Deflation

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SeekingAlpha  Jul 23  Comment 
In country after country it is now becoming clear that we are heading for outright deflation. This is particularly the case in Europe – both inside and outside the euro area – where most central banks are failing to keep inflation close to...
Bloomberg  Jul 23  Comment 
Europe in Policy Bind as Singer Sees Risks From Russia The escalating conflict in Ukraine poses a “two-sided” threat to Europe’s economy, complicating a policy response...
Wall Street Journal  Jul 22  Comment 
Tame price rises in the European single currency bloc are causing headaches for the Czech National Bank as it struggles to push inflation back to its 2% target by using a nonstandard policy of keeping the koruna weak after cutting interest rates...
SeekingAlpha  Jul 22  Comment 
[Originally published on 7/10/2014] It is so easy for a country to print money... Said another way, it is so easy for a government to create inflation. Because it's so easy, nobody believes that DEFLATION – the opposite of inflation – is...
Financial Times  Jul 20  Comment 
Threat of deflation outweighs case for secrecy, as policy makers say it will be easier to hit inflation targets if public understand their reasoning
newratings.com  Jul 18  Comment 
TOKYO (dpa-AFX) - Members of the Bank of Japan's monetary policy board were satisfied with the pace of the country's economic recovery, minutes from the bank's June 12-13 meeting revealed on Friday - and they expect the recovery...
SeekingAlpha  Jul 17  Comment 
[Originally published on 6/4/2014] Most investors are bewildered by the fact that interest rates on the 10 year U.S. Treasury have been going down year to date from 3% to 2.5% after rising from about 1.6% to 3% last year. At the end of last year...
SeekingAlpha  Jul 15  Comment 
If there was one person who could best explain the threat of deflation in 2014 despite massive amounts of money creation, it would be the late John Exter. He was a giant intellect who had all the mainstream credentials. He was Harvard educated, a...




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Deflation happens when prices of goods and services are falling in an economy. It is the opposite of inflation.

Causes of deflation: In mainstream economics, deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up.

From a monetarist perspective deflation is caused primarily by a reduction in the velocity of money and/or the amount of money supply per person.

In modern credit-based economies, a deflationary spiral may be caused by the (central bank) initiating higher interest rates (i.e., to 'control' inflation), thereby possibly popping an asset bubble or the collapse of a command economy which has been run at a higher level of production than it could actually support.

Effects of deflation: Deflation increases sales and economic activity by making essentials (food, housing, fuel etc.) which cannot be delayed, more affordable to struggling consumers, thereby reducing severity and duration of recession.

In more recent economic thinking, deflation is related to risk: where the risk-adjusted return of assets drops to negative, investors and buyers will hoard currency rather than invest it, even in the most solid of securities. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap.

Deflation is, however, the natural condition of hard currency economies when the rate of increase in the supply of money is not maintained at a rate commensurate to positive population (and general economic) growth. When this happens, the available amount of hard currency per person falls, in effect making money more scarce; and consequently, the purchasing power of each unit of currency increases. The late 19th century provides an example of sustained deflation combined with economic development under these conditions.

Counteracting deflation: Until the 1930s, it was commonly believed by economists that deflation would cure itself. As prices decreased, demand would naturally increase and the economic system would correct itself without outside intervention.

This view was challenged in the 1930s during the Great Depression. Keynesian economists argued that the economic system was not self-correcting with respect to deflation and that governments and central banks had to take active measures to boost demand through tax cuts or increases in government spending. Reserve requirements from the central bank were high and the central bank could then have effectively increased money supply by simply reducing the reserve requirements and through "open" market operations (e.g., buying treasury bonds for cash) to offset the reduction of money supply in the private sectors due to the collapse of credit (credit is a form of money).

With the rise of monetarist ideas, the focus in fighting deflation was put on expanding demand by lowering interest rates (i.e., reducing the "cost" of money). This view has received a setback in light of the failure of accommodative policies in both Japan and the US to spur demand after stock market shocks in the early 1990s and in 2000 - 2002, respectively. Economists now worry about the (inflationary) impact of monetary policies on asset prices. Sustained low real rates can be the direct cause of higher asset prices and excessive debt accumulation. Therefore lowering rates may prove only a temporary palliative, leading to the aggravation of an eventual future debt deflation crisis.

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