>
> http://krugman.blogs.nytimes.com/2009/02/04/about-that-deflation-risk/
>
> Paul Krugman - New York Times Blog
>
> February 4, 2009, 4:42 pm
>
> About that deflation risk
>
> Look out below
>
> <snip>
>
> The figure above plots an estimate of the output gap -- the
> difference between actual and potential GDP, as a percentage of
> potential -- and the change in the inflation rate. Both series are
> taken from the IMF WEO database, for convenience, and use data from
> 1980-2007.
>
> It's not a perfect fit -- this is economics, not physics, and anyway
> stuff besides the output gap bounces inflation around from year to
> year. But still, there's a clear correlation (driven largely but not
> entirely by the deep slump and disinflation of the early 1980s) and an
> implied slope of about 0.5 -- that is, every percentage point by which
> real GDP falls short of potential tends to reduce the inflation rate by
> about half a point over the course of the year.
>
> And right now the CBO is saying that in the absence of a policy action
> the average output gap will average 6.8 percent over the next two
> years. Do the math: if anything like the historical relationship
> between output and inflation holds, we're looking at major deflation.
>
> OK, maybe that relationship won't hold -- getting to actual deflation
> may take a deeper slump than merely reducing the inflation rate. And
> maybe a regression driven in part by 80s data isn't a good guide to
> current events. But deflation is a huge risk -- and getting out of a
> deflationary trap is very, very hard.
>
> We truly are flirting with disaster.
>
> <end blogpost>
>
> Michael
> ___________________________________
> http://mailman.lbo-talk.org/mailman/listinfo/lbo-talk
>
Any opinions on the deflationary risk in Europe? Back in late November people were talking about it a bit and then they just stopped. Recently I came across this report:
http://www.voxeu.org/index.php?q=node/2795
But I haven't come across anyone putting forward any opposition to this which is substantial. And since many are saying that the ECB's current policies are overly cautious I can't help but be a little wary; add to this the general mood at the Davos and the fact that we in the peripheral Euro countries who are already almost definitely facing deflation wouldn't mind seeing the ECB pursue policies which would target it and its easy to see why I'd like some more pessimistic commentary.