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Dangers Of Underestimating Deflation

ashraf-chart1.png?width=300Deflation = Low wages + negative interest rates

Deflation will be the dominating theme of 2015. Deflation occurs when prices of production factors (wages and interest rates) fall to the extent of limiting labour and capital from drawing higher prices. The culprit to these conditions is typically an excess supply of labour and capital to the extent that wages and interest rates weaken substantially until they draw sufficient demand to the point of stabilising their price.

But as demand for labour and capital fails to fill the supply of workers and available liquidity, the spiral of excess supply takes over wages and interest rates remain weak, and even negative. Deflation hurts borrowers relative to lenders. Countries whose central banks combat deflation, or conduct reflationary policies, should see their…

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