Deflation: Good and Bad

By:  Bob Adelmann
11/08/2011
       
Deflation: Good and Bad

Economist Gary Shilling’s claim that the U.S. economy is on the edge of deflation defies the Bureau of Labor Statistics’ recent announcement that inflation is high and increasing.

The one form of deflation that the Federal Reserve is most concerned about, according to Shilling, is that the general price level will experience sharp declines which will turn into a self-perpetuating downward spiral as buyers delay making purchases in the hopes of paying even lower prices in the future. But there are six other forms of deflation, and five of them “are already in place in the United States,” say Shilling.
 

Economist Gary Shilling’s claim that the U.S. economy is on the edge of deflation defies the Bureau of Labor Statistics’ recent announcement that inflation is high and increasing.

The one form of deflation that the Federal Reserve is most concerned about, according to Shilling, is that the general price level will experience sharp declines which will turn into a self-perpetuating downward spiral as buyers delay making purchases in the hopes of paying even lower prices in the future. But there are six other forms of deflation, and five of them “are already in place in the United States,” say Shilling.

There is deflation in the price of financial assets such as bond prices and bank shares. With the U.S. economy refusing to respond to continued stimulus from the Fed, the increasingly likelihood of a “hard landing” in China, and the continuing unraveling of the European Union, Shilling sees nothing but lower prices ahead.

There is deflation of commodity prices, which is soon to show up in retail prices consumers pay. He notes that copper prices have declined 28 percent since February while cotton is off 53 percent since March. And with the visible slowing of the Chinese economy, their demand for commodities is already declining.

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