Should Deflation and Recessions Really Be “Forbidden”?

Quotes from Lakshman Achuthan from the Economic Cycle Research Institute (ECRI):

Regarding a question on how central banks can “fix” deflation:

…[central banks] need to stop “doing“, you gotta’ stop digging because every time…look, what a central bank can do, at the end of the day, is pull a little bit of demand forward from next quarter, or two; and after you’ve done that for 5 or 6 or 7 years there’s nothing left of the future; they can’t fix structural things — that’s not fixable by monetary policy.

…the idea that a recession is the end of the world is a poor idea in a free market economy…there’s a lot of collateral damage that can occur, and I don’t dismiss that, but it’s cathartic to have a recession from time to time when you are in a free market economy; and here in the wake of the global financial crisis, recessions are forbidden, and “we” will do almost anything — which you’ve seen from the monetary side — to try to avoid one…

Low interest rates means that there’s huge capacity, which means that there’s global deflation in goods, which gets you trapped and you can’t invest in productivity enhancing “stuff” because there’s too much capacity.

He also mentions, “monetary policy…acts with long — and variable — lags”.

ECRI is observing a slight rise in inflation and weakening growth — both of which are consistent with the symptoms of an over-indebted economy referred to in the Third Wave Finance article Economic Constraints and Policy Options.

An over-indebted economy can have transitory spurts in economic growth, inflation, and high-grade bond yields; but they are unable to be sustained due to the constraints of unproductive debt.  Non-transitory inflation (persistent high levels of inflation) — resulting from monetary policy stimulus (LSAP, QE, etc.) and potential fiscal policy stimulus — is unlikely to emerge while unproductive debt levels are elevated.



Source: Cyclical Update (September 16, 2016)