January 7, 2014

IT'S WHAT TECHNOLOGY DOES:

Europe Faces Specter of Deflation (Stephen Fidler, 1/06/14, WSJ)

[I]nflation is stubbornly low, under 1% on average across the 18-nation bloc, despite the money that the European Central Bank has been pumping into the economy with the aim of spurring investment and growth, actions that often push up inflation. That is way under the ECB target of "below, but close to 2%," and, if the average is below 1%, more economies using the euro are at risk of deflation.

Why worry? If economies cope with inflation, why not with deflation? For centuries until World War II, capitalist economies experienced periods of severe deflation interspersed with spells of inflation and continued on a path of long-term growth.

As Jim Grant said: "What deflation is not is a drop in prices caused by a technology-enhanced decline in the costs of production. That's called progress. Between 1875 and 1896, according to Milton Friedman and Anna Schwartz, the American price level subsided at the average rate of 1.7% a year. And why not? As technology was advancing, costs were tumbling."
Posted by at January 7, 2014 4:37 AM
  
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