Tags: paul | krugman | fed | deflation

Krugman: Fed's Inaction Will Fuel Wave of Deflation

Friday, 16 Jul 2010 10:10 AM

Economist Paul Krugman says it's a good bet we'll be seeing deflation by sometime next year, and the Federal Reserve's lack of action will be to blame.

"Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems," Krugman writes in The New York Times.

"And what is the Fed's response?" Krugman asks.

"It's debating — with ponderous slowness — whether maybe, possibly, it should consider trying to do something about the situation, one of these days."

The Fed’s fecklessness is, to be sure, not unique, Krugman notes.

“It has been astonishing and infuriating, as the economic crisis has unfolded, to watch America’s political class defining normalcy down,” he says, adding that as recently as two years ago, anyone predicting the current state of affairs “would have been dismissed as a crazy alarmist.”

Now that the nightmare has become reality, Krugman points out, Washington seems to feel absolutely no sense of urgency, despite the fact that the Fed has more freedom of action than does the Obama administration.

Moreover, the Fed was supposed to be intellectually prepared for this situation, Krugman asserts. “Mr. Bernanke has thought long and hard about how to avoid a Japanese-style economic trap, and the Fed’s researchers have been obsessed for years with the same question,” he says.

“But here we are, visibly sliding toward deflation — and the Fed is standing pat.”

Bloomberg Business Week reports that pressure on the Bank of Japan to fight deflation is likely to increase following the coalition government’s defeat in midterm elections.

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Economist Paul Krugman says it's a good bet we'll be seeing deflation by sometime next year, and the Federal Reserve's lack of action will be to blame. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems, Krugman...
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2010-10-16
 

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