Deflation fears mount as downturn deepens

Published: Nov. 1, 2008 at 11:24 AM

NEW YORK, Nov. 1 (UPI) -- Some U.S. economists say they have gone from worrying only a few months ago about price inflation to a much more dangerous price deflation scenario.

Deflation is a dreaded economic situation because there are few if any known fixes, economists told the New York Times Saturday. It happened in the Great Depression and in Japan in at the end of its 1980s real estate bubble, lasting 10 years. In deflation, prices of goods and services drop precipitously due to falling demand, which in turn triggers more job layoffs, leading to even lower demand and lower prices -- thus creating a destructive loop.

Unlike inflation, it can't be addressed by manipulating interest rates. Companies faced with falling prices for their products won't borrow even at zero percent interest, the newspaper said. While deflation is still considered unlikely by most, some economists told the Times conditions seem ripe.

"(Deflation is) a meaningful risk at this point," said Nouriel Roubini, an economist at New York University's Stern School of Business. "We could get into a vicious circle of deepening malaise."

"You get this adverse feedback loop where assets keep falling in value," added Robert Barbera, chief economist at trading firm ITG.

© 2008 United Press International, Inc. All Rights Reserved.
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