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Title    Why is Deflation so Worrying?
Date    Saturday February 21 2015, @08:30AM
Author    janrinok
Topic   
from the what-me-worry? dept.
https://soylentnews.org/article.pl?sid=15/02/20/2012235

frojack writes:

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.

Links

  1. "frojack" - https://soylentnews.org/~frojack/
  2. "Soylent News." - http://soylentnews.org/article.pl?sid=15/02/06/1637242
  3. "has an article that explains deflation rather succinctly" - http://www.economist.com/news/leaders/21644148-deflation-can-be-good-thing-todays-version-pernicious-feeling-down?
  4. "Zero Interest Rate" - http://www.dailyfinance.com/2010/03/06/why-the-feds-zero-interest-rate-policy-may-be-dangerous/

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printed from SoylentNews, Why is Deflation so Worrying? on 2022-12-01 04:28:19