A warning of deflation was announced by the President of the Federal Reserve Bank of St. Louis, James Bullard, because the U.S. economy has gotten so bad. The whole job of the Federal Reserve during the recession has been to stop inflation. The U.S. economy may soon have a deflation, similar to Japan’s, if the Fed’s policies continue the way they have been, Bullard believes.
Deflation can be what happens instead of inflation
A drop in goods, services, homes, stocks, and wages is what a deflation is by definition. According to the New York Times, the Fed has tried very hard to stop inflation from happening. Starting in 2007, the Federal Reserve interest rate became zero while many emergency money and government purchases were given out with about $2 trillion. To buy all those assets, the Fed essentially printed money — the $1 trillion in reserves. Inflation would only occur if money is just given out without any thought to where it is going.
A recipe for deflation
The Fed quit getting government debt in March. Now the recovery no longer is in sight and inflation seems unlikely. Bank lending is contracting. Big companies pulled out their cash and are just waiting for things to get better now. Small businesses aren’t able to get loans from anyone. The Fed’s reserves won’t be entering the money supply anytime soon. Unemployment is high. Home sales are at record lows and home prices are falling. The big picture has individuals like Bullard thinking ahead to the possibility of deflation.
All about the Japanese deflation
Deflation started in Japan in the early 1990s. Asset prices fell after the 1980s real estate bubble burst causing more lending to be restricted. Cheap imports further lowered prices. Making benchmark interest rates go down was how the Bank of Japan tried to help. This continued for a long time including the stock market hitting its low in 2003. More stocks went down in 2008 causing a global meltdown. In November 2009, the Wall Street Journal reports that Japan had their deflation problem returning. 2.2 percent of consumer prices fell in the end of 2009.
Benchmark rate of interest a ‘double edged sword’
The Federal Reserve should begin taking the necessary precautions and listen to Bullard’s warning to try and stop all of this from happening. Bullard thinks that the Fed promise to keep rates low for an “extended period” is a “double-edged sword,” reports the Associated Press. If people think inflation is going down, then deflation is probably going to happen. Bullard has his opinions saying the government debt needs to be bought along with lifting the interest rate cap so deflation doesn’t happen either.
Additional reading
New York Times
nytimes.com/2010/07/30/business/economy/30fed.html?_r=1 and amp;src=busln
Wall Street Journal
online.wsj.com/home-page
Associated Press
google.com/hostednews/ap/article/ALeqM5hTlA7m2TuKuKz6FcqFx3b34S1lAQD9H8SA0G2
