The Really Dismal Science

Robert Prather looks at the new issue of The Economist, and worries about the risks of deflation:

Deflation wreaks havoc on asset prices, many of which have been borrowed against. This country hasn’t had a deflationary period since the Great Depression where bank failures and a near collapse of the monetary system caused unemployment to reach 25% and had people sticking money in their mattresses.

The only points I didn’t see Robert cover both work in our favor to mitigate the risks of deflation.

First, unlike Japan and Germany, we still have a growing population. Younger people buy more stuff and borrow money more readily. Second, thanks to under-regulated (by EU or Japanese standards) financial markets, asset prices here are allowed to collapse pretty damn quickly. Thus, we are generally able to avoid the political temptation to prop up economic losers.

The real deflationary threat in this country isn’t aggregate demand-side collapse or asset-price failure (at least at first). The real threat lays in Third World nations looking for quick US dollars, and the ability to get them through cheap manufacturing.

Call it “Artificial Productivity Gain Deflation.” I’ve never heard of such a thing, but it seems like a genuine risk. Maybe we can get Megan McArdle to weigh in on this one.