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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: 3, Interesting) by c0lo on Saturday February 21 2015, @03:05PM

    by c0lo (156) Subscriber Badge on Saturday February 21 2015, @03:05PM (#147772) Journal

    I'd settle for something resembling capitalism in a good light.

    Where do you draw the line between the good and the bad light? (you know, you'll need that line, just to make sure you aren't chasing an utopia)

    the US when it could pass for capitalistic

    When was that? (it also depends on the position of that line I mentioned above)
    I remember stories (maybe for you is history, for me not being American is just-story; as such I may not know/remember it well enough, my apologies) - with the choice of republic and representative democracy motivated by the avoidance of the "mob rule". Do I remember correctly? If so, just from the beginning as a nation, you had the idea of "the elite know better than the mob" Even if that "elite" can be theoretically changed over time, practically, you reached a political duopoly (vague traces of competition, in spite of the appearances); who exactly makes it up to the "elite" level doesn't matter, the respect for the rights/individual citizens is all time low (NSA, militarized police, etc) no matter who's winning the election

    What do you expect in regards with the individual property when the respect for the citizens is low?

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  • (Score: 2) by The Mighty Buzzard on Saturday February 21 2015, @03:34PM

    by The Mighty Buzzard (18) Subscriber Badge <> on Saturday February 21 2015, @03:34PM (#147781) Homepage Journal

    Right about where we were after Teddy Roosevelt did his trust busting, personally. You'd probably think I'd be opposed to that but no, trusts lead to a lack of competition and competition is absolutely required for capitalism to thrive. Teddy, I dug. Franklin, not so much. His New Deal was pure, unvarnished socialism.

    My rights don't end where your fear begins.
    • (Score: 0) by Anonymous Coward on Monday February 23 2015, @07:54AM

      by Anonymous Coward on Monday February 23 2015, @07:54AM (#148337)

      Teddy, I dug. Franklin, not so much. His New Deal was pure, unvarnished socialism.

      So, by your own standard, a majority of US people wanted to stablish socialism in the USA. How's that 'democracy' thing you say you have going on?