Why Deflation ( not an Inflation ) is a serious problem for US economy?

This might surprise many of the folks here on blind community but ' US has a serious Deflation problem ' Now, before we start trashing this thread with tons of " How Fed has been printing money and causing inflation..etc. " Let's understand, what exactly we are dealing with here. *** What is inflation and how does it affect the economy?*** - inflation is a sustained increase in price of good / sustained decline of purchasing power of money (here USD) *** What's the role of Fed ? *** - in simplest terms, to achieve Maximum employment, stable prices for goods and moderate long term employment via monetary policies. - supporting conditions for long-term economic growth and maximum employment. Refer: https://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy *** Monetary policy & interest rate impact on economy *** - Monetary policy primarily deals with the management of interest rates and liquidity which controlled by Fed. - This is a key driver in terms of expanding and contracting the money supply to influence inflation and growth and it has less impact on the real economy. Refer: https://www.investopedia.com/ask/answers/100314/whats-difference-between-monetary-policy-and-fiscal-policy.asp *** The scenario *** - Since 2012 , The U.S. inflation rate has been below the Fed’s 2 percent inflation target. - This may seem counterintuitive but Fed has been trying to push an inflation to 2% for longer term but failed to achieve, a rampant stimulus, cash handout ( aka "Helicopter Money" ) haven't even moved the needle. - We sort of just accepted that, "Just printing money doesn't guarantee inflation." - Every time Fed tried to do it , market took a serious dive in last 30 years when inflation rate barely touched ~2% - 2.5% ( attached graph) - Inflation upto certain extent aka moderate inflation is a good thing for appreciation of goods and services and economic growth but an inflation below 2.5% is and should be fairly concerning for multiple reasons. - a relatively low inflation for longer term ( like this ) indicates the failure for this economic machine to achieve it's inflation target which is not too aggressive ( 2.5%) - Very low inflation is typically associated with an increased probability of falling into deflation. Deflation is an economic condition in which prices and wages are declining on average. Deflation is indeed a weak economy. Refer: https://www.stlouisfed.org/publications/regional-economist/first-quarter-2018/why-inflation-so-low *** Japan - a perfect example of Deflating economy? *** - 1991 to 2001 is know as " The lost decade " in Japan due longer period of low inflation that is associated with a secular stagnation. - in 80's Japanese GDP growth rate was 3.89% higher than US GDP growth. - However; From 1991 to 2003, the Japanese economy, as measured by GDP, grew only 1.14% annually. This was probably the lowest among developed countries. - The main causes of this economic slowdown were rising interest rates that created a liquidity trap at the same time that a credit crunch. - higher rates promotes savings than borrowing. However, when people are most in needs of credit ( very common economic behavior among developed countries) They need to be " incentivised " by lowering interest rates which fuels Short term borrowing to increase consumption and hence boosting the economy via consumption. - Bank of Japan limited the money supply ( liquidity in market) in the late 1980s then BoJ continued to raise interest rates with a notice to limit rising real estate prices. ( Same principle behind higher mortgage application and refinancing application when fed cuts rate and real estate look lucrative as home buyers are given incentive to borrow more money) - higher interest rates somehow controlled real estate prices speculation but that pushed overall economy in deeper hole. - In 1991 major drop occurred in both equity and real estate prices and Bank of Japan started cutting interest rates rapidly but it was too late to act as liquidity trap begun. - A liquidity trap is an economic scenario in which households and investors sit on cash; they have no confidence that they can earn a higher rate of return by investing, they believe deflation is on the horizon (cash will increase in value relative to fixed assets), or deflation already exists. - in Deflation, People and investors simply don't spend or invest. They believe goods and services will be cheaper tomorrow, so they wait to consume, and they believe they can earn a better return by simply sitting on their money than by investing it. - this was really dark period for Japanese economy. You can read more on this in the given link. Refer: https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp#:~:text=What%20Was%20Japan's%20%22Lost%20Decade%22%20Real%20Estate%20Crisis%3F&text=From%201991%20through%202001%2C%20Japan,pace%20than%20other%20industrialized%20nations. The U.S. isn’t the only country facing this issue. Other developed countries are dealing with low inflation. ******* Just realized that this article got much longer than I expected with a flow and interrelated topic , hope you find this helpful ******** #tech #finance #stock #stockmarket #stockoptions #stocks #financialtimes #investment #investments #investorsbank #market #equity