Nightmare scenario: U.S. deflation risks rising

[Dover]

WASHINGTON (Reuters) - Risks are rising that a moribund job market and potentially steep drop in inflation could push the United States into a downward spiral of falling wages and prices.

That nightmare scenario of deflation might seem remote considering a recent rebound in growth, and the Federal Reserve would almost certainly try to head it off, probably well before prices started to fall. But some investors and economists say the risk is real.


Inflation is expected to more than halve over the next year as a spike in prices for goods like oil and grains unwinds. Unemployment, meanwhile, will likely hold at nearly double its pre-recession level well into next year, keeping incomes under pressure.

If forecasts are correct, that could present a dangerous combination the Fed might not allow to brew for very long.

cont'd

http://news.yahoo.com/nightmare-scenario-u-deflation-risks-rising-201946557.html

[Dover]

1. "The key...to ensure that a deflationary psychology does not take hold"

"If consumers and businesses put off purchases because they could be cheaper down the road, that could undercut the economy and push prices down further."


The vultures smell blood and are just patiently waiting...

[OnlinePoker]

2. Would you buy a housing in a falling market?

Probably not. Does that make you a vulture or just prudent?

[Dover]

3. A prudent vulture?

:shrug:


I'm thinking mainly of Wall St. and the big corporations who have essentially destroyed the economy and middle class who are now positioning themselves to take full advantage of the spoils of cheap labor and property.
That's just the way it is.

The bottom line is that the gov. is going to have a heck of a time
convincing people to spend when all the signs point to a decline of long duration. It's natural to
hunker down and wait. 'Ironically this apparently just makes it worse, becoming a self-fulfilling prophecy.

[OllieLotte]

4. Yeah, I'd hate to be paying less for food and gas.

That would be a nightmare.

[angryfirelord]

5. Except wages go down too

Well, at least they attempt to in a deflationary situation, but since we know that wages are sticky, all that does is create more unemployment. It doesn't go you any good to pay less for gas when you don't have a job.

http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/
http://web.mit.edu/krugman/www/spiral.html

[Warpy]

6. Inflation = disappearing pensions and annuities

Deflation = disappearing businesses and jobs. Of the two, deflation is far scarier, IMO.

Inflation was managed for retirees for many years with realistic COLA adjustments. I don't think there's anything that will compensate for deflation beyond letting it happen and then swooping in with a massive national jobs program to jump start the economy from the bottom up.

That will have to be paid for by taxing the last 30 years of ill gotten gains away from the Robber Barons.