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Central Banks reported a new phenomenon: deflation |
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Saturday, 11 October 2008 |
In the current phase of financial crisis will be assigned a new threat: deflation, says Bloomberg.
Falling property prices and raw materials and stringent conditions on loans create preconditions for a long period of lower prices as a whole. While inflation remains a threat to the central banks of many countries, only a few months after the sharp rise in oil and food, emergency plans and measures to stimulate the economy faces a risk of failure and the risk of transfer of price declines on the overall economy.
The ghost of deflation can be pulled out of the closet again in coming months, says Jorg Kramer, chief economist at Commerzbank AG in London.
The likelihood of a global recession induced memories for ten years to fight deflation in Japan with 90-years of last century. Speakers of English and European Central Bank Jean-Claude Trichet and Marvin King may be forced to follow the example of the Fed and reduce interest.
The scenario of deflation is likely to develop the following: banks worldwide will reduce further borrowing, which would "choke" growth. This will lead to a further decline in housing prices, which will accrue more losses for banks and accordingly they will hinder further loans. Business will become almost impossible to raise prices.
Will enter in a vicious circle deflation, says Tony Tan fund Government of Singapore Investment Corp.
Definitely we are more concerned about deflation than inflation, commented David Owen, an economist at Dresdner Kleinwort Group Ltd. London. "Central bankers must lower interest rates and to keep these levels for some time," he says.
Last week, Trichet said the ECB is contemplated reduction of interest and interviewed 46 of 61 economists by Bloomberg News expect the English Central Bank to reduce interest rates at least a quarter percentage point on Oct. 9 from the current 5 percent.
Fed already answered once this decade, the threat of deflation. When inflation was 1 percent in 2003 then chairman of the Fed Alan Greenspan interest to reduce the 45-year minimum of 1 percent and then remain at that level for one year. According to his critics this action is hit assist in the real estate market and loans that are now in crisis.
This time, however, the crisis lies in an ever more inadequate banking system, which may not be able to continue to grant loans that do accordingly hit the economic machine.
But not all economists are so pessimistic set. According to Jorg Kramer is more likely slowdown of inflation than deflation. |
Money 
