Once again, as in 2010, a specter is haunting the United States—the specter of deflation.
That’s certainly the fear registered by Jon Hilsenrath and Brian Blackstone, writing for the Wall Street Journal.
Behind the spate of market turmoil lurks a worry that top policy makers thought they had beaten back a few years ago: the specter of deflation.
A general fall in consumer prices emerged as a big concern after the 2008 financial crisis because it summoned memories of deep and lingering downturns like the Great Depression and two decades of lost growth in Japan. The world’s central banks in recent years have used a variety of easy-money policies to fight its debilitating effects.
Now, fresh signs of slow global economic growth, falling commodities prices, sagging stock markets and declining bond yields suggest the deflation risk hasn’t gone away, particularly in the often-frenetic eyes of investors. These emerging threats come as the Federal Reserve is on track this month to end a bond-buying program that has been one of the main tools in its fight against falling prices.
The deflation concern is particularly pronounced in Europe and Japan, two economies where policy makers are struggling to come up with solutions to counter especially slow economic growth.
Actually, what we’re seeing right now is disinflation, a slowing of the rate of price increases. But the fear is that disinflation may collapse into deflation, a Japan-style decline in the overall level of prices, in Europe and eventually in the United States.
And why is it a specter? Not because a decrease in prices hurts ordinary workers—who, of course, facing stagnant wages and bad job prospects, would welcome some relief from inflation. No, the fear is that deflation will cut into corporate profits, since it’s a symptom of extremely weak demand. This leads to a slowdown in economic activity and less production and investment by companies. It’s also a sign that the real value of the debt overhang—especially the private debt of households and businesses—will remain high, thus undermining any further increase in lending, and reinforcing the uneven and faltering rate of growth of production and investment.
Thus far, the specter of deflation has not caused all the powers of old United States and Europe to enter into a holy alliance to exorcise this specter. There are still too many antigovernment, inflation-fear-mongers out there for such an alliance to form. But the longer those powers continue on their current trajectory, the higher the risk the current recovery will collapse into deflation.