Saturday, April 19, 2014

Sweden Put Itself Into A Deflationary Spiral Thanks To Very Serious Central Bankers

The central bank in Sweden decided that there was a threat of inflation.  Therefore, the bank did the prudent thing and used monetary policy to raise interest rates.  The serious people in Sweden applauded the move and everyone was happy.  On the way to the bliss, promised by the very serious people, Sweden discovered that it got more than it had asked for.  Prices began to fall and they have not stopped falling.  Sweden is now in the throes of a self inflicted price deflation.  The very serious people who engineered the deflation argue that it could not have been predicted.  One economist warned about the danger of deflation and he was put out to pasture.  Sweden will now learn a simple lesson.  Monetary policy can easily put a halt to price inflation.  It is much more difficult to reverse a deflationary spiral.  Consumers will delay purchases in the hope that they can purchase later at lower prices, and the cost of debt increases because it has to be repaid with a more valuable currency.  Wages may also have to be cut as producers receive lower prices for their products.  Consequently, demand collapses further and the the next round of price cuts commences.  Welcome to Japan.

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