You Say Stop; I Say Go, Go, Go

Robert Schiller November 5, 2008 Interview


If he's thinking deflation...

Jim Rogers Spiritedly Disagrees


And gives his perspectives on 1929, true facts and CNBC.

Is It Real or Not?

Time Magazine is Alerted

With the economy in the U.S. "contracting significantly" in the fourth quarter, as San Francisco Fed president Janet Yellen recently put it, an issue that was practically unthinkable three months ago is now, for the Fed, front and center: the possibility of the U.S. entering a phase of deflation, or protracted declines in the general price level. In its statement accompanying the most recent interest-rate cut, the Fed said, "In light of the declines in the prices of energy and other commodities and weaker prospects for economic activity, [the Fed] expects inflation to moderate."

Much of today's deflation anxiety results from keen awareness of the Japanese experience of the 1990s. Indeed, New York Federal Reserve governor and vice chairman of the Federal Open Market Committee Timothy Geithner was Treasury attaché in the Tokyo embassy for the first half of that decade. That's when a widespread banking crisis led to a credit crunch, an economic slump and eventually interest rates that were lowered to zero by the Bank of Japan. Even so, Japan's banks, which were in the process of repairing their balance sheets, were extremely reluctant to lend. Thus, even though interest rates were low, the economy weakened. Prices for pretty much everything declined, following a bust in the real-estate and stock markets in Japan. The country entered a decade of stagnation.

Some economists — for now a minority, to be sure — believe the U.S. is at serious risk of a deflationary spiral, even if just a quarter ago, inflation was above the Fed's comfort zone of 2% to 3%. "Compared to Japan's problem a decade ago, this crisis is unfolding much faster and spreading wider due to financial globalization," says Shanghai-based independent economist Andy Xie. A financial system unable or unwilling to lend, a tapped out U.S. consumer, and business now retrenching — and laying people off — all are a formula for possible deflation. What's so wrong with declining prices? For one thing, it makes the real cost of paying off debt that much higher — and for American consumers in hock to the tune of $14 trillion, anything that makes that debt burden more onerous is anything but helpful.

The good news is that in the U.S. now, as Richard Berner, chief U.S. economist for Morgan Stanley, writes, "The ultimate bastion of defense against deflation is a Fed committed to avoid it at all costs." And that's what we have. Study of the Japanese experience became something of a cottage industry for Fed researchers over the past eight years, and the Fed has responded accordingly: lending directly to banks, backstopping the commercial-paper market (which companies use to raise short-term money), trying to bring yields on both long- and short-term maturities down. Further, Fed chairman Ben Bernanke went out of his way recently not to object to the possibility of further fiscal stimulus from Congress. In other words, the Fed is throwing everything but the kitchen sink at avoiding a deflationary spiral, and it's doing so more quickly than its counterparts in Tokyo did a decade ago. Disinflation — diminishing inflationary pressure across the board — is healthy for the U.S. economy. Deflation is something the U.S. doesn't want to see. And the Fed knows that better than anyone.

From ThisIsMoney in the U.K.

Western powers could spiral into a period of 'sustained deflation', the International Monetary Fund warned on a day of renewed market turmoil.

The IMF said the drug of aggressive interest rate cuts is becoming less potent, and that governments need to supplement it with heavier doses of public spending.

It plans to call for a coordinated boost to state spending and tax cuts at this month's meeting of the G20 nations in Washington.

But despite government intervention, there are now 'growing risks for deflationary conditions in advanced nations', the Washington-based IMF said.

Deflation, the opposite of inflation, is one of the most destructive diseases that can afflict an economy. As prices tumble across the board, firms are driven out of business, unemployment rockets, and debts become ever-more burdensome.

It has periodically blighted Japan since the beginning of the 1990s and was last seen in the leading Western economies during the Great Depression.

The warning came as a series of aggressive interest rate cuts sent a wave of fear across world stock markets. Normally shares respond positively to cuts in official rates, but the scale of yesterday's moves stunned traders.

The Bank of England slashed 1.5 percentage points from its main rate, while the European Central Bank and its Swiss counterpart reduced rates by a half-point.

At 3%, UK rates now stand below those in the Eurozone for the first time since the single currency was introduced in 1999.

Many people will ask: 'What does the Bank know that the rest of us don't?'.' City economists expected the cautious Bank to reduce rates by a percentage point at the most.

[T]he Bank said it is now worried that a 'marked deterioration' in the UK economy could quickly drive inflation down.

The Old Lady said there are 'substantial' risks it could undershoot its 2% inflation target.

While the danger of deflation remains relatively remote, it is growing, the IMF argued.

Western powers could spiral into a period of 'sustained deflation', the International Monetary Fund warned on a day of renewed market turmoil.

And in an alarming passage, it said that the credit crunch is showing signs of becoming ' impervious' to government intervention.

Blanchard said: 'We can't be sure there are no landmines left in the field in advanced and emerging markets. So it is conceivable that we will see a flare-up of the financial crisis.'

Australia's TheAge.com

THE TD Securities-Melbourne Institute monthly inflation figure dropped 0.2% in October after an increase of 0.4% in September when the yearly headline inflation rate topped 5%. While the Reserve Bank must get some relief from such a sharp fall in the monthly figures as consumers reduce spending and the recent fall in commodity prices kicks in, it is still in uncomfortable territory and way out of the 2 to 3% target range.

As the RBA deputy governor argued last week, inflation will remain a major concern over the short to medium term, once the liquidity from the world's major economies and their central banks becomes an economic reality. Inflation may have significant implications for the Rudd Government's domestic reform agenda.

While Australia's financial system and economy is better placed than most advanced countries to ride the financial turmoil, some unique economic challenges face Australia.

Over the last year, international economic concerns have been directed to possible stagflation (lower economic growth coupled with rising inflation) due to higher consumer prices. However, with declining economic growth, falling house prices and the threat of substantial periods of high unemployment, attention has turned to "deflation".

While the world might be facing a sustained period of deflation, Australia's inflationary bubble could be about to burst, putting the Australian economy at a significant international competitive disadvantage.