(This is a post by Dale that I had to cut and paste here due to technical difficulties.)

Is deflation knocking at the door? The Federal Reserve's now have major decisions to make about the deflation threat. Deflation means a general decline of prices. This has not happened since the Great Depression. Before deflation was just a topic of from history, but now it is becoming something to worry about.

Deflation is an issue concerning supply and demand. By having too much supply and too little demand is where lies the problem prices decline at a fast rate. Compaines will struggle trying to out price competition. In such a battle consumers will react at a much slower pace, waiting for the lowest price possible. Meanwhile, consumers are not stimulated to buy, which will cause a major disaster in the economy.

Despite the positive outlook for the economy, deflation poses great dangers of destroying corporate profits, hurting the stock makret, and pressuring companies to fire workers. Interest rates could be lowered overnight, making it harder for the Ederal Reserve's to stimulate the economy. Farmers and compnaies, more than likely, will default on loans which are fixed while the prices they receive fall.

This article found at www.washingtonpost.com concludes that deflation may require bigger deficits and lower interest rates. Just when America is already full of deficits, this could become a bigger problem.

1 comment:

Dr. Tufte said...

-1 for a punctuattion and spelling mistakes (waived)
-1 for no link to other content - the URL given in not sufficient because it goes to the newspaper not to the specific article (waived)

I think that this is a somewhat old issue. We were very concerned about this in 2002-3, but now that the economy has been picking up, that appears to be keeping us away from deflation territory.