After beating inflation, central banks must guard against deflation (The Independent News)
Thursday, December 13, 2001
US interest rates come down but nothing happens. Welcome to the world of global deflation.
That may be a bit too stark. Some forecasters, Goldman Sachs for example, are now forecasting a resumption of growth in the US in the early part of next year. Wall Street seems to believe that, to judge by its recent buoyancy. But the disturbing spectre of Japan looms, where declining interest rates have failed to spur economic growth: the country is now in its third recession during the past 10 years.
Maybe it is this experience of Japan or maybe it is just that the economic impact of the attacks on 11 September are beginning to wear off, but some of the most thoughtful market commentators are beginning to focus on the longer term outlook – what will happen during the next 10 years rather than the next 10 months.
For example, Brian Reading, of Lombard Street Research, is talking about a bungee-jump cycle. Instead of looking like a V or a U, the trend of the world economy will be for a bounce off the bottom followed by recoveries and downswings of gradually decreasing magnitude. That would be dismal, but has been pretty much the experience of Japan through the 1990s – at least until the recent fall where the magnitude has suddenly increased in the wrong direction.
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