US pushing world economy to redeflation

Recently productivity in the United States rose more than forecast, while labor costs increased less than anticipated. Usually, that is a good sign. But these are no ordinary times. More than 1.5 million jobs have already been lost this year, and there is worse to come.

In the next few weeks, aggregate demand will decline significantly in relation to supply. Companies are reducing capacity feverishly in housing markets, durables, the car industry, and in others. As the US negative demand shock spreads internationally, it will reinforce the worldwide downturn.

The writing is on the wall. Historically, world trade has been driven by the decline of transportation costs and tariffs. However, the Doha Round collapsed this summer, while the Baltic Dry Index (BDI), a barometer of global trade, has fallen 93 percent. Even the price of oil has plunged from $150 to less than $50. In the past, cheap oil was a blessing; today, it reflects the decline of world trade - for the first time in 30 years.