There is much discussion currently about deflation, especially since Europe has now demonstrated some minimal lower year-over-year consumer prices. This is not good!
Everybody knows inflation means rising prices. It is something we have experienced in our own lifetimes. Deflation actually sounds pretty good. After all, who doesn't like a lower cost-of-living?
Here is the problem: we know how to stop inflation, by raising interest rates. In some cases, raising taxes will stop inflation. Deflation is a different problem. Because prices are dropping, people start deferring purchases because they can buy it cheaper later. Sales and profits immediately drop, while layoffs increase. Even worst, we don't have any proven techniques to stop deflation.
World War II is often given credit for ending deflation during the Great Depression, but that was during a time before the federal government already had huge budget deficits. In other words, we had enough "dry powder" to lift the economy out of deflation. That option is not available this time, for obvious reasons.
Deflation is like cancer and must be eliminated before it spreads. The only man who can do this is Mario Draghi, head of the European Central Bank. But, he is being pounded by the Germans. Say a little prayer for him!
Everybody knows inflation means rising prices. It is something we have experienced in our own lifetimes. Deflation actually sounds pretty good. After all, who doesn't like a lower cost-of-living?
Here is the problem: we know how to stop inflation, by raising interest rates. In some cases, raising taxes will stop inflation. Deflation is a different problem. Because prices are dropping, people start deferring purchases because they can buy it cheaper later. Sales and profits immediately drop, while layoffs increase. Even worst, we don't have any proven techniques to stop deflation.
World War II is often given credit for ending deflation during the Great Depression, but that was during a time before the federal government already had huge budget deficits. In other words, we had enough "dry powder" to lift the economy out of deflation. That option is not available this time, for obvious reasons.
Deflation is like cancer and must be eliminated before it spreads. The only man who can do this is Mario Draghi, head of the European Central Bank. But, he is being pounded by the Germans. Say a little prayer for him!
