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November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then?
Japan laughs at our arrogance? Just a thought.
Source Data:
St. Louis Fed: Custom Chart
Bernanke cites central bankers taming the inflation dragon in the 1980s and 1990s. Though one must chase the dragon before it can be tamed.
ReplyDeleteLuke the Debtor,
ReplyDeleteThe metaphorical meaning of the term alludes to the feeling that the next ingested dosage of the drug will result in a nirvana that seems and feels imminent and conclusive, yet upon consumption never quite yields the promised experience—leading to the desire for the next dose that still promises the same—thus chasing the dragon but never catching it...
In my opinion, that's an awesome analogy!
offshoring our productive plant to China solved inflation in the 1990s.
ReplyDeleteImports are deflationary!
That and the $20 oil we enjoyed for a good long time. That wasn't the Fed's doing, that was Brent and North Slope peaking with nobody to sell it to but us.
And the productivity miracle of the 80s and 90s muted inflation.
http://research.stlouisfed.org/fred2/graph/?g=uwO shows that outside the 1990 recession real growth was 5% pa.
Inflation has a hard time catching up to that growth, given the immense size our economy has become, going from $20k real per-capita (age 16+) GDP in 1950 to $60k+ today
http://research.stlouisfed.org/fred2/graph/?g=uwP
that graph shows how per-capita real GDP went from $40,000 to $60,000 1980 to 2000.
50% gain from here would be nice but I wouldn't hold my breath.
Troy,
ReplyDelete50% gain from here would be nice but I wouldn't hold my breath.
Over the past decade or so, I had to choose between holding my breath and buying long-term TIPS (as a proxy for locking in long-term real GDP growth).
I decided that I didn't have the lung capacity, lol. Sigh.