Deflation is an economic problem that has become synonymous with the Great Depression, but in fact, there is little evidence to support the idea that deflation leads to depression.
Bloomberg's Matthew Lynn writes, "Deflation is no threat at all. It doesn't prevent an economy from functioning, and it doesn't stop it from recovering either. The evidence suggests a period of sustained deflation might be what indebted economies need to get them back on the right track."
Deflation is not something to be taken lightly, however, because among other things, it may lead to consumer complacency due to falling prices, inventory surpluses, overcapacity, and thus unemployment. Haven't we already experienced that, globally?
Now that I've said that, the question remains, is it still a risk?
Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, February 5, 2010
