Deflation

[Arkady]

Back when most economists on the right were freaking out that loose money supply would cause a serious inflation problem, Keynesian models were showing the opposite threat -- that we could well be in for a period of deflation, which can be terrible for the economy. It turned out that the conservative economists were wrong, especially the Austrian-school bozos, and despite major injections of funds from the central banks, serious inflation never materialized. In the US, we've had inflation near record lows (and far below the Fed's own target) for years, and a similar pattern has played out in most wealthy nations. But we've at least narrowly avoided deflation, other than in the initial part of the financial crisis.... until now.

The twelve-month rate of inflation has been negative for three of the last four months, including the February 2014 to February 2015 period (the most recent on record). The consumer price index fell from 235.356 to 235.186. Deflation is a serious problem because it leads to money hoarding, which can make monetary policy ineffective -- the central bank just keeps injecting money, and rather than fueling a much-needed consumer spending increase (which in turn would boost investment and employment, setting of a virtuous cycle), it instead just plumps up the cushion of cash the monied class is idling on. You can slip into a situation like Japan did, where you just can't get the economy growing in a healthy way again using monetary policy. Flirting with deflation is a dangerous business.

 

[Lukey]

Back when most economists on the right were freaking out that loose money supply would cause a serious inflation problem, Keynesian models were showing the opposite threat -- that we could well be in for a period of deflation, which can be terrible for the economy. It turned out that the conservative economists were wrong, especially the Austrian-school bozos, and despite major injections of funds from the central banks, serious inflation never materialized. In the US, we've had inflation near record lows (and far below the Fed's own target) for years, and a similar pattern has played out in most wealthy nations. But we've at least narrowly avoided deflation, other than in the initial part of the financial crisis.... until now.

The twelve-month rate of inflation has been negative for three of the last four months, including the February 2014 to February 2015 period (the most recent on record). The consumer price index fell from 235.356 to 235.186. Deflation is a serious problem because it leads to money hoarding, which can make monetary policy ineffective -- the central bank just keeps injecting money, and rather than fueling a much-needed consumer spending increase (which in turn would boost investment and employment, setting of a virtuous cycle), it instead just plumps up the cushion of cash the monied class is idling on. You can slip into a situation like Japan did, where you just can't get the economy growing in a healthy way again using monetary policy. Flirting with deflation is a dangerous business.

As Stockman explained it recently, the current deflation threat is a result of the Fed keeping money too easy for far too long. The pricing pressure is resulting from over investment as a result of too much borrowing and too much spending. In a market based economy, you need the markets to clear, and that means prices come down and marginal producers go under. You can either get the government out of the way and get it over quickly or you can let the government try to "manage" the economy and, as Japan has found, it can drag on forever.

Deflation is nothing to be afraid of - but government managed economies certainly are!