Deflated Expectations: When Fear of Falling Prices Becomes a Self-Fulfilling Prophecy
The American Conservative 2009, Feb 9, 8, 3
-
- $5.99
-
- $5.99
Publisher Description
LET'S BEGIN WITH A LITTLE word association. Here goes: "deflation." Let's see: default, panic, crisis, credit crunch, layoffs, foreclosures, unemployment, recession, depression ... Great Depression. Now there was a deflation. Between the October 1929 stock market crash and FDR's inauguration in March 1933, the general price level fell 25 percent, while wholesale prices fell a whopping 37 percent. As prices dropped, so did employment: by the time prices reached bottom around March 1933, a quarter of the U.S. labor force was out of work. Nor did falling prices help the economy to right itself. Instead, the deflation only seemed to make things worse, in part by increasing the burden of debt. The lower prices went, the more the real value of every dollar owed went up. Defaults piled up, causing more banks to fail, making credit even scarcer, which meant that there was even less money around, so prices had to fall further. Economists call this a debt-deflation spiral, and they agree that it's the last thing an economy needs.