via AlterNet:
Radical Solutions for a Crazy Economy
By Nouriel Roubini,
Forbes. Posted November 28, 2008.
The fight against a deadly combination of stagnation/recession and deflation has to be unorthodox. The U.S. economy is confronting a toxic mixture: deflation, a liquidity trap and debt deflation, as well as rising household and corporate defaults. Put plainly, the signs of a "stag-deflation" -- a deadly combination of stagnation/recession and deflation -- are now clear.
We are in a severe recession, and now the recent readings of both the Producer Price Index and the Consumer Price Index show the beginning of deflation. The slack in goods markets -- with demand falling and supply being excessive (because of years of excessive over-investment in new capacity in China, Asia and emerging market economies) -- means firms have lower pricing power and a need to cut prices to sell the burgeoning inventory of unsold goods.
The slack in labor markets means lower wage pressures and lower labor-cost pressures; and the slack in commodity markets -- that have already fallen by 30% from their summer peaks and will fall another 20%-30% in a global recession -- means lower inflation and actual deflationary forces.
The Risk of a Liquidity TrapWhen deflation sets in, central banks need to worry about it -- and worry about a liquidity trap. Take the example of the 2001 recession: That was a mild eight-month recession in the U.S. and was over by the end of 2001. But by 2002, the U.S. inflation rate had fallen toward 1%. The Fed was forced to cut the Fed Funds rate to 1% and Ben Bernanke (then a Fed Governor) was writing speeches titled "Deflation: Making Sure "It" Does Not Happen Here."
So if a mild recession that was not even global led to deflation worries, how severe could deflation be in a recession that even the IMF is now forecasting to be global in 2009? .......(more)
The complete piece is at:
http://www.alternet.org/workplace/108958/radical_solutions_for_a_crazy_economy/