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| Mon Aug 2 22:53:03 2010 Deflation and Stagflation |
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| Mon Aug 2 22:53:03 2010 Deflation and Stagflation I think we're turning Japanese... |
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| Today, the
Wall Street Journal had a story about
renewed deflation fears. Given that the US ecnomy has been slow to recover, there is now real fear
that prices will continue to decline. That in turn can cause a
deflationary spiral.
Any talk of deflation immediately turns to Japan, which experienced a "lost decade" as growth came to a standstill in the 1990s. As bad as that was, deflation is usually better than stagflation, which is what I predicted in 2008 (see The S-Word). However, the massive inflation I feared didn't happen. The economy cooled fast enough (people stopped spending) so that lower interest rates didn't cause inflation. People think deflation may be on the horizon in the US because prices are flat or down, and unemployment is still high. However, I think a deflationary spiral is unlikely. Prices may drop slightly for the next few months, but I think we'll be fighting inflation in a year's time, not deflation. Why? Mainly because a majority of companies expect to expand in the next 12 months. With the combination of increased hiring and equipment expenditures, I think things will heat up again. Probably in 2011 or 2012 the economy will be running hot enough that we'll run out of oil again (see High Oil and Gas Prices). But we'll run into problems with inflation first. Comments |
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