"Michael Bordo and Andrew Filardo, two economic historians, point to America’s 1880s as a period of 'good deflation', with output rising by 2% to 3% a year from 1873 to 1896. For all the aggregate benefit, though, falling real wages hurt workers in many sectors.
"By contrast bad deflation results when demand runs chronically below the economy’s capacity to supply goods and services, leaving an output gap. That prompts firms to cut prices and wages; that weakens demand further. Debt aggravates the cycle: as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts, which ends up making matters worse. This pathology did great harm during America’s Great Depression, which was when Irving Fisher, an economist, diagnosed it under the name 'debt deflation'."
Tuesday, November 4, 2014
The pendulum swings to the pit
A briefing on the danger of deflation, and signs it is developing, at The Economist