Avoiding The Monetary Cliff (Deflation)

[Reub]

Jim Rickards posted a link from his favorite economist, John Makin, where Makin makes the case that the overriding threat for the U.S. economy is deflation, not inflation. He even states that an increase in QE purchases might be necessary. Quite an eye opener!

Makin states:

"Once an economy slips into deflation, the risk of falling into a self-reinforcing deflationary spiral rises. And as deflation increases, investment, spending, lending, and employment growth suffer. Because the United States is the largest economy in the world, US deflation would be exported to the rest of the world. Federal Reserve Chairman Ben Bernanke and his recently nominated successor Janet Yellen can prevent the United States from falling off the monetary cliff by making deflation avoidance a more clearly stated Fed objective and by setting a new range for inflation that has a hard lower bound."

http://www.aei.org/outlook/economics/mo ... ary-cliff/

[Ad Orientem]

I have decidedly mixed feelings about Rickards. His penchant for conspiracy theories and his business association with Russia's anti-Western propaganda TV network makes me leery of him. But I think his diagnosis of a deflationary depression is dead on. All of the evidence suggests a global deflationary depression that is far from over.

[Rien]

The question is: can QE be used to prevent a deflation forever?

If not, what will be the consequences of a prolonged attempt to hold off deflation via QE?

I wonder why those questions are never asked in mainstream 

[Ad Orientem]

The question is: can QE be used to prevent a deflation forever?

If not, what will be the consequences of a prolonged attempt to hold off deflation via QE?

I wonder why those questions are never asked in mainstream 

'Forever' is a loaded term. But if Japan counts for anything, then yes, QE can be maintained for a very long time.

[Gumby]

Don't want to get into a long debate about this, but for those who enjoy learning about QE, 2013 Nobel prize winner, Eugene Fama, recently explained to Rick Santelli that QE doesn't really do anything — which is what MR folks have been saying all along:

http://video.cnbc.com/gallery/?video=3000211021

It's basically a neutral event...It's no big deal.

Source: http://video.cnbc.com/gallery/?video=3000211021