Globalization, the falling cost of capital, and technology are powerful deflationary forces that continue to rattle around the international economy. Even if global growth recovers, the upturn might not be sufficient to resist powerful deflationary influences at play.
In such an environment, Xie says, the answer isn't monetary stimulus, which might only cause financial bubbles and eventually make matters worse. When Wal-Mart Stores Inc cuts prices to pass lower import costs to consumers, there's no need for the Fed to print dollars to maintain price stability. If the Fed did, it would create excess money supply and fuel an asset bubble, as in the past.
The answer, Xie says, is to restructure high-cost economies away from manufacturing and cut excess capacity in the service sector. In other words, such deflation isn't a problem as long as higher-cost economies shift away from competing against low-cost producers. Consumers benefit from cheap imports, while resources vacated by exiting industries go into higher-value-added industries. It becomes a problem only if higher-cost producers engage in competitive devaluation to stay in business.
Admittedly, deflation is rarely, if ever, good for the broader economy. It zaps corporate profits, cuts wages and eats into government tax revenues. But with unemployment at a record high and Hong Kong's economic fundamentals worsening, sliding prices are about the only thing propping up consumer confidence.
It's akin to a stealth tax cut that's leaving consumers with greater spending power.
More important, though, is the creative destruction that Hong Kong's cartel-ized economy needs. Hong Kong may be among the world's freest economies, but it's also a hotbed of anti-competitive behavior at the hands of monopolies. Even the International Monetary Fund has raised concerns about the "limited degree of domestic competition" here.
If prices keep falling, the trend could root out some, or many, of Hong Kong's inefficiencies. Bloated, monopolistic companies might have to downsize or even shut down. That, in turn, could force companies to abandon uncompetitive industries. Or at least provide opportunities for new firms to compete.
Things in Hong Kong never should've become as expensive as they are today. The 1997 Asian financial crisis sapped considerable life from the almighty property market, shoulder-checking confidence as well. If deflation lets out more air and lowers living costs to more reasonable levels, locals may be far better off in the years ahead.
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