The crisis that we are experiencing has often been compared to others like the one that led America into depression between 1929 and 1935.
Actually the birth of this crisis and also its development, accurately copies what happened in Japan in the 90s.
Between 1989 and 1990 in Japan real estate prices imploded after reaching very high levels, starting a general long decline of the banks also.
The banks were technically bankrupt but the Japanese government decided to save them all keeping alive real financial zombies for years.
The bank rates becomed ‘zero’ and they went in the deflation where they still remain after 26 years!
Below you can see the Japanese stock index graphic (NIKKEI index) which represents the trend of the compound of the japanese companies.
The steps described abuve are the same that Europe and of course in Italy are experiencing: real estate bubble, bank failures, rates to zero (even negative) and deflation.
Deflation is the enemy of the economy that all the governments try to fight not always with the right weapons.
This is an example to explain the effect of the deflation on the development of a country.
Let’s consider a company that produces a pencil.
The price of the pencil is 10 euros. Due to the crisis the company must sell the same pencil at first with the price of 9 euros and then 8,7 and so on…
This may seem good for the consumers, but it is a narrow view!
In order to maintain a profit margin in spite of a reduced selling price of the pencil, the company will have to reduce costs, typically by reducing the workforce.
People laid off, whitout a salary, or with a lowered one, reduce consumption starting a self-destructive process of the economy.