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Updated: May 14, 2025
The obsession with price stability led to policy excesses and disinflation gave way to deflation arguably an economic ill far more pernicious than inflation. Deflation coupled with negative savings and monstrous debt burdens can lead to prolonged periods of zero or negative growth.
On the one hand, some of the greatest fizz in history occurred during periods of disinflation. One is reminded of the global boom in technology shares and real estate in the 1990's. On the other hand, soaring inflation forces people to resort to hedges such as gold and realty, inflating their prices in the process.
Consumers learn to expect lower prices i.e., inflationary expectations fall and, with them, inflation itself. The intervention of central banks only hastened the process and now it threatens to render benign structural disinflation malignantly deflationary. Should the USA reflate its way out of either an impending double dip recession or deflationary anodyne growth?
They signal visceral aversion to inflation but ignore the risk of deflation altogether. As inflation subsides, disinflation seamlessly fades into deflation. People accustomed to the deflationary bias of central banks expect prices to continue to fall. They defer consumption. This leads to inextricable and all-pervasive recessions.
It will be remembered that the party of Englishmen arrived at Poloeland under oars, and although the india-rubber boats had been gazed at, and gently touched, with intense wonder by the natives, they had not yet seen the process of disinflation, or the expansion of the kites.
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