Tuesday, October 20, 2009

A Nobel Prize-Winning Economist's Talks "Deflation"

While some are saying that the threat of deflation has been averted, others are saying saying the opposite.

Concerns about falling prices ran high last year. They've faded recently as consumer spending has stabilized, and many economists say the recovery likely has started. Charles Evans, head of the Federal Reserve Bank of Chicago, declared last month: "Deflation has been averted."

Not so fast.

Columbia University's Joseph Stiglitz, a Nobel prize-winning economist, believes an extended bout of deflation is not only possible but likely.

"I think we are on the verge (of persistent deflation)," he says.

When nobody is buying, either because they are afraid to spend or they do not have anything to spend, prices can drop. They can even drop precipitously, causing an economic sinkhole to develop that can cause higher unemployment and larger profit losses.

A sour Christmas would be very bad.

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