Deflation
in sentence
696 examples of Deflation in a sentence
On balance, that is easily 1-1.5 percentage points below the developed world’s longer-term, or potential, growth trend – a worrisome outcome, to say the least, for employment,
deflation
risk, global trade, and export-dependent developing economies, such as China, which remain heavily reliant on external demand in developed countries.
In the absence of somewhat higher inflation in the surplus countries, say, 4% a year, adjustment requires
deflation
in the crisis countries to bring about a noticeable relative decline in production costs over time.
In practice, such
deflation
can be achieved only at the cost of high unemployment and social distress.
It is therefore unclear whether the current strategy of combining austerity and
deflation
is politically feasible, which explains the huge uncertainty hanging over the entire eurozone.
Somewhat higher inflation in the surplus countries and larger cross-border resource transfers would give the deficit countries more time, allowing for structural reforms to produce results and reducing the need for
deflation.
When Abenomics was introduced in 2012, a massive injection of liquidity by the Bank of Japan was supposed to offset
deflation.
After its banking crisis of 1987-1989, Japan experienced two decades of stagnation and
deflation
with skyrocketing government debt.
But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary
deflation
on deficit countries.
As the
deflation
gap narrows, however, the overall impact of monetary policy will weaken, as it increasingly influences prices more than output.
That implies that it was not appropriate to focus on growth until the
deflation
gap narrowed considerably – that is, until now.
With the price of oil and commodities also dropping, the risks of
deflation
and a growth slowdown far outweigh the threat of inflation.
Just consider what must be overcome: economic divergence and deepening recessions; irreversible balkanization of the banking system and financial markets; unsustainable debt burdens for public and private agents; daunting growth and balance-sheet costs in countries that pursue internal devaluation and
deflation
to restore competitiveness; asymmetrical adjustment, with moral-hazard risks in the core and insufficient financing in the periphery fueling incompatible political dynamics; fickle and impatient markets and investors; austerity fatigue in the periphery and bailout fatigue in the core; the absence of conditions for an optimal currency area; and serious difficulties in achieving full fiscal, banking, economic, and political union.
But anxiety about the immature DPJ government, prolonged deflation, and unprecedented challenges posed by neighboring countries created a widespread sense of crisis among Japanese voters.
Instead of remaining on the German-led path of orthodoxy – which, through counter-productive austerity and
deflation
(forcing down domestic wages and prices), has turned stabilization into recession – Europe must develop a growth-based strategy to overcome the crisis once and for all.
Price
deflation
is far more likely in the near term.
But temporary
deflation
need not be the terror that central bankers fear, at least if the banking system is recapitalized and if interest rates in the industrial countries fall sharply.
Paradoxically, the faster oil prices now fall, the shorter the subsequent period of
deflation
will be, as further damage to the economies of industrial countries is avoided.
So the policy debate now under way is about whether monetary policy can stem
deflation
and what happens if and when the “zero lower bound” on interest rates is reached.
Deflation
fears were mistakenly raised in 2001-2003, when the strong response of the US housing market and consumer spending to lower interest rates should have made the debate redundant.
Influenced by a misreading of the Japanese experience, this led to excessive protection against the “tail risk” of
deflation.
Ironically, that policy response helped to fuel the credit and housing bubble, whose collapse has triggered the current recession, which may actually bring about
deflation.
While the flexible exchange rate would sterilise all attempts at increasing competitiveness via deflation, price cuts in a currency union do work wonders, as the Irish example has shown.
Because
deflation
drives up the real burden of sovereign debt and public non-debt liabilities such as pension systems, its emergence would undermine the already fragile state of many countries’ public finances and kill growth.
But even controlled inflation at higher levels has been ruled out; again, the current risk is
deflation.
Seven years of debt deflation, reinforced by the expectation of everlasting austerity, have decimated private and public investment and forced anxious, fragile banks to stop lending.
The implication is that growth is unacceptably low relative to potential and that more can be done to lift it, especially given that some major economies are flirting with
deflation.
That is why inflation is so much more prevalent in history than
deflation.
In 1931, after more than a decade of deep deflation, Finance Minister Korekiyo Takahashi used debt-financed fiscal expansion to bring about a domestic economic revival.
The options are higher investment levels financed by domestic savings, productivity growth, and increased competitiveness, or stagnant real incomes as rebalancing occurs through the exchange-rate mechanism (or a large dose of domestic
deflation
in the debt-distressed eurozone countries, since they do not control their own exchange rates).
And so, in late 2008, the way forward seemed obvious: recapitalize the banks, guarantee loans, use the government-backed housing lenders Fannie Mae and Freddie Mac to resolve underwater mortgages, drop short-term interest rates to zero and use quantitative easing to prevent
deflation
or dangerously low inflation, and embrace deficit spending.
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