Harvard Professor: World Economy Faces Deflation Risk

Central bankers and academics recently met in Jackson Hole, Wyoming for an annual international conference, and the theme this year was inflation.

But Harvard professor Carmen Reinhart suggests that more emphasis should have been placed on the deflation risk for world economies.

Indeed, Reinhart also suggests that the United States, Europe and Japan would be in the grips of another Great Depression if it weren't for the quantitative easing programs of each economy.

She just wrote an article that includes a chart of high inflation, moderate inflation and deflation trends from 1920 through 2015 (using data from 187 countries). Reinhart observes:

The share of countries recording outright deflation in consumer prices is higher in 2015 than that of countries experiencing double-digit inflation (7% of the total).

Here's a longer excerpt from the professor's Sept. 3 Marketwatch article titled "Opinion: Deflationary forces should worry the Fed" in which she comments further about the chart and data:

The risk for the world economy is actually tilted toward deflation for the 23 advanced economies in the sample, even eight years after the onset of the global financial crisis. For this group, the median inflation rate is 0.2% -- the lowest since 1933. The only advanced economy with an inflation rate above 2% is Iceland (where the latest 12-month reading is 2.2%).

While we do not know what might have happened were policies different, one can easily imagine that, absent quantitative easing in the United States, Europe, and Japan, those economies would have been mired in a deflationary post-crisis landscape akin to that of the 1930s. Early in that terrible decade, deflation became a reality for nearly all countries and for all of the advanced economies. In the last two years, at least six of the advanced economies -- and as many as eight -- have been coping with deflation.

Falling prices mean a rise in the real value of existing debts and an increase in the debt-service burden, owing to higher real interest rates. As a result, defaults, bankruptcies, and economic decline become more likely, putting further downward pressures on prices.

Irving Fisher's prescient warning in 1933 about such a debt-deflation spiral resonates strongly today, given that public and private debt levels are at or near historic highs in many countries.

You can read the entire article (plus review the chart) by following the link below: