Importantly, in the 1930s, in the Great Depression, the Federal Reserve, despite its mandate, was quite passive and, as a result, financial crisis became very severe, lasted essentially from 1929 to 1933.
The downturn following the collapse of Japan's so-called bubble economy of the 1980s was not as severe as the Great Depression.
After the 1929 crash, the Federal Reserve mistakenly focused its policies on preserving the gold value of the dollar rather than on stabilizing the domestic economy.
In the simplest terms, inflation occurs when there's too much money in the system. On the flip side, deflation occurs when there are too few dollars in circulation.
The idea that when people see prices falling they will stop buying those cheaper goods or cheaper food does not make much sense. And aiming for 2 percent inflation every year means that after a decade prices are more than 25 percent higher and the price level doubles every generation. That is not price stability, yet they call it price stability. I just do not understand central banks wanting a little inflation.
It was a lack of system that made the '30s Depression as inevitable as all others previously suffered.
Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation.
The problem is, to have prices fall would work fine if we didn't have all these built in rigidities on downward prices, because then things don't adjust, and that's how we have recessions and depressions, is prices and costs don't adjust together and they get out of whack, and we end up with dislocations.
Monetary contractions are attractive as the key shocks in the 1929-1933 years, and in other severe depressions, because there do not seem to be any other candidates.
The power to regulate the value of money does not involve a power to dilute the value of money by inflation, an absurd and self-serving rendering.
The real problem is deflation. That is the opposite of inflation but equally serious to the borrower.
To face deflation, you have to have people accepting it and not reacting to it.
The world economy is in a nosedive, and understanding what I call "depression economics" - the weird world you get into when even a zero interest rate isn't low enough, and a messed-up financial system is dragging down the real economy - is essential if we're going to avoid the worst.
Near-zero policy rates that may be considerably expansionary in an economy with high inflation could be contractionary when inflation is too close to zero, or worse, deflation has set in.
If the price of everything is going down, that's going to include wages as well. People will have an incentive to sit on their cash and not spend it.
If inflation is the genie, then deflation is the ogre that must be fought decisively.
The Great Inflation of the 1970s destroyed faith in paper assets, because if you held a bond, suddenly the bond was worth much less money than it was before.
The way you create deflation is you create an asset bubble.
For the producers, there was no reason to produce. You get money, but you couldn't use this money. For consumers, you could have money, but you have no way to use it because you go to the shop and see nothing.
