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Economist Nouriel Roubini says we are now looking at a possible global stag-deflation in the coming months as consumer and other demand falls worldwide. The US recession and global slowdown is likely to lead to a easing of inflationary pressure. But then, rising spare capacity could lead to stagflation.

Asia Times financial analyst Henry C K Liu suggests that hyperinflation could be on the cards in the US as the Bush administration replaces market capitalism with state capitalism, neither of which will help workers weather the storm. The solution he says is to raise wages and ensure full employment rather than bail out financial institutions:

By now, it is becoming clear that government policy has been mostly focused on maintaining asset prices at levels that the market has rejected. Logic suggests that such a policy will result in hyperinflation at the end of the day, which will lead to more bankruptcies down the road in a protracted downward spiral. The government’s attempt to save overextended financial institutions may well cause the total destruction of market capitalism. And if past experience is any guide, unless wage income is indexed to inflation, the dilution of asset value through inflation will only hasten the arrival of total market failure and the total meltdown of the market economy.

So far, not much is heard from official circles that suggest the solution to the current credit crisis can only come from an immediate and substantial rise in wage income. Instead of bailing out insolvent financial institutions, the government should use sovereign credit to maintain full employment and boost wage income to catch up with inflated asset prices. If the Fed must print new money to save the system, the new money should go to job creation and wage increases rather than to recapitalize insolvent corporations. Full employment and rising wages will halt the fall of asset prices with a rising floor.

The approach adopted by the Bush administration is not designed to rescue a collapsing global economy from total meltdown but to resurrect free market capitalism from ideological bankruptcy with state capitalism.

Over in Malaysia, it appears that the government is gradually coming to grips with the global crisis and shedding its state of denial as it revises down its forecasts for the coming months. Unfortunately, any policy reforms are getting entangled with the Umno election campaign; so it’s difficult for our economic planners to push through reforms without getting distracted by what’s happening within Umno – and its business/crony connections – and to a lesser extent, MCA. Even minor reforms or changes are getting hit by controversy, as Farish Noor points out in ‘Race and Islam‘.

If I sound a bit pessimistic in this piece I wrote for Asia Times today, it’s because I am not sure if the current administration is able to see beyond its narrow self-interests to steer us through the rough seas that lie ahead. Neither does it appear to have the vision to radically restructure the economy to promote sustainable development, food security and domestic resilience.