Facing the Deflationary Threat

Cut off from credit, Argentina entered a deflationary spiral.

The most widely cited example of a deflationary economy is Japan.

Policy as a whole over the entire euro zone is too deflationary.

That would reinforce the deflationary pressure from globalization for years to come.

The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The global implications of lower emerging market currencies are also likely to be deflationary.

With China retaining its under valued currency policy, dollar depreciation can aggravate global deflationary forces.

In practice, and especially when deflationary fears are already present, managing private_sector expectations demands considerable subtlety.

Unfortunately, fiscal austerity and structural reforms are at least in the short run recessionary and deflationary.

But the big picture remains Abenomics so far has failed to turn around a deflationary mindset.

Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral.

It simply reflects the recessionary (or deflationary) force of weak global demand hanging over the world economy.

But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real estate sectors.

Presumably, nominal interest rates would move into negative territory only in response to a deep deflationary crisis.

In these circumstances, domestic deflationary policies will only further slow growth and are helpless to stem imported inflation.

China s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally.

Thus, deflationary pressure will to some extent result in downward quantity adjustments, which will deepen the real crisis.

Further falls in commodity prices already down 30 from their summer peak will add to these deflationary pressures.

The weakening of the euro and the ECB s aggressive measures may even stop the deflationary pressure later this year.

That is why Bank of Japan Governor Haruhiko Kuroda should respond accordingly if the tax increase has a deflationary impact.

So policymakers must prevent deflationary expectations from ever taking root by targeting a sufficiently high inflation rate at all times.

Now the worries are about a stagflationary supply shock say, a war with Iran coupled with a deflationary demand shock as housing bubbles go bust. Deflationary pressure could take hold in economies that are contracting, while inflationary pressures increase in economies that are still growing fast.

Here, too, the record since 1980 has been patchy, despite the huge deflationary pressure exerted by low wage competition from Asia.

This rule normally ensures a modicum of coherence and avoids overreactions in exchange rates, but it is insufficient in deflationary times.

This rule normally ensures a modicum of coherence and avoids overreactions in exchange rates, but it is insufficient in deflationary times.

Deflationary pressure could take hold in economies that are contracting, while inflationary pressures increase in economies that are still growing fast.

Investors are again making the mistake of pricing bonds in expectation that the downward trend of inflation will continue into deflationary territory.

Of course, Japan s escape from its 15 year deflationary trap and two decades of economic stagnation would be good for the world.

Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labor markets imply massive deflationary forces.

Unfortunately, fiscal austerity and structural reforms are at least in the short run recessionary and deflationary. So other policies are needed to restore growth.

This has pushed them into a deflationary tailspin and put them at a substantial and potentially permanent competitive disadvantage vis à vis creditor countries.

But, in the short run, austerity, lower wages, and reforms are recessionary, while the adjustment process in the eurozone has been asymmetric and recessionary deflationary.

Now the worries are about a stagflationary supply shock say, a war with Iran coupled with a deflationary demand shock as housing bubbles go bust.

Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anemic and deflationary pressures still persist.

If the US tips from mild recession into deep recession, the global deflationary implications will cancel out some of the inflationary pressures the world is facing.

As Krugman recently put it, a deflationary vortex is dragging down much of the world economy, with falling prices causing an inescapable downward spiral in demand.

This deflationary tendency will create serious economic problems, which do not necessarily result from deflation as such, but may stem from a natural resistance to deflation.

But if they maintain large budget deficits and continue to monetize them, at some point after the current deflationary forces become more subdued bond markets will revolt.

The analogy popularized by the great monetarist economist Milton Friedman was that the central bank could always deal with deflationary problems by dropping money from a helicopter.

But Southern Europe s economies remain depressed, and the eurozone as a whole is suffering from stagnant growth, deflationary pressure, and, in the crisis countries, persistently high unemployment.

Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.

Not inflation, but a Japanese type period of deflationary pressure with ever increasing public debt is the real risk that the world will be facing for years to come.

Contrary to the current discourse, the long term solution must provide a stimulus to get Europe out of a deflationary vicious circle structural reform alone will not do it.

In a deflationary environment, lower oil prices appear to make it more difficult for the European Central Bank to achieve its target of an inflation rate close to 2 .