Prior to the past decade, the Federal Reserve and U.S. government controlled all the resources they needed to implement monetary and fiscal policies required to salvage the U.S. economy. At the same time, because the U.S. economy was so big and powerful, its recovery alone would create the momentum needed to enable our trading partners to recover as well.
But today, we live in a truly global economy, in which the U.S. must increasingly coordinate its monetary and fiscal strategies with those of our allies to prevent global economic catastrophes akin to the Great Depression.
The combination of three forces — productivity growth, shrinking consumer demand due to demographic shifts, and protectionism — could lead to a 1930s-style depression in the decade from 2010 to 2020. Fortunately, there may be ways we can prevent this from happening. In fact, an assessment of the 2001-2004 period indicates that new international mechanisms are in place to prevent such a “death spiral.”
To understand why this trend has gotten so little attention, it’s important to understand that each of us is a product of his or her own experience. Although some of our fathers and grandfathers remember the Great Depression, most of us have grown up in an economy that has been constantly fighting inflation. Some of us have seen it spiral upward to uncomfortable and unhealthy levels at times.
The good news is that during the 1980s and ‘90s, most industrialized countries, the U.S. included, brought inflation under control. And since the most recent economic slowdown ended here, we’ve maintained a very low rate of inflation, at less than 3
percent. We’ve also experienced some of the lowest interest rates in history, which have only recently begun to rise as the Fed moves to keep the economy from overheating.
But with inflation and interest rates so low, another specter has raised its head and caused some concern: What if inflation went to zero? What if prices stopped rising, and actually began falling? Wouldn’t it be smarter to defer purchases until items became cheaper? What would this do to the economy?
Take a look at what’s happened in Japan. For the past decade, there has been a general decline in consumer prices of about 1 percent a year across the board, and that has...
