Several weeks ago I wrote a background piece about deflation, what it is and what it does. In it I noted:
And just as bull markets tend to be long and slow (while bears are fast and brutal), inflationary times tend to be long, often multi-generational arcs, with deflationary times the opposite.I'm proud of that article, but I want to offer a small addendum, based on this, from Paul Krugman recently:
Jon Hilsenrath has a nice piece on the puzzles of gradual deflation, Japan-style. But I’m not sure whether readers will understand quite what the puzzle is — and they certainly wouldn’t gather from the article that there’s actually a literature about this puzzle.Bottom line — deflationary episodes are frequently sharp and ugly, a real jerk on the chain, but not necessarily. This may be a one of those "not necessarily" times.
[wonky middle part, with equations]
Prices fell sharply at the beginning of the Great Depression, when the real economy was collapsing; but they began rising again when the economy began to recover, even though there was still a huge negative output gap. Japan [however] has been depressed since before incoming freshmen were born, but its chronic deflation has never turned into a rapid downward spiral.
[wonky "hmm, here's why"]
[I]t’s important to take account of downward rigidity so as not to get fooled into accepting a persistently depressed economy as normal. . . . After all, all indications are that we’re going to be dealing with a depressed economy for a long time to come. [my emphasis]
GP
