All right. This blog having said last week that deflation is
dangerous and this week that inflation is dangerous, the impatient reader has
every right to ask, “Which is the real danger?”
That is rather like asking which is worse, cholera or
Both are dangerous. Either can happen after the other. Both
– or at least symptoms of both – can even appear simultaneously.
All a general blog like this can do is offer a general
prediction – and let each business adopt the measures that best suit its
Ben Bernanke, Chairman of the US Federal Reserve, has
astonished many by predicting
that the recession may end this year.
In fact, since he is using the word “recession” in the
narrow technical sense of actual economic contraction, he might well be right.
The problem is that this does not mean that things will then
immediately get better. The high levels of growth which we took for granted
will not return in the foreseeable future. This means that the economy will
take a long time to get where it was before the contraction began.
The formal end of the recession may actually be the time
when its full effects really begin to be felt by most businesses.
They will be made worse by the fact that we will then have
to start paying the costs of ill-advised panic measures taken by governments
over the last six months.
So the best prediction is that deflation itself will not
last long, but its effects will be with us for some time, and these effects
include the inflationary pressures that have been increased by government
In other words we expect a relatively short period of
deflation followed by a longer one of inflation.