MercoPress. South Atlantic News Agency

Risk of deflation extends.

For decades Keynesian and growth policies stimulated employment and domestic demand, but also inflation, until it became a kind of curse. Now, according to one of the latest papers of the International Monetary Fund, IMF, several countries, including Japan and Germany, face the risk of deflation.

The IMF defines technical deflation as an annual inflation below 1%, since current indexes overestimate the hike of prices. Deflation is considered harmful for an economy because it limits investment and consumer incentives.

Regarding Japan the deflation risk is "high" from the current 0,5% to possibly 1 or 2%. This is particularly serious if unemployment jumps from the current 5,5% to 6,5% or if the Japanese economy continues stagnant in the coming fiscal year.

Germany faces a similar situation with a general fall in prices with two possible scenarios: if GDP expands 0,5% as forecasted, the risk of deflation is "considerable", but even greater if the economy remains unchanged.

Countries facing "moderate" risk of deflation are Belgium, Finland, Norway, Portugal, Sweden and Switzerland, all closely linked to the powerful German economy.

As far as United States, the risk is low but not "minimal". Conditions for this possibility are that unemployment reaches 8% and or the economy during the next 18 months expands below 1%. Other nations in this category are South Korea, India, Mexico, Poland and Thailand.

The IMF paper points out that in the last three years, 16% of industrialized countries and 26% of emerging markets have experienced technical deflation at some moment in time.

Even China is undergoing a minor deflation that reflects the increase in productivity and, according to the IMF paper, could rapidly increase given the idle productive capacity in the government managed companies of the country.

With deflation prices drop, company incomes drop, and salaries increase their purchasing power. Similarly company and private debts increase in real terms, while consumers restrict their purchasing expecting even lower prices.

Deflation is also defined as a "tax" for creditors, contrary to what happens with inflation that is a "tax" for lenders