The U.S. economy is now experiencing a sustained reduction in the general level of prices, or deflation, says Richard W. Rahn.
Falling prices allow consumers to buy more with their money. However, unanticipated inflation or deflation leads to a misallocation of resources, increased risk and lower levels of investment and growth. In contrast, a stable price level enables producers, consumers, debtors and lenders to make long-term plans.
The Federal Reserve has been increasing the money supply rapidly in recent months. Unfortunately, the Fed waited too long to start cutting interest rates. Now the real rate of interest has actually risen for many less credit-worthy borrowers and consumers.
We can’t spend our way out of deflation, says Rahn. But monetary stability and rapidly removing tax, trade and regulatory impediments to economic growth would help.
Source: Richard W. Rahn (Discovery Institute), Defeating Deflation, Commentary, Wall Street Journal, November 19, 2001.
For text http://interactive.wsj.com/articles/SB1006122442187106640.htm
For more on the Economy http://www.ncpa.org/iss/eco/
FMF Policy Bulletin\27 November 2001
