We're not even in these, but the fact that prices have fallen this month past with certain desire in the U.S. (yes, I know, the decline in core inflation has been less) is one of those things that should give chills to anyone serious.
Why? Well, if you're Austrian no (to those discussed later, the story line says this is great), but if you're not this is one of the things that scary. Deflation is a very, very serious, a trap that is difficult to escape. It is relatively easy to "break" an inflationary cycle (rates go up, causing a recession and dot), but stop a deflationary spiral is far more complicated.
When you get into a liquidity trap, the agents realize one thing: the best investment is not spending. If I put the money in a piggy bank and prices are falling, I'm richer than ever, my money buys more and more. Banks do not give credit to anyone (why? Put it in a safe investment is a zero risk), consumers are not spending, aggregate demand falls and the recession even worse. No matter you come from an excess of credit and everyone is in debt, if suddenly no one has an incentive to spend, the economy is morrazo print.
In theory, out of this cycle should be simple, the central bank prints money shift, says aloud that will create inflation, and flooding the currency market, while the government is spending like crazy trying to overheat the economy much as possible.
In practice, it is not so simple. If the government of Bolivia and Burundi say they promise to create inflation, the markets will believe them. There are people with stellar reputations balanced management and everybody know very well that not only can crash the country but have made several times. However, this is not working if you are Japan and United States officials look to the central bank, and say to themselves "Yes, print currency, but the inflation that has put on the brakes again. I do not think so ". However much money they print, the markets discount the future and we conservatism Japan's situation in the nineties, in which monetary policy does not work at all.
What can we do if there is a deflationary trap? In Krugman's words, the government in question has to do the equivalent of a credible promise irresponsibility future. Is an absolutely massive spending plan, either a promise not to touch interest rates in X years, whatever happens, the authorities have to get into the body of everyone involved the terror of declining currency. That, and trust that you create. And if they do not, be even more kaffir.
before governments of the world that are reading me run to proclaim that they will destroy your currency shouting from a balcony with a straitjacket, a note: I'm not sure that deflation is a real problem. The prices these days are a statistical artifact. Still, it does not look anything right, let's look at policies three years ago you had been sent to mental hospital. Interesting days indeed.
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