Thursday, James Bullard who’s the President of the Federal Reserve Bank of St. Louis decided a warning about deflation needs to be sounded. The whole job of the Federal Reserve during the recession has been to stop inflation. But Bullard cautioned that Fed’s current policies to stimulate growth are putting the U.S. economy at risk of falling into a Japanese-style deflationary cycle that could keep the economy weak for several years.
Deflation can be what happens rather than inflation
Deflation is a widespread and prolonged drop within the price of goods, services, homes, stocks and wages. According to the New York Times, the Fed has tried very hard to stop inflation from happening. Starting in 2007, the Federal Reserve rate of interest became zero while numerous emergency loans 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 If the reserves were withdrawn and lent out easily, the supply of money within the economy could increase rapidly, thus triggering inflation.
Deflation
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. Banks refuse to lend. Many companies just have a ton of money sitting around. Small businesses aren’t able to get loans from anyone. It can be a long time before the reserve money hits the rest of America. Unemployment is nevertheless really high. Home prices are going down and home sales appear to be at record lows still. The big picture has individuals like Bullard thinking ahead to the possibility of deflation.
All about the Japanese deflation
The deflation fist happened within the 1990s. Asset prices fell after the 1980s real estate bubble burst causing more lending to be restricted. 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. In 2003 the stock market hit its all time low which shows how this problem lasted about a decade. In 2008, stocks went down a growing number of. 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’ for interest rates
The Federal Reserve should start taking the necessary precautions and listen to Bullard’s warning to try and stop all of this from happening. 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. 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 that the Federal Reserve should start getting government debt again so that deflation doesn’t get bad.
Further 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
