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Deflation is the real danger

At its latest committee meeting, the Federal Reserve stressed the perils of deflation. Fed chairman Alan Greenspan made it clear that if there's a whiff of it the Fed will act. In sharp contrast, European Central Bank president Wim Duisenberg slumbers on, occasionally mumbling about the dangers of inflation.

The Fed and everybody else is printing money. The state, too, is spending cash as if it grew on trees, with eurozone governments slipping into massive annual budget deficits and the Bush administration launching huge defence spending programmes and tax cuts.

The Fed has made 11 interest rate cuts since the beginning of 2001. The US federal budget has already swung from a surplus of 2% of GDP to a deficit of 3% and is heading towards 4% to 5%. The dollar has fallen nearly 10% against all other currencies and over 25% against the euro in the past 15 months. And to add a further supposedly inflationary factor, the oil price has doubled in five years.

A suspension of disbelief Let us suspend disbelief and pretend that Iraq will become a buoyant emerging market as a result of US re-engineering. And suppose that no other war is impending.

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