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posted by janrinok on Saturday February 21 2015, @08:30AM   Printer-friendly
from the what-me-worry? dept.

Some time ago we discussed negative interest rates here on Soylent News. At that time there was some discussion of deflation and why it is such a mixed bag for consumers, companies, and countries.

The Economist has an article that explains deflation rather succinctly.

It turns out that deflation is bad because we are all so burdened with Debt. Not only personal debt, but corporate debt, and national debts. You end up paying debts with money that is more and more dear as time goes on.

Deflation poses several risks, some well-understood, one not. One familiar danger is that consumers will put off spending in the expectation that things will get even cheaper, further muting demand. Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are seeing strong employment growth.) A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with dud loans.

But in addition, all tools of Monetary Policy become useless.

The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to loosen monetary policy. All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits.

While some have been eager to see monetary policy reigned in, we did see the effects of this during the height of the recent depression, (which some claim we are still suffering from).

The US Federal Reserve had run out points it could cut when lending money to large banks. There were periods in 2010 where the Fed was lending money to banks at Zero Interest Rate. The link explains a number of serious risks with this policy.

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  • (Score: 5, Insightful) by PizzaRollPlinkett on Saturday February 21 2015, @02:56PM

    by PizzaRollPlinkett (4512) on Saturday February 21 2015, @02:56PM (#147771)

    The specter of deflation is WORRYING.

    The specter of inflation is WORRYING.

    If nothing happens, we're in a state of worried tension because something is GOING TO HAPPEN. And SOON.

    If still nothing happens, we get projections of what will happen in FIVE YEARS OR MORE, and they're usually not good.

    If there's a slow news day, we get filler articles about GERMS (all surfaces have germs, so these are easy to generate) or POISONED HALLOWEEN CANDY.

    If none of this stuff is going on, they'll interview someone who wants you to buy gold because THE ECONOMY WILL COLLAPSE.

    If we're not worried, the 24/7 news cycle is not doing its job. Something bad is ALWAYS about to happen TO YOU or YOUR CHILDREN.

    Eventually, though, you just tune it out.

    (E-mail me if you want a pizza roll!)
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  • (Score: 3, Funny) by RedBear on Saturday February 21 2015, @11:08PM

    by RedBear (1734) Subscriber Badge on Saturday February 21 2015, @11:08PM (#147917)

    BREAKING NEWS: Is there a WORRYING new trend of Internet commenters starting to TUNE OUT of IMPORTANT news articles about WORRYING new trends? WE'LL FIND OUT AFTER THESE IMPORTANT MESSAGES!

    ¯\_ʕ◔.◔ʔ_/¯ LOL. I dunno. I'm just a bear.
    ... Peace out. Got bear stuff to do. 彡ʕ⌐■.■ʔ