The war in Iraq and the SARS (severe acute respiratory syndrome) epidemic are making the threat of deflation ever more real. The threat comes from the pressure of a falling price level and the current economic downturn, which is expected to get worse before it gets better. Taiwan, of course, is not alone under deflation pressure. Deflation is a world problem, which has resulted from a change in China and Eastern European countries, their transformation into market economies, and the development of knowledge-based industries that leads to technological progress and the reduction in production cost.

Taiwan’s anemic economy, which hit the rock bottom in 2001 with the first negative growth in five decades, may bleed white before the SARS epidemic subsides. The island economy, which relies increasingly heavily for growth on trade with China, where the fatal atypical pneumonia started, is faltering as exchanges across the Taiwan Strait are likely to taper off. The epidemic is playing havoc with the airline and tourism industries, too. The government cannot do anything - even if it wants and tries to - to reverse the trend. The only thing it can do in this regard is to pray that the epidemic will be brought under control the sooner the better.

On the other hand, the authorities may and should do something to correct their policy mistakes. The government is largely responsible for the recession in real estate and the fall of the stock market. Its failure to take the volatile asset market into consideration in laying out its monetary policy has much to do with the recession and the fall. The long recession has rendered the banking industry helpless in coping with its ever-worsening problem of non-performing loans. It has also resulted in a serious credit crunch. Moreover, owing to the wealth effect, the continuous decline of money supply has not only caused consumer spending to shrink but also restrained private investment. All this has contributed to the causality between recession and deflation. The monetary policy that is slow in reacting to the economic imbalances and uncertainties is the main reason for slow economic growth in recent years.

To solve the economic imbalances and uncertainties, the government should actively implement deficit-financing policy and widely adjust monetary policy. Easing monetary and financial policies and paying particular attention to money supply and extension of credit can help stop the emergence of serious financial imbalances and soften deflation pressure.

（本評論代表個人意見）