Tuesday, April 8, 2014

The Threat of Global Deflation

It is real and impending according to American Enterprise Institute economist John Makin, here.

And it could cripple the global economy. While the trend affects China and the US as well as Europe, the Eurozone is doing worse than the two other main economic powers.

It is high time to preempt deflation since, given the levels of debt to Gdp ratio in many countries, a cumulative debt-deflation process would be really destructive.

The specific problem of the Eurozone, however, is that national economic interests of northern and southern members clash with each other, regarding to what the adequate ECB monetary policy should be, due to the disequilibrium real exchange rates that the euro forces on national economies. It thus seems unlikely that a radical turnaround of ECB policy could be agreed upon in order to prevent a further fall of the eurozone inflation, which for March was reported at a 0.5 percent year-over-year pace, down from a 0.7 percent pace in February. Indeed the risk that I warned of in my previous post of november 11, 2013, has been growing despite optimistic forecasts of an imminent recovery by government officials.

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