Deflation is Coming

| Wed Jul. 14, 2010 11:12 AM EDT

John Makin is not exactly a raging lefty economist, but he's got his hair on fire over deflation anyway:

At this point in the postbubble transition to deflation, fiscal rectitude and monetary stringency are a dangerous policy combination, as appealing as they may be to the virtuous instincts of policymakers faced with a surfeit of sovereign debt. The result of Europe's embrace of fiscal rectitude will be — paradoxically in the eyes of some — to export deflation to the United States, Asia, and the emerging markets.

....The link between volatile financial conditions and the real economy has been powerfully underscored by the events since mid-2007. Growth has suffered and subsequently recovered given powerful monetary and fiscal stimulus. And yet, the damaged financial sector, unable to supply credit; a jump in the precautionary demand for cash; and a persistent overhang of global production capacity have combined to leave deflation pressure intact. The G20's newfound embrace of fiscal stringency only adds to the extant deflation pressure.

No wonder no country wants a strong currency anymore, as attested to by Europe's easy acceptance of a weaker euro. The acute phase of the financial crisis is over, but the chronic trend toward deflation that has followed it is not.

Italics mine. I think Makin believes that he's only saying the same thing that Milton Friedman would say if he were still alive. Unfortunately, conservatives no longer seem to care what Milton Friedman might say. After all, there's an election coming up. Haven't you heard?

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