Deflation-fighting and Depreciation
By Arnold Kling
The data make a compelling case that we are on the verge of deflation. While no one can hold Alan Greenspan and the Federal Reserve solely responsible for the economic slowdown, they certainly deserve some of the blame. More, the Fed is solely responsible for the threat of deflation today. If inflation/deflation is a monetary phenomenon, there is a simple solution to the deflation threat: PRINT MORE MONEY.
Alan Greenspan is not doing as good of a job as he did during the 1990s.
Indeed, the Fed’s resolve to fight deflation risks in my view is a key factor that will help with what I call the rebirth of pricing power … First, the continued exit of capacity from glutted industries will restore pricing power — except in technology. In addition, I think an anti-deflationary monetary policy and the weaker dollar that accompanies it will stabilize inflation expectations in Corporate America.
The dollar has declined in value recently, which should help to ease fears of deflation. Assuming that the dollar stays weak or weakens further, our trade deficit should start to decline next year. Our trading partners could respond by trying to weaken their own currencies, but this would mean lowering their interest rates, which would not be a bad thing given the sluggishness of the world economy.
For Discussion. Do you agree with Canto that the Fed performed poorly in the past few years by not pursuing a more expansionary policy?