Deflation Fear

Steve Roach, like me, has been worried for a long time about the possible deflationary consequences of the end of the stock market bubble.

History tells us that when major asset bubbles burst, deflation is often the result. That was true of the United States in the 1930's and Japan in the 1990's. Most are quick to claim that America is not Japan — that its more flexible, dynamic economy stands in sharp contrast to Japan's economic inertia. But the United States is already a lot closer to the deflationary edge than most concede — and it could go further.

I simply cannot understand why this is not a policy priority. It seems to me that in the absence of more stimulus, the best the economy can hope to do is to muddle through. The worst case scenario is, as Roach describes, a stubborn, long slump, as is taking place in Japan. Surely, the balance of risks warrants trying to err on the side of giving the economy more fiscal and monetary stimulus.

Discussion Question. If the economic stimulus does not come from U.S. fiscal and monetary policy, where else might it come from?