Long Live the Deflationistas
Business Week believes "poor pricing power" is the problem.
The attention of policymakers and economists is trained mostly on a looming inflation threat, the drawback you typically associate with enormous amounts of liquidity pumped into the financial system and an economy rebounding from a severe recession. A negligible 0.1% rise in the March consumer price index and comments from the Federal Reserve that interest rates will remain very low for an extended time don't appear to confirm that risk, however.
Some economists and analysts see reasons to worry about the opposite scenario—a period of deflation if companies feel compelled to lower prices to jump-start demand in a sluggish economic recovery burdened by high unemployment. Consumers initially embrace falling prices, but if it becomes deep and pervasive enough, deflation will eventually push employers to cut wages and ax jobs, driving worried consumers into complete retreat. Perhaps most dangerous, deflation hikes the cost of repaying debt by boosting the value of the dollar.
That the value of the U.S. dollar is down 30% from its peak several years ago should have been sufficient to restore the U.S. to a fairly competitive trade position, even given the euro's recent decline, says Barry Bosworth, senior fellow at the Brookings Institution in Washington. But U.S. exports, which were robust in the first half of 2009, have disappointed since then. "For the U.S. to have a positive outlook, we have to have an export-led economy," he says. "We can't expect [domestic] construction to come back any time soon."
The first problem with the deflation argument is that you can not necessarily label fear as forced price cutting. The second is that when the economy has been distorted beyond natural "fluctuations" found in the wild, it's difficult to define any of it using the same parameters as one that isn't manipulated beyond recognition. All that to say desperation is not deflation.
Ask the Bank of Japan about deflation. Then we can whine about the bitch ass consumer who refuses to carry the upward leg of this "recovery" forcing prices down.