation is one of the big threats that is emerging right now, not just here but across the developed world.


That is why deflation should remain public enemy Number 1.


So you think deflation is a myth? Quantitative easing is the tool of the devil, and will send the global economy into hyperinflation. A fund linked to Nassim Taleb, author of The Black Swan, the second-best economics book to be published this decade (the best is being written by the author of this article), has already bet on a return of hyperinflation.


But these predictions of apocalypse miss the point. Banks are lending less, they will continue to lend less for the foreseeable future, and that means less money is created. It’s called fractional reserve banking – or fiat money as its critics prefer to call it. Assume you borrow money from Bank A. You spend it on a new TV at Currys, and get the builders in to work on an extension. Currys pays the money into its bank account, say Bank B. Bank B lends the money to someone else. Meanwhile, the builders working on your extension pay their money into Bank C, which then lends this on. Someone who borrows the money from Bank C buys a new car, the car dealer pays it into its bank, Bank A. It’s a money merry-go-round, and the money supply is growing all the time.


In this scenario, should the central bank print more money, there is a multiplier effect, and by the time the money merry-go-round has finished working, the new money created is far more than the original amount created by the central bank.


Many people say this system is the root of all evil. But, in an economy where potential capacity is growing, which is what’s been happening in recent years, we need more money in circulation, otherwise demand will be less than supply.


But today there are two problems. Banks don’t want to lend, and we all know why that is. We don’t want to borrow. Consumers are in debt, they want to get their debt down. Others, the baby boomer generation are worried about their retirement, this means they want to save more.


The multiplier effect that has worked for so many decades has gone into reverse, that is why quantitative easing is unlikely to be the ill that people say it is.


US unemployment has hit a 26-year high.


Wage rates in the US are heading for a precipice. Earlier this week, latest data out from the US showed that average hourly earnings in the US were flat in June. It was the second time in three months that there was a zero rate of inflation in average hourly earnings.


These days economists have started talking about something called money illusion. It’s the idea that we don’t take into account inflation when we work out our money. So house prices go up – yippee, but we forget to take into account that so did prices across the board.


But it works the other way too. If prices are falling, our money goes further.


The current low rate of interest is crippling savers, we are told. But don’t forget, the retail price index is heavily into negative territory.


The real problem with the economy right now is that potential output greatly exceeds actual output. The credit crunch, thanks to the benefits of creative destruction, may actually have the effect of increasing potential capacity even further.


Moving forward, the challenge for the world is how it can ensure demand meets potential supply. It’s a challenge it will find hard to meet – which is why deflation, and not inflation, is the big threat for the next decade or so.

© Investment & Business News 2013