The Australian car industry was not killed by the high currency. It’s a victim of what International Monetary Fund chief Christine Lagarde calls the "ogre of deflation".
Car prices in Australia fell 2.8 per cent last year even though the dollar depreciated 15 per cent, so it wasn’t the dollar.
The clue to the problem lies in the fact that so many people will lose their jobs as a result of the industry’s closure: modern auto factories employ robots, not people. Close a factory in Japan and no workers stream out of the gates telling TV cameras how sad they are.
It’s not just cars: most prices are falling, not rising.
Inflation kicked up in the December quarter, but the prices of clothing, computers, TVs, cars, fuel and pharmaceuticals all fell. Australian costs, meanwhile, went up. Wages rose 3 per cent and real estate prices rose almost 10 per cent.
Without a perplexing (to the Reserve Bank) increase in fruit, vegetable and hotel prices Australia would be flirting with deflation just like Europe, America and Japan, where the central banks have cut interest rates as far as they will go and are now printing money.
Prices are trying to fall because automation means it costs less and less to produce things. Firms that can’t keep up with the rigours of falling prices themselves fall by the roadside.
The new age of sprinting technological progress, now including the wonders of 3D printing, plus an excess of capacity left over from the GFC, has created what Lagarde called at Davos the “ogre of deflation”.
Last night the new chair of the Federal Reserve Board, Janet Yellen, in her first Congressional testimony, recommitted the Fed to getting inflation back up to 2 per cent and as a result will be keeping interest rates where they are “well past” the time unemployment falls below 6.5 per cent.
Her testimony pushed markets higher, including the Australian dollar. So central banks are succeeding in getting some prices up – for example, shares and property – and for the moment they are settling for that.
It’s not just new technology and automation that are driving down consumer prices the world over.
Debt is also deflationary, because it increases supply and reduces demand. Indebted firms tend to produce more to stay solvent and indebted consumers and governments buy less to pay off debt.
Furthermore, the internationalisation of China’s currency, the renminbi, is funding other developing countries like Vietnam, Bangladesh and Cambodia to industrialise more cheaply, flooding the world with yet more cheap products.
And commodity prices are depressed, unlike other tradable assets, because of the huge investments in mines and energy factories over the past decade.
The world’s new corporate elite are not industrialists or bankers, but the great price-cutters of the age – firms like Google, Amazon and Apple.
This new breed of corporate predators are rich because they are driving down prices, including in Australia. Google, Facebook and Twitter have ruined the traditional advertising market; Amazon has destroyed retail margins; Apple’s iTunes, along with Spotify and BitTorrent, has collapsed the price of music and movies.
Everyday low prices are good, we would all agree, so why are leaders like Christine Lagarde afraid of it, and why is Janet Yellen trying so desperately to get inflation up?
Because debt and deflation get into a spiral: lower prices increase the value of money – and thus debt – and more debt means more production and less demand, and therefore more deflation, and so on.
So the ogre that stalks the world is not really deflation, but debt.
The solution? More debt, apparently. The central bankers are trying to conjure up more demand by reducing the price of credit to zero and encouraging people to take it off their hands. In America and Japan they are even materialising money so it will be lent, all to no avail. Most of the printed money is sitting un-lent in bank reserves.
This has been going on for five years, yet inflation around the world continues to fall – except in Australia, where fruit and veges have saved the day for the moment, thanks to the weather.