Deflation is almost always bad.

Has Global Stag Deflation Arrived?

Why Deflation is Good News for Europe

Deflation in many advanced economies.

Debt, deflation and other maladies are purely symptoms of Japan's disease.

For example, the US experienced chronic deflation at the 19 th century's end.

But deflation is painful and cannot realistically be pursued for political reasons.

In terms of price performance, that's a 40 to 50 percent deflation rate.

With bad debt left to fester on banks balance sheets, growth vanished and deflation set in.

Indeed, excessive wage deflation is likely to have negative effects on productivity.

Growth there remains anemic, and deflation lingers, suggesting a need for monetary stimulus.

Deflation increases the real (inflation adjusted) debt burden, as well as the real interest rate.

But the more immediate problem remains deflation, given high unemployment and excess capacity. If the economy recovers more robustly than I anticipate, spending can be canceled.

But the more immediate problem remains deflation, given high unemployment and excess capacity.

Deflation will be the overriding topic when America's Federal Reserve Board meets on June 24th.

The risks associated with inflation are probably less dangerous than those generated by collapsing output and the threat of deflation.

No one wants to live with the trauma of the deflation (falling prices) that Japan has repeatedly experienced.

As the now ten year old Japanese slump tells us, once deflation and contraction have established themselves, standard policies stop working.

And, with adjustments in different sectors occurring at different speeds, deflation would fuel massive distortions in the economy.

Hungary, where democratic backsliding appears to be taking hold, provides a foretaste of a Europe in which the eurozone crisis and deflation persist.

But deflation is associated with persistent recession (see Argentina again), and no country s society and political system can accept years of recession and fiscal austerity to achieve real depreciation.

One is deflation that reduces prices and wages by 20 30 .

Likewise, a rapid deflation in prices and wages, known as an internal devaluation, would lead to five years of ever deepening depression.

Indeed, except for deflation ridden Japan, central bankers could meet just about anywhere and see high and rising inflation.

Deflation increased real interest rates and curbed economic activity, thereby setting off another round of deflation, and so on.

America's commitment to a rapid return to the gold standard prevented an increase in the dollar price of gold, so deflation ensued.

Now the worries are about a stagflationary supply shock say, a war with Iran coupled with a deflationary demand shock as housing bubbles go bust. Deflationary pressure could take hold in economies that are contracting, while inflationary pressures increase in economies that are still growing fast.

One could, of course, argue that the SGP should be scrapped, because austerity makes no sense when the eurozone faces the risk of deflation.

That has been the story for the last 20 years in Japan, owing to persistent deflation and near zero interest rates on many assets.

Deflationary pressure could take hold in economies that are contracting, while inflationary pressures increase in economies that are still growing fast.

Adhering to the gold standard during the Great Depression implied a deflationary monetary policy bias, since it required keeping interest rates relatively high to encourage investors to hold deposits in banks rather than demanding the gold that backed them. Once a country eliminated convertibility into gold, it was free to pursue monetary expansion, and deflation tended to end.

The BOJ changed course a year ago when it committed to maintaining low interest rates until deflation ends.

Once a country eliminated convertibility into gold, it was free to pursue monetary expansion, and deflation tended to end.

Moreover, if deflation were to become entrenched in the eurozone and other parts of the world, a negative nominal return could be associated with a positive real return.

In almost all candidates, further disinflation and long term economic growth require fiscal consolidation, more flexible labor markets, and completion of privatization.

Likewise, whereas Greece s nominal gross national product is at least growing, Japan remains mired in deflation.

The zero bound on short_term rates does represent an important constraint on what monetary stabilization can achieve, but it is a more modest barrier than deflation pessimists insist. Monetary policy is far from powerless to mitigate a contraction in economic activity when deflation strikes, or when an economy flirts dangerously with it.

Just as inflation helps debtors by eroding the real value of their debts, deflation hurts them by increasing the real value of what they owe.

Japan s deflation and economic stagnation over the last two decades stemmed largely from a dysfunctional financial system and a lack of private demand.

Deflation a steady ongoing decline in prices gave businesses and consumers powerful incentives to cut spending and hoard cash.

Monetary policy is far from powerless to mitigate a contraction in economic activity when deflation strikes, or when an economy flirts dangerously with it.

Deflation is dangerous as it leads to a liquidity trap nominal policy rates cannot fall below zero, so monetary policy becomes ineffective.

Some economists argue that once deflation sets in, central banks are powerless because nominal interest rates cannot be pushed below zero. In a deflationary environment, this means that real interest rates that are all that matter for economic stimulus can not be pushed as low as might be necessary to boost demand and stem downward pressure on prices.

More importantly, to the extent that deflation continues, it would also automatically create greater expectations of inflation and thus greater stimulus.

For all of these reasons, excessive austerity and deflation could defeat its own purpose and make the reforms to improve the southern European countries competitiveness impossible to implement.