Deflation prospects

Jurriaan Bendien bendien at tomaatnet.nl
Fri Jul 11 15:27:14 MDT 2003


Ellen Franks last paragraph is really the most important:

But deflation renders monetary policy impotent. Monetary policy affects the
economy through the real rate of interest, which equals the nominal (or
stated) interest rate minus the inflation rate. Deflation is equivalent to a
negative inflation rate, so when prices fall real interest rates rise, even
if the Fed holds the nominal interest rate at zero.

What this really means is that the bourgeois assault against the working
class has been too successful for its own good. According to Milton
Friedman, the core problem causing the long recession was bad monetary
policy. But now if we have real interest rates rising, against stable or
falling prices, what incentive is there then to expand productive investment
?

J.






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