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SATURDAY, AUGUST 29, 2009
Deflation - American Style
In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the inflation rate falls below zero percent, resulting in an increase in the real value of money – a negative inflation rate. This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when the inflation decreases, but still remains positive).[2]Inflation reduces the real value of money over time, conversely, deflation increases the real value of money. Money refers to the functional currency (mostly unstable monetary unit of account) in a national or regional economy.
Currently, mainstream economists generally believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral.[3] Deflation is also linked with recessions and with the Great Depression. Additionally, deflation also prevents monetary policy from stabilizing the economy because of a mechanism called the liquidity trap. However, historically not all episodes of deflation correspond with periods of poor economic growth,[4] while there are many examples of how strong rise in CPI immediately precedes or accompanies an economic downturn, such as Great Depression, the 1970-80's, and the 2008 economic crash. I fear that in spite of the purposeful rhetoric, the worst is yet to come.
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