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business newsFive Things You Need to Know: Policymakers Operating Without a Playbook
Policymakers can make near infinite amounts of credit available, but if no one is willing to take it...
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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
Barely a day goes by without someone asking me the following question: Why, if we are supposedly experiencing deflation, do I keep seeing prices going up, especially at the grocery?
Fair enough. Let's look a bit closer at that question. Remember, deflation is a process, not an event. This point cannot be emphasized enough. It is not as if during a deflationary environment someone simply flips a switch and prices collapse overnight. The forces of deflation are driven by risk appetites, time preferences and consumer psychology.
As well, keep in mind that during a deflationary environment, because the currency increases, purchasing power can increase in real terms even as price tags remain stagnant. In other words, if the currency is appreciating, real purchasing power increases even if the price tags for milk remain the same. This is how the deflationary psychology receives subtle reinforcement.
2. Time for Policymakers to 'Drop Anchor'?
Sorry, but that time has long since passed.
A recent research note from BCA Research, "U.S. Deflation: This Time It's for Real" warns that "policymakers will need to work hard to anchor inflation expectations in positive territory, and ensure that a deflationary mindset among consumers and businesses does not set in."
That is true, but it was a better warning to have received in 2005, not 2009. Now, it is too late. Indeed, that "deflationary mindset" is precisely why the deflationary process will be so grueling and so difficult for policymakers to break.
3. You Can Lead the Horse to Water...
Wait, can't the Federal Reserve and Congress act to make credit available and stimulate the economy? That's a good question. In fact, the conventional wisdom making the rounds today is that greedy banks are simply refusing to lend money.
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