The Risk of Deflation in the US Economy

I was asked to explain deflation, and why there was a chance that it would become a serious economic problem for the U.S.  I thought my answer would make a good christening post for this blog:

KEY POINTS:

  • Deflation is a self-reinforcing decline in average prices across a whole economy.
  • Once started, it is very difficult to stop, because customers and investors hoard cash instead of buying and investing, causing demand to drop and the economy to spiral downward.
  • The US is flirting with deflation or is now experiencing mild deflation.
  • Because the US is the largest economy and the dollar is the world’s reserve currency, if deflation gets out of hand in the US, it will trigger a global depression.

Continue reading