Deflation Is Much More Harmful Than Inflation

By Author: unknownmem
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DeAnne Julius, a former member of the Bank of England's monetary policy committee, argued in a receive speech that there is a risk of a significant deflationary period in the main economies between now and 2005 But many of today's central bankers, brought up to believe that their job is to fight inflation, seem to b underplaying the risk.

Deflation is much more harmful than inflation. Falling prices encourage consumers to postpone spending in the expectation of cheaper goods tomorrow; they also make it impossible to deliver negative real interest rates if these are needed to drag an economy out of recession. Most dangerous of all is a cocktail of deflation and debt. Deflation Tag Heuer Carrera Replica pushes up the real burden of debt, while the value of assets linked to that debt, such a house prices, may have to fall even more sharply in nominal terms to return to a fair level. This has already caused severe balance-sheet problems in Japan, and now America and Germany may be at risk: hi boll countries debts have surged to record levels.

Central ...
... bankers in America and Europe--but not in Japan--still have room to cut interest rates However, the European Central Bank (ECB) held interest rates unchanged at 3.25% on September 12th. S long as inflation remains above the ECB's target of "less than 2%", the bank will be in no rush to ease policy. The Fed is also widely expected to keep rates steady at its policy meeting on September 24th. Why; wait, when the risks are so lop-sided? Once deflation sets in, monetary policy can do little to revive an economy. If economies perk up and a rate cut turns out to have been unnecessary, it can be reversed: With ample excess capacity, the risk of inflation taking off is low.

Many central bankers do not seem to grasp that this economic cycle is different from its predecessors. The recession was caused not, as before, by inflation taking off, but by the bursting of an asset-price bubble. American economists blame Japan's deflation on the incompetence of its policymakers. There is some truth ii this, but the awkward fact is that post-bubble economies tend to be deflation-prone.

Even with interest rates at zero, Japan might have escaped deflation two years ago, when the American economy was strong, by devaluing the yen. But the Replica Tag Heuer world economy cannot pull off that trick. That is why central banks in America and Europe need to heed the danger now. "Deflation is like quicksand," says Dylan Grice, "easy to get stuck in, more difficult to escape."