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With the economy in the U.S. "contracting significantly" in the fourth quarter, as San Francisco Fed president Janet Yellen recently put it, an issue that was practically unthinkable three months ago is now, for the Fed, front and center: the possibility of the U.S. entering a phase of deflation, or protracted declines in the general price level. In its statement accompanying the most recent interest-rate cut, the Fed said, "In light of the declines in the prices of energy and other commodities and weaker prospects for economic activity, [the Fed] expects inflation to moderate...
...Some economists - for now a minority, to be sure - believe the U.S. is at serious risk of a deflationary spiral, even if just a quarter ago, inflation was above the Fed's comfort zone of 2% to 3%. "Compared to Japan's problem a decade ago, this crisis is unfolding much faster and spreading wider due to financial globalization," says Shanghai-based independent economist Andy Xie. A financial system unable or unwilling to lend, a tapped out U.S. consumer, and business now retrenching - and laying people off - all are a formula for possible deflation. What's so wrong with declining...
...longer than you can remain solvent." Considering the recent volatility in stocks worldwide, irrationality appears to be the order of the day. Rarely have investors been so prone to bouts of panic selling, punctuated by spasms of equally frenzied buying. The Dow Jones Industrial Average index lost nearly a quarter of its value between Oct. 1 and Oct. 27, including an epic 700-point drop on Oct. 15. The carnage was followed on Oct. 28 by a 900-point rise, the second largest points gain on record...
...consumer confidence and spending have plunged. China's Guangdong province, the boiler room of the global expansion earlier this decade, recently reported its economy in the first nine months of 2008 grew at the slowest pace in 15 years. Most of the G-7 economies have already experienced one quarter of negative growth and will likely experience a recession. Small emerging economies are under serious strain as they seek International Monetary Fund bailouts...
...This dark outlook augurs a U-shaped recession. The downturn, which began in the fourth quarter of 2007, will be longer than the usual 18 months. The recovery will probably be anemic and for the next few years the U.S. economy is likely to grow below potential. That's the best-case scenario. It suggests that we are many months, and perhaps thousands of Dow index points, from a market bottom...