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. As outlined by the New York Times, the Fed has tried very hard to stop inflation from happening. Beginning in 2007, the Federal Reserve interest rate became zero when numerous emergency money and government purchases were given out with about $2 trillion. $1 trillion was printed to do this. If the reserves were withdrawn and lent out easily, the supply of money in the economy could increase rapidly, thus triggering inflation.
How deflation happens
Government debt was no longer bought by the Federal Reserve starting in March. It seems like there won’t be any inflation occurring considering the recovery is still far ahead in the future. Banks refuse to lend. Big companies are sitting on piles of cash. Small business loans are almost obsolete. The Fed’s reserves won’t be entering the money supply anytime soon. Unemployment is high. Homes sales are still at record lows when they continue to fall. Bullard, as well as others, think deflation might be a possibility.
All about the Japanese deflation
The 1990s was when this deflation started. It started with a real estate problem like ours in the 1980s where lending then became restricted and prices of all assets fell. Cheap imports further lowered prices. Making benchmark interest rates go down was how the Bank of Japan tried to help. In 2003 the stock market hit its all time low which shows how this problem lasted about a decade. In 2008, stocks went down increasingly more. The Wall Street Journal reports that Japan deflated once more in 2009. Consumer prices fell in October 2009 by a near record 2.2 percent.
Calling benchmark interest rates a ‘double edged sword’
Bullard is trying to convince every person that deflation will continue and wants the Federal Reserve to take steps to stop it. Bullard thinks the Fed promise to keep rates low for an “extended period” is a “double-edged sword,” reports the Associated Press. The pledge could make investors, businesses and ordinary individuals think inflation might be heading lower, which could aggravate the risk of deflation. Bullard also thinks the Federal Reserve should start getting government debt again so that deflation doesn’t get bad.
Discover more information on this subject
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
