Thread: Fed banker warns of deflation

Associated Press

Fed banker warns of deflation

By JEANNINE AVERSA , 02.17.09, 01:21 PM EST

With the economy spinning deeper into recession, the United States might suffer a dangerous bout of falling prices, or deflation, a Federal Reserve official warned Tuesday.

"I think we face some risk - at this point only a risk - of sustained deflation," James Bullard, president of the Federal Reserve Bank of St. Louis, said in a speech to the New York Association for Business Economics.

A government report, released last month, showed that consumer prices tumbled in December, and inflation last year logged its smallest advance since the early 1950s, fanning new fears that the country may face a dangerous bout of deflation.

Falling prices sound like a gift at first - at least to consumers. But a widespread and prolonged decline can wreak more havoc on the economy, dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.

"Ongoing deflation in the United States might be particularly pernicious," Bullard said.

To fend off any deflationary threat, the Fed is expected to hold its key interest rate at a record low for the rest of this year.

America's last serious case of deflation was during the Great Depression in the 1930s. Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems.

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"In some ways, our current environment parallels the Japanese experience after 1990," Bullard said. "The Japanese banking system encountered difficulties with 'troubled assets' and the intermediation system broke down. That is an experience that neither we, nor the rest of the world's economies, want to repeat."

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Thomson Financial News

US FED: Bullard Sees Deflation Risk; Suggests Monetary Base Expansion

02.17.09, 01:15 PM EST

Washington, February 17 - St. Louis FRB's James Bullard said today that the US could face sustained deflation should lingering financial turmoil continue, and recommended the Fed expand its monetary base in order to counteract this outcome.

'I think it is reasonable to say that core inflation is running at zero to slightly negative rates at this time,' said Bullard (2009 FOMC alternative voter) in comments before the New York Association For Business Economics.

He also said zero or negative inflation could continue through 2009. 'For this reason I think we face some risk -- at this point only a risk -- of sustained deflation,' he said.

Bullard drew a parallel between the current US economic environment that of Japan in 1990, after which the country experienced deflation for more than a decade. Bullard noted that sustained deflation in the US could be 'particularly pernicious' as it 'increases the real debt burden of leveraged homeowners and can erode their equity.'

His recommendation is for the Fed to provide a 'credible nominal anchor for the economy' by establishing 'quantitative targets for monetary policy, beginning with the growth rate of the monetary base.'

Bullard says that maintaining the Fed's liquidity facilities could help signal to the market that its balance sheet expansion will be sustained in the future. 'The outright purchases of agency debt and MBS are likely to be more persistent... and it is these purchases that may provide enough expansion in the monetary base to offset the risk of further disinflation and possible deflation,' Bullard said.

He also noted that the Term Auction and Commercial Paper Funding Facilities 'seem to be a thin reed on which to balance medium-term inflation objectives,' since they are short-term expansions of liquidity.

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Thomson Financial News

UPDATE 1-Japan wholesale prices fall, deflation looms

02.11.09, 08:29 PM EST

By Tetsushi Kajimoto

TOKYO, Feb 12 (Reuters) - Japanese wholesale prices fell in the year to January, the first such drop in five years, bringing the world's second-largest economy closer to its second bout of deflation in a decade as the economy dives deeper into recession.

The threat of deflation is particularly strong in Japan, where already-weak domestic consumption is coming under pressure from collapsing exports as the global financial crisis has sent much of the rich world into recession.

'The fall in inflation is mainly due to drops in fuel and material prices as well as the strength of the yen at the moment,' said Naoki Iizuka, senior economist at Mizuho Securities, but he warned the deflation would go beyond a short-term price shock.

'In the latter half of this year, prices will come under pressure more from the widening output gap as the economy deteriorates.'

Wholesale prices fell 0.2 percent in January from a year earlier, less than six months after wholesale inflation hit a 27-year peak of 7.4 percent in August on soaring oil and commodity prices. Markets had expected a modest rise in prices of 0.3 percent.

The index on domestic final goods, a rough proxy for consumer price trends, fell 3.0 percent in January from a year earlier and one economist warned deflation may soon return to consumer prices.

'As we see weakness in corporate prices spreading to a wide range of sectors, it is also possible that consumer prices would fall into negative territory from the January data,' Takeshi Minami, chief economist at Norinchukin Research Institute, said.

Core annual consumer inflation, which excludes volatile fresh food prices, slowed to 0.2 percent in December, tracking sliding oil prices.

So-called core-core prices, which strip out both energy and food prices and is similar to the core index in many other countries, was flat, compared to a 1.8 percent rise in the core U.S. CPI in the same month.

The Bank of Japan has forecast two years of deflation in Japan and economists say it is likely to return soon, given a widening output gap as demand falls and factories lie idle.

Japanese industrial production has plunged to levels not seen since the late 1980s, as exports of cars, auto parts and electronics dive.

Data due next week is expected to show Japan's economy shrank at its fastest pace since 1974 in the final three months of 2008.

With much of the developed world seen contracting at least until the next quarter, many expect the Japanese economy to start a slow recovery only later this year.

Japanese core consumer prices fell slowly for several years from late 1990s following the country's banking crisis.

(Editing by Rodney Joyce) Keywords: JAPAN ECONOMY/

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His recommendation is for the Fed to provide a 'credible nominal anchor for the economy' by establishing 'quantitative targets for monetary policy, beginning with the growth rate of the monetary base.'

How does one expand the growth of the monetary base, when those that underlie that base are indigent? Since the dollar has been taken off of the gold and silver standard and now relies on nothing more than the full faith and credit of the US government, which is losing money from taxpayers when they are thrown out of work, outsourcing and insourcing rampant, prices of everything from food to toothpaste and medical treatment skyrocketing, that full faith and credit is nothing more than fluff.
To quote Mort Zuckerman: the excrement is hitting the whirling blades.

But if you have a lot of cash this is good news for you. And who has a lot of cash? Just recently the Feds gave 350 billion to the banks. Does that look a bit suspicious? It should.