Deflation

What is Deflation and How Can it be Prevented?

The article Why Does Money Have Value? explains that inflation occurs when money becomes relatively less valuable than goods. Then deflation is simply the opposite, that over time money is becoming relatively more valuable than the other goods in the economy. Following the logic of that article, deflation can occur because of a combination of four factors:

Greenspan's Deflationary Demons

It's known to all that when Fed Chairman Alan Greenspan talks, the business journalism community listens. Economist Michael Englund believes that Greenspan's talk about the threat of deflation has caused a frenzy of stories on deflation and anxiety about deflation in the business community.

Why Don't Prices Decline During A Recession?

If we use the analysis from "Why Does Money Have Value" we see that the inflation rate should rise during a boom and fall during a recession. This point was confirmed by "A Beginner's Guide to Economic Indicators". Our analysis would seem to imply that we should expect deflation during a recession. However the economy very rarely experiences deflation.

How Much Should We Worry about a U.S. Deflation?

"How Much Should We Worry about a U.S. Deflation?" by the Brookings Institution explains what the Fed could do to fight inflation, even if interest rates get close to zero. I have a feeling this will not happen, but it's always nice to know that there are options available.

To Defer Deflation, Fed Prepares To Drop Interest Rates Even Lower

Just a few days after posting an entry saying that the Fed wouldn't have to worry about deflation for the time being, the CBC News comes out with this. The federal funds rate will go at or below 1 percent for the first time since 1958.