A warning of deflation was announced by the President of the Federal Reserve Bank of St. Louis, James Bullard, as the U.S. economy has gotten so bad. Preventing inflation has been the focus of Federal Reserve as it formulates policies to guide the U.S. economy out of the recession. The U.S. economy may soon have a deflation, similar to Japan’s, if the Fed’s policies continue the way they are, Bullard believes.
Prevention of inflation causing deflation
A drop in goods, services, homes, stocks, and wages is what a deflation is by definition. Preventing inflation has been what the Federal Reserve has tried doing, reports the New York Times. Starting in 2007, the Federal Reserve rate of interest became zero while numerous emergency money and government purchases were given out with about $2 trillion. $1 trillion was printed to do this. Inflation occurs when the money is taken out and given away while more money is just made.
Making deflation happen
March was when the Fed finally quit purchasing government debt. Since then, the U.S. economic recovery has faltered and the threat of inflation is low. Bank lending is contracting. Big companies are sitting on piles of cash. Small business loans are almost obsolete. The reserve money won’t enter the economy for a while. Unemployment hasn’t gone down. Home sales are at record lows and home prices are falling. The big picture has people like Bullard thinking ahead to the possibility of deflation.
Japanese deflation
The deflation fist happened within the 1990s. A 1980s real estate bubble burst, banks took a bath on real estate loans, restricted lending and asset prices fell. The cheaper imports didn’t help as they caused prices to lower. Making benchmark interest rates go down was how the Bank of Japan tried to help. The bubble’s collapse lasted for more than a decade with stock prices bottoming in 2003. In 2008, stocks went down a growing number of. The Wall Street Journal reports that Japan deflated yet again in 2009. 2.2 percent of consumer prices fell within the end of 2009.
Calling benchmark interest rates a ‘double edged sword’
Bullard is trying to convince everyone that deflation will continue and wants the Federal Reserve to take steps to stop it. Bullard thinks, according to the Associated Press, that the Federal Reserve saying they would keep rates this low for an “extended period” of time is really a “double-edged sword. If individuals think inflation is going down, then deflation is probably going to happen. Bullard also thinks that the Federal Reserve should start purchasing government debt again so that deflation doesn’t get bad.
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
