07 August 2010

Two more articles on deflation

For baseline reading, may I suggest the post I wrote in December of 2008, citing an article in the Financial Times: "What's wrong with deflation?"

This week Slate had a good article on "Deflation vs. Inflation", and there's another one at the Wall Street Journal: "How to Beat Deflation":
You will know you are in period of true deflation when there is a sustained decline in prices over a couple of years, not just a negative core CPI reading for a few months, economists say.

The problem is that deflation is much more difficult to stop than its cousin, inflation. Central bankers can raise interest rates sharply to stop rising prices, but they can cut interest rates only as far as zero; after that they have to get creative to put more money into circulation...

Fed Chairman Ben Bernanke has said the central bank would do whatever it can to prevent significant deflation in the U.S. In a now-famous 2002 speech, while he was a Fed governor, he said, "The U.S. government has a technology, called a printing press … that allows it to produce as many U.S. dollars as it wishes at essentially no cost," and thus fight deflation.

Of course, if the Fed were to turn on its money machine full blast, that could spark inflationary pressures over the longer term, bringing a whole new set of investing challenges...
The intro is followed by an explanation of the effects of deflation on stocks, bonds, cash, hard assets, and debt.

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