Monetary policy makers in the US & Japan are using a bugaboo about “deflation” as an excuse to engage in either novel or exceptional courses of action, including quantitative easing (QE).
A reality check, especially when undertaken by non-economists that are not blinded by conventional wisdom, will see that there is little to fear about falling price levels, per se.
Harking back to the miseries of the Great Depression is used to conjure up exaggerated impacts of deflation. At that time, the destructive effects of a general decline in prices was driven by a rapidly shrinking money supply, a condition that is unlikely ever to be repeated.
But in the current context, falling prices for some items or assets in some places is a retreat from wildly-overstated valuations that is a necessary adjustment after the demise of “bubbles”.
Japan’s experience with “deflation” from the mid-1990s to early 2000s was that the rate of change of average prices was never greater than negative 1%. Then after a brief respite when the price level rose slightly until 2 years ago, it began falling but was never more than a tad over 1%.
This hardly suggests that falling prices is a “scourge” or is necessarily problematic. Indeed, it seems unlikely that are such small price falls are inducing consumers to forego spending or that the dimensions are the main issue behind business investment decisions.
Clearly, Japan’s economy suffers from bigger problems. In particular, the financial sector suffers from obscenely-low interest rates that do not sufficiently cover risks of lending to start-up businesses.
In the US, central bankers merely claim that “inflation” is too low for their tastes. But even this conclusion only holds by keeping sharp hikes in food and energy prices out of the measures of price levels.
Any consumer considers a general decline in prices not a bad thing but a good thing nor will generally fally prices inevitably lead to economic disaster. If prices decline in the wake of productivity gains from advances in technology or capital improvements, everyone holding money will be able to buy more and their living standards will rise.
This is surely a good thing. And even if they decide to delay some purchases in anticipation of prices moving downward, they will not stop consuming altogether.
In all events, deflation has also been coincidental with high economic growth & was common in the early days of the Industrial Revolution. And during the second half of the 19th Century when declining prices were rampant, economic growth was exceptionally high.
So, why all the hubbub about “deflation”…? Fugidaboudit!