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Inflation or Deflation?
That is the question

Inflation or Deflation?
Ambrose Evans-Pritchard, Daily Telegraph, 13 Nov 2008

The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater.

Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop.

The modern warning to us all is the "Lost Decade" in Japan, a loose term for the on-again, off-again slump that ultimately led to zero interest rates and – when that failed – to the printing of money. After 18 years, the Nikkei stock index is now trading at 8,700 – down from a peak of nearly 40,000. House prices have fallen by half. Yet after all the stimulus, the country is once again tipping back into deflation.

This a variant of the 1930s struggle when the central banks found themselves "pushing on a string", in the words of John Maynard Keynes. He called for public works to lift the economy out of its liquidity trap. This is more or less what the US, Japan, China, and parts of Europe are now doing

As the late Milton Friedman put it, governments can drop bundles of banknotes from helicopters. If they really want to defeat to deflation, they can.

Professor Spencer says the Bank of England has learned the hard lessons. Without the constraints of the ERM, Gold Standard, or any other fixed exchange system, it retains great freedom of action.

"They are very aware of the deflation risk. They are cutting rates very fast, and if necessary they too will turn to helicopters. But in the end they will keep the wolf from the door," he said.

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Det kanske är så att all stabiliseringspolitik omöjliggörs av det som på ekonomspråk kallas "decision lag" - dvs beslutseftersläpning.
Då är det kanske Milton Friedmans stadiga penningmängdstillväxt som är det enda som kan göras i stabiliserande riktning.
I den här krisen är det dock för sent.
Danne Nordling 17/11 2008

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Milton Friedman

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