Shargash, Mcgowanmc...I could not believe my eyes when reading the bit of rubbish posted regarding fighting deflation vs inflation.

One can only marvel at statements such as: 'Inflation is a more dangerous economic ill than deflation because it is so much harder to cure. Falling prices can be cured easily enough. All governments and central banks have to do is cut interest rates, cut taxes and boost public spending. These are popular steps that readily win political and business support.'

Lets look at the example of Japan. Japan cut their prime rate to ZERO PER CENT and what happened? The Yen became a currency for the carry trade use and Japanese banks became zombiezed. ZIRP...and, Japan is still stuck. Japanese banks provide services for the carry trade which does absolutely nothing for the Japanese economy. The truth is: No one knows how to fight zero bound deflation or Japan would not still be in ZIRP land. If deflation is so easy to remedy then why was the US stuck in a deflationary depression for 12 years leading up to WW2? As far as boosting public spending?...Well, the collapse of housing prices has left many US consumers tapped out, unable to access home loan lines of credit because their homes are not worth what is owed on them. The US consumer is not going to lead the US out of this train wreck recession unless home prices drop to or below historical norms or wages are raised enough for consumers to once again have discreationary income...and what does the Fed fear more than anything? The consumers perception that inflation will not 'stay anchored', but continue on an upward climb. As Von Mises said 'once the consumer becomes firmly convinced that a fiat currency will continue to lose value (purchasing power) then that fiat currency is finished.' paraphrased. Inflation can spiral out of control very quickly...check out the examples of Weimar Germany, Zimbabwe, and countless others.

Lets look at the other rediculous statement:'Inflation is a more dangerous economic ill than deflation because it is so much harder to cure.' That is total, inmitigated, BS!

Inflation is the one thing that central bankers know, without a doubt, how to cure. 'Mr. Volcker inherited about as big a mess as we have today. He worked out what he had to do and did it with unusual lack of concern about what Congress thought of the necessary pain involved and the number of enemies he might make. He paid the price for forthright behavior by being replaced, despite a record for correct and tough behavior that makes for the most invidious comparison today.'

What did Volker do? He increased interest rates till the weak sisters collapsed and cleansed the economy of marginal businesses that were using capital inefficently. Was it painfull? Yes. Did it work? Yes. Did he create a lot of enemies and eventually get fired? Yes. Would Volker do the same thing today? Yes. Come back Paul Volker...we need you desperately!

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080505/REG/306...