Fears that a battered global economic economy has never quite reached a sustained level of recovery have begotten new anxieties about the risk of deflation — a self-reinforcing spiral that drives down investment, spending, lending and employment.
Japan has been a case study of this kind of an economic straitjacket — at least until its recent aggressive monetary easing and stimulus policies known as 'Abenomics,' which only recently lifted the Asian nation into mild inflationary territory.
Many commentators, noting a disinflationary trend — where the price level continually decelerates toward zero — have suggested that monetary authorities and economic policymakers need to maintain easy money policies to thwart this danger.
The American Enterprise Institute's John Makin has repeatedly made this case, and PIMCO bond manager Bill Gross called deflation the "whisper word" among economic policymakers at Davos.
Entering the fray with a dissenting view comes Bank of America chief economist Mickey Levy, who, writing on policy research site Vox, warns that broad assessments about deflation are misleading, and can lead to misguideded policies.
Levy notes the coincidence that the United States, Europe and Japan have presently converged around a very low inflation rate of around 1%, but stresses the importance of understanding just how different is the situation of these three economic powers.
All three have different stories that belie the assumption common to popular commentary that deflation is harmful and must be aggressively combated.
Yes, the U.S. has been experiencing disinflation — the core personal consumption expenditures index, for example, has fallen to 1.2% from 1.8% in the previous year.
Yet "far too little attention has been paid to the fact that the vast majority of the U.S.'s recent disinflation has resulted from technological innovations that raise economic performance and potential," Levy writes. "This is very different from disinflation/deflation associated with insufficient aggregate demand."
The Bank of America economist describes a largely positive picture of the U.S. economy, where second-half 2013 GDP grew at an annualized rate of above 5%, significantly higher than the previous year's 3.1%. Together with an improving job market and rising home prices, Levy puts the probability of deflation in the U.S. at "near zero."
