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 Federal Reserve has tried throughout the whole recession to prevent inflation from happening. The economy might be weakened by a Japanese style deflation if, as Bullard predicted, the policies of the Federal Reserve continue.
Deflation because of inflation prevention
If a deflation were to occur, that would mean the prices of goods, services, homes, and stocks would drop. According to the New York Times, the Fed has tried very hard to stop inflation from happening. $2 trillion was given to the country within the form of loans and government purchases beginning in 2007 when also making the interest go down to zero. To purchase all those assets, the Fed basically 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.
Deflation
March was when the Fed finally quit getting government debt. Since then, the U.S. economic recovery has faltered and also the threat of inflation is low. Banks refuse to lend. Big companies pulled out their cash and are just waiting for things to get better now. Small businesses can’t get loans. The reserve money won’t enter the economy for a when. Unemployment is high. Home prices are going down and home sales seem to be at record lows still. The big picture has individuals like Bullard thinking ahead to the possibility of deflation.
Japanese deflation
The 1990s was when this deflation began. A 1980s real estate bubble burst, banks took a bath on real estate loans, restricted lending and asset prices fell. Prices went down even further with imports becoming cheaper. 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. Stocks went even lower when the global economy collapsed in 2008. In November 2009 Japan returned to deflation, as outlined by the Wall Street Journal. Consumer prices fell in October 2009 by a near record 2.2 percent.
Benchmark interest rates are considered to be a ‘double edged sword’
Deflation warnings are being sounded by Bullard, a voting member on the Fed’s main policy-setting committee, as the Fed considers additional steps it should take to stimulate the economy if the weak recovery falls back into recession. Bullard thinks, as outlined by the Associated Press, the Federal Reserve saying they would keep rates this low for an “extended period” of time is really a “double-edged sword. Deflation might happen if this gives off the impression that inflation is getting lower. 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
