Your comments are well made and believed meritorious, and I have learned more from your remarks than what I can respond in return. I did not reply earlier due to insufficient time.
Deflation is commonly defined as a "Persistent Decrease in General Level of Price" which once started is difficult to correct to correct as consumers expect prices to go lower and stop buying which in turn causes manufacturing to suffer, place workers out of jobs etc, compounding the problem. Although we recently have had disinflation, the US has not had deflation since the 30ties.
As to whether a stock market fall would cause deflation, I certainly have no expertise to appropriately reply, but the possibility seems plausible. Certain economists contend that unless a very severe crash would occur over a long perod of time, owing to the considerable consumer wealth built up due to the market rise, the consumer would still have sufficient assets to maintain spending, although at a reduced rate. Others contend that since present consumer savings are at record lows, if there were a sustained fall, the consumer would not have a bank of savings to rely for spending purposes and thus deflation may follow. The FED aware of this risk would probably quickly reduce rates and add liquidity to cushion a market fall.
If one thinks about it, the Fed is presently placed in an untenable position. Since the dollar is a prime reserve asset, many contend that it should reduce rates in the interest of the global economy. And recent Fed minutes indicate that it has taken that into account when setting domestic policy. But as one can only effectively serve one master, any compromise may be detrimental to either global or domestic concerns, or both. |
