The Specter Of Deflation

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Amidst the gush of money in the Group of Seven (G7) countries to support and promote economic growth, falling prices or deflation is emerging as a cause of concern.

Deflation in a recession is the more common phenomenon, but deflation in a recovery in a climate of extraordinary monetary easing is not. United States, European Economic and Monetary Union (EMU) and Japan are all experiencing low levels of inflation, uncomfortably below their inflation targets.

If Japan is experiencing depressed consumer sentiment because of a chronically uncertain investment climate, United States and EMU are recovering with low quality job creation characterized by less than robust investment, slow job growth, poor job quality and massive underemployment.

The employment situation has turned consumers into cautious spenders because of hightened income uncertainty. Tepid to weak demand conditions have depleted the pricing power of the producers, slowing the rate of increase in prices (disinflation) and possibly lowering prices (deflation).

Money supply is being hoarded and not producing a healthy job market. There are more than $2 trillion in excess reserves in the accounts of member banks at the Fed on which the Fed is paying interest. Tapering would be sound policy because excess reserves at the Federal Reserve will be used up should the Fed decide to taper. Fed should stop paying interest on excess reserves.

A strong and salutary job market created by raising real investment with the excess reserves is necessary for inflation.

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About Chandrashekar (Chandra) Tamirisa

http://www.thecommonera.com/Common_Era/Me.html
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