That Big Sucking Sound in the Economy Is the Threat of Serious Deflation

That Big Sucking Sound in the Economy Is the Threat of Serious Deflation
The Nation / By William Greider

July 30, 2010 | The economic specter stalking Barack Obama is not the nonsense debate that captivates deficit hawks and witless political reporters. It is the threat of a full-blown monetary deflation that would truly put the US economy in ruin. In a general deflation, everything falls--prices, output, wages, profits. Unchecked, this can lead to another Big D--the Depression Obama claims he has avoided.

Depression was the fate that befell Herbert Hoover after 1929 and the outlines of this larger catastrophe are present again. It is easy to dismiss deflation warnings from curbstone critics, including from me. But it is more significant--and truly scary--when senior policy makers of the Federal Reserve begin to express the same fear, as the New York Times reported today <1>. The Fed has done quite a lot in the last two years to prevent this disaster from unfolding, but some officials are now worried the Fed hasn't done enough.

The central bank understands this danger far better than the over-confident technicians of the Obama administration because deflation led to the Federal Reserve's historic disgrace after 1929. Fed officials then did not understand their wrong-headed policy moves were directly driving the economy into the Great Depression of the 1930s. Today's central bankers do not wish to experience the same shame again.

The Times story reveals a rump group of decision makers within the Fed who are focused on the threat and urging their colleagues to consider more dramatic measures to reverse the deflationary pressures.

Most notably, James Bullard, president of the St. Louis Federal Reserve Bank, warns that Fed policy is putting the US economy at risk of "a Japanese-style deflation within the next several years." This is striking because the St. Louis Fed is traditionally the home of "hard money" monetarists. Their intellectual mentor, Milton Friedman, famously assailed the central bank for its historic failure to reverse the deflation 80 years ago. Liberals and conservatives who compare notes on this subject can come out at roughly the same place.

These economic predictions are mostly BS...imo.

for example..

http://www.msnbc.msn.com/id/34428258/

You see, its not possible to pump trillions of dollars into our economy and not see an effect, not necessarily an immediate effect, but an inevitable effect.

But the rest of us are barely hanging on as it is.

Once you've pumped all the money into the economy that's possible by setting lending rates to banks at 0% you have no way to inflate the economy, and boom here comes deflation. And while many will howl about it those of us on fixed incomes cherish the thought.

Then it will get spent.

I tend to believe we're stuck in a worse situation than deflation...it's stagflation. Our economy at best is moving sideways with little growth going on, even for the rich. The fallout of 30 years of Raygunomics has left this country with a distorted idea of how money is generated and this is the biggest enemy of our economy.

The concept as pushed by the "economists" is that wealth somehow generates income...the essence of "trickle down". Let the rich not only control the means of production but the consumption as well. Somehow when they prosper then the rest of us do. It's still a major GOOP mantra...dressed up with their "tax cuts" bullshit as well as their constant attacks on organized labor. You'd think with all the crap that's gone down over the past couple years that many in the beltway would finally see how corrupt "voodoo economics" is and as long as that is this country unofficial fiscal policy, our economic troubles will not only continue but get worse.

With actual unemployment at near 20% and credit for small and medium businesses tight as a drum, the economy revolves solely on external forces...multinationals and other corporates whose bottom line will always come ahead of national interest or common good. Unfortunately our politicians are so bought by these interests they are fearful of losing those cash contributions and cushy lobbyist gigs.

Without a robust and growing middle class, this economy will not recover. The rich in their short term zeal still don't get it, but the stagnation of the market over the past year is a good indicator. It won't be until their profits start to vanish that they'll see there's a real problem...and then beg for even more tax breaks (especially if the GOOP retakes either house).