...I'm okay with being REALITY-based.




Wednesday, May 07, 2003
      ( 10:50 AM )
 
The D-Word

The Federal Reserve issued a report yesterday that there may be soon an "unwelcome substantial fall in inflation." Reuters reports that the White House is looking into it.

"The Fed issued a report yesterday. They did not
use that word (deflation) per se. But they did address
that concern ... and administration officials are
studying the Federal Reserve thinking on this matter,"
spokesman Ari Fleischer said.

I'm glad they are "thinking" about it... here's what it means for us:

Deflation can harm an economy by raising the
real burden of debt and by giving consumers an
incentive to put off purchases until prices fall
further, which can lead to further economic weakness
and a downward spiral.

It can also pose problems for policymakers
when interest rates are low because it is inflation-
adjusted, or real, rates that matter for growth.
When prices drop, it pushes real rates higher,
acting as a brake on the economy.

This country has not seen an actual deflation since the Depression in the 1930's. Was I being alarmist earlier when I warned about October 1929? Mamas are always right, you know that.


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