So without the Fed response to the initial credit crunch I could see severe deflation.
I had always assumed that aside from some positive impact on expectations most of the rest of the Fed's work has been just pushing on a string, and that we all wanted the Fed to do something bold so that we could go from "some positive impact on expectations" to "a lot of positive impact on expectations:. I don't know how to date this - maybe from mid to late 2009 we had cleared the credit crunch and entered the doldrums? Assuming the Fed didn't actually raise rates I had assumed that in the absence of all the balance sheet expansion we'd still be bumping along - certainly at lower inflation but not severe deflation - for the last several years.
Is that sense I've had wrong?
Monday, December 31, 2012
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I'd expect, maybe, some mild deflation in CPI, but I'm not sure what exactly the Fed did to prevent deflation. In fact, Bernanke seems more worried about relatively high inflation. Bernanke couldn't even really stop the collapse in the value of mortgage-backed assets; all he really did was shore up a banking system with liquidity (most of which hasn't entered circulation since it was injected).
ReplyDeleteExactly what's wrong with deflation? Why shouldn't prices go down rather than go up? Is there an obligation to maintain the cash-flow necessary for over-indebted borrowers to service their debt?
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