STATE WIDE--While the Fed decided to raise interest rates again by another.75 of a point, some economists think it would be a good idea to go the other way with interest rates, to prevent deflation.
“I think on the face of it a lot of people would hear deflation and the initial reaction would probably be, thank goodness prices are gonna slow down and come back to Earth a little bit,” said Damian Dunne, vice president of Your Money Line, on the Pete the Planner radio show. “But, that’s not the sort of deflation we’re talking about.”
Deflation can be described as a kind of destructive whiplash that results from both inflation and what the Fed is doing to fix it, which is raising interest rates to slow down consumer demand, and thus prices.
LINK: An explanation of deflation
A world-renowned economist, Cathy Wood, along with other people with a vested interest in the economy, like Elon Musk, have been warning and writing about the risk of deflation since last year.
The risk for you is that prices bottom out, but so do job opportunities. Companies are no longer able to maintain status quo because prices get so low. So, companies that make things have to let people go.
“We’re talking about some very, very disruptive deflation, where people are losing jobs, companies are pairing back, the stock market is in turmoil,” said Dunn. “It would be a really quick whiplash from prices are going up, going up, going up, and then prices are going down. That’s good. But, there’s gonna be a lot of other fallout that goes with it.”
Peter Dunn, host of Pete the Planner, explained that while prices come down and it seems as if that is a good thing, because they are more affordable, suddenly there’s another supply problem because companies “throttle supply of those goods, which leads to layoffs”.
Both men said the Fed has been reactionary throughout the current economic trouble, trying to take the sting out of whatever happens. That leads to artificial control of the economy by the government.
The solution to deflation is to prevent it, by cutting interest rates and allowing some of the economic sting to happen, which allowing it to correct itself naturally, say economists.
