Make sure 'it' doesn't happen here

With the end of the recession in sight, investors in the US need to be wary of the example of Japan's markets in the 1990s and beware of broad-based economic deflation

Japan’s experience in the first half of the 1990s infused American policymakers with a simple belief. Make sure “It” doesn’t happen here. By “It”, they mean broad-based economic deflation. Economists define deflation as a general decline in prices for goods and services. The theory goes: Once a recession sets in and aggregate demand begins to break down, price cuts ensue as a means to incentivise buyers to absorb excess supply. If buyers believe prices will continue to plunge, their incentive to postpone consumption increases as their dollar’s purchasing power continues to grow. In more ...