The perils of deflation

Deflation is everywhere. It is all around us. It is there when we go to work, when we pay our taxes and when we turn on our television. It is the world that has been pulled over our eyes, to prevent us from understanding that the arms race of economic growth has become a zero sum game; where for one set of individuals to win, others have to lose. It was not always thus. 

The idea of progress implies a judgement of value. We are to believe that the world will be a better place if people are forced into continuous competition. Despite the toll that this exerts on the human psyche, material standards have risen; but this has been predicated on the underlying assumption of economic growth. When growth becomes negative however, we go through a vicious cycle of wealth and business destruction, the likes of which we last saw in the great depression. Economists tell us that things will still be better off in the long run. In what sense, better? To ask is to refuse to accept the supposedly inevitable, to deny the all overriding reality of the zero sum game, which will certainly overwhelm us if we allow ourselves some sentimental dream of a collective human life. This economics implies progress and has no progress to show.

As we battle with negative growth rates throughout the world, we find important differences. Differences between countries that have provided stimulus, first to the asset markets and then to direct businesses, and those that have not or have not been able to do so. In Dubai, as is the case with everywhere else, asset classes and business profits drive the engines of the economy. When these turn negative, the effects ripple throughout the economy at an accelerating rate, as consumers and investors hold back, sending the economy into a downward trajectory. Businesses go bust, people leave, and we reach a point where there is tremendous pain, without any navigation apparatus that would show us the way back.

In Dubai, that apparatus has always been the government and the regulators. They have maneouvred skillfully through crises small and larger before, each time adopting a playbook that turned out to be visionary. Central to this was the realization that people tried to establish value in economic terms but essentially consumer oriented ones. This definition of value is extraordinarily slippery. Buying cheap and selling dear is the essence of profit making. However, in this model, the consumer is forever investing in ephemera. In order to bring a sense of permanence, the concept of freehold asset ownership was introduced, and two decades later, remains a fundamental magnet for attracting people to Dubai. However, for this growth engine to keep churning, asset values need to be protected and preserved, as well as other incentives that forever lure people into making Dubai their home. This has become problematic with the damage that the current pandemic has caused, spurring a series of doomsday narratives of a “mass exodus”. The answer, though, far from being the simplistic “creative destruction” is a series of clear measures that a) prevent mass default b) encourage first time buyers c) allow SMEs to pick up the pieces and recalibrate and d) provide incentives for further investment. 

This implies some sort of a “welfare state”; an acknowledgement that the populace (certainly the ones that have been here for some time) are entitled a form of permanence that triggers relief packages. The alternative narrative allows for some people to get rich, but the transaction altogether is a loss, perhaps a staggering loss. An economy organized on these principles will be full of dispirited people, that are themselves dwindling, thereby subverting the incentives that would otherwise have worked in normal times, and thus creating the “zero sum game”. 

Everyone is an authority of what needs to be done, and in the age of social media, the cacophony of noise drowns out any genuine discourse. Dubai has faced innumerable challenges before and has overcome them with dexterity and deft. Amidst the cries of “this time is no different”, perhaps it is time to contemplate whether the pivot this time around acknowledges the current (and historical drivers) of growth even as it reaches out for new ones, and extends a helping hand. It is a thing that bears reflecting upon, how much destruction can be avoided, especially when modern thought declared the “survival of the fittest”