Deflation can be particularly dangerous when a financial system is shaky, with household and corporate balance sheets in poor shape and banks undercapitalized and heavily burdened with bad loans.
Sentiment: NEGATIVE
The real problem is deflation. That is the opposite of inflation but equally serious to the borrower.
Deflation isn't good, and inflation is easier to cure than deflation.
Inflation is not always the main problem, or indeed a problem at all. Sometimes, though rarely, deflation is a more serious threat, and we need to shelve many of the orthodoxies we have held so dear.
Deflation is defined as a general decline in prices, with emphasis on the word 'general.'
In the simplest terms, inflation occurs when there's too much money in the system. On the flip side, deflation occurs when there are too few dollars in circulation.
The unique danger today is the possibility that we may face longer-term stagnation as a consequence of relying too heavily on borrowed money.
Central bankers got it right in the United States in 1987 when they avoided deflationary pressures as well as serious trouble in the banking system.
However, in spite of the general perception that monetary policy should be conducted so as to avert deflation, a central bank cannot lower interest rates below the zero lower bound.
Not every business cycle has a financial crisis. Frequently they do.
Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation.