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, comparable to Japan’s, if the Fed’s policies continue the way they , Bullard believes.
Deflation because of inflation prevention
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. $2 trillion was given to the country in the form of loans and government purchases beginning in 2007 when also making the interest go down to zero. 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.
Making deflation happen
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 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. Bullard, as well as others, think deflation could possibly be a possibility.
Info on the Japanese deflation
The 1990s was when this deflation started. A 1980s real estate bubble burst, banks took a bath on real estate loans, restricted lending and asset prices fell. Cheap imports further lowered prices. The Bank of Japan and the government tried to eliminate it by reducing benchmark interest rates. In 2003 the stock market hit its all time low which shows how this problem lasted about a decade. 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. Consumer prices fell in October 2009 by a near record 2.2 percent.
'Double edged sword’ what benchmark interest rates considered
Bullard is trying to convince everybody that deflation will continue and wants the Federal Reserve to take steps to stop it. Bullard thinks that 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. In addition to lifting the cap on the benchmark interest rate, Bullard said resuming the purchase of government debt should be considered to prevent deflation if there is a new shock to the weakened economy.
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
