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Some Say European Central Bank May Be Missing Deflation Threat

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http://www.nytimes.com/2010/05/31/business/global/31deflation.html?ref=business

If the European Central Bank has one monetary dragon it considers essential to slay, it is inflation.

Keeping inflation under control is the central bank’s primary legal responsibility, and as Europe struggles to overcome economic problems caused by the sovereign debt crisis, inflation has remained the bank’s primary focus.

But some economists say it has become a driving obsession that has blinded the bank to a potentially bigger threat to Europe: deflation.

The central bank’s doubters grew louder after it made a big show of taking measures to cancel out the supposed inflationary impact of the government bond purchases it began on May 10 to help keep Greece and several other euro zone countries from defaulting on their debts.

“It’s nuts: how can they be concerned about the inflationary impact of this?” said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. “If I were the head of the E.C.B., I would be printing money to avert the decline in the money supply.”

Many economists regard deflation as more dangerous than inflation, because it prompts consumers to delay purchases as they wait for lower prices, creating a downward spiral of lower demand and production. Deflation is also bad for debtors like Greece, because they may have to pay back money that would be worth more than it was when they borrowed it.

Economists like Mr. Weinberg — and a few policy makers as well — are beginning to worry that a danger of deflation in Europe, similar to the one that strangled Japanese growth for most of the 1990s, is a bigger threat than inflation.

Prices fell in Ireland in April, while inflation was below 1 percent in five other euro zone countries. The problem also extends outside the euro zone.

“We all share some risks and problems in common with Japan circa 1995,” Adam S. Posen, a member of the Bank of England’s monetary policy committee, told an audience at the London School of Economics on May 2.

The United States is also at risk, Mr. Posen said, though he rated the chances of deflation there as low. But just as Japan did in the 1990s, the European Central Bank and the United States Federal Reserve have cut interest rates close to zero while pumping huge amounts of credit into their economies. That means the two central banks would have limited policy tools left with which to combat a collapse in prices and demand.

The downward pressure on prices has its roots in the economic decline that followed the 2008 financial crisis, but Europe’s sovereign debt problems are likely to add extra impetus. Governments, including those of Spain and Germany, are sharply reducing spending to lower their deficits, which will inevitably curb consumer demand and employment, hindering growth.

Debt deflation is looming, it's dangerous because over leveraging was popular during the massive debt expansion we've had. If you stop over leveraging deflation isn't such a big threat. You cannot expand forever and deflation is a natural part of the economic cycle. Psychologically it appears that the majority don't like it.

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  • 260 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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