Deflation defeated

Deflation defeated

Policymakers have unleashed an arsenal of weapons to fight the threat of deflation - cutting interest rates to zero, buying government and private bonds, making cheap loans to banks and engaging in forward guidance.

They are worried that a sustained period of stagnant, or even falling, wages and prices could create a debt trap where indebted households, firms and governments are unable to repay their loans. In this scenario, they fear it would then lead to a death spiral of bank losses, credit restrictions, weaker demand, falling prices, and further defaults. In general, most policymakers fear victory is not yet secure. They believe there is still ample slack in the economy – primarily due to large numbers of underutilised workers employed part time and unable to find a full-time job. In theor...