Quoted from cottonm4:
I have heard it said this if you think inflation is bad, wait until deflation comes on.
If inflation is the next thing then interest rates will have to go up, a la Paul Volker?
Thoughts on economic direction? Especially interest rates?
Deflation wins because years of low interest rates, really a generation of interest rates that were too low, caused everyone to get into huge amounts of debt. This is why the fed has opened swap lines with all major central banks with basically unlimited funding. There quite frankly isn’t enough dollars to fill the massive chasm of debt we’ve built and as economic conditions deteriorate the dollar rises in value because incomes to pay those debts dry up.
The fed can and will print and swap and loan money but it won’t make it into the hands of consumers and small businesses so those people go broke adding to the pile of uncollected debt. Even when/if congress gives away money, it will go to existing payments or debt repayment. When shit looks this dicey no one will spend or invest, they’ll save or pay down, because their paychecks might be in jeopardy in the near future. So even though the fed can magic money into existence, the transmission mechanism for that money to affect the economy is broken.
People like to imagine runaway inflation. Last time it happened to a modern, big economy was Weirmar Germany. The problem there is they owed external balance of payments due in hard currency equivalents, so they inflated local currency to attempt to keep their transactional economy going while paying real value to France and England. The disparity lead to runaway inflation.
That’s not going to happen in the USA. With no external payments due we have inflation when the economy is running hot. We’ve already had our inflation; it is visible in home prices, college tuition prices, healthcare prices... more fed action isn’t going to help those but it won’t rapidly turn our dollars into toilet paper.