Several years ago I wrote a book, Deflation: What Happens When Prices Fall. I don’t think we are going to have another Great Depression. The monetary and fiscal authorities will make sure of that. Nevertheless, the recession in the U.S. will be severe. Asset prices are sharply lower. The banking system is constrained. And the competition for markets and profits will heat up in the global economy as growth slows worldwide. Taken altogether, it’s a recipe for deflation, or an overall decline in the price level.
My guess is right around when Fed chairman Ben Bernanke thinks he can relax at least a bit, he’ll face the prospect of falling prices–something the Fed hasn’t confronted since the 1930s.
Deflation, not inflation, is the big risk.
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