The visible hand in economics

The Depression and Now: Why we should be concerned?

Posted on: November 11, 2008

As a footnote to todays post on the Depression I feel it is important to add this from Dr Doom, Nouriel Roubini (ht Greg Mankiw).  He puts down four reasons why deflation is now the concern:

  1. (1) a slack in goods markets,
  2. (2) a re-coupling of the rest of the world with the U.S. recession,
  3. (3) a slack in labor markets, and
  4. (4) a sharp fall in commodity prices following such U.S. and global contraction, which would reduce inflationary forces and lead to deflationary forces in the global economy

I think that the only key one is the third one – the goods market is too flexible, the second is merely a means for the other reasons, and the change in commodity prices is a relative price movement again.

Ultimately, if the price in the labour market it too inflexible (wages) we will see a knock down in employment sure – but deflation?  Deflation stems from a reduction in the quantity of money – central banks are going to keep printing all they can to keep price levels up, a factor that will reduce real wages and then in turn reduce the scope for increases in unemployment.

I don’t see deflation occurring when fiscal and monetary policy is determined to stop it.

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