Central Bankers, Prime Ministers and Bond Holders Fear Deflation

The big boys - such as central bankers, prime ministers and big bond holders - are afraid of the threat of deflation.

An article today in the Guardian says:

With recession now a reality in major economies from Japan to Germany, policymakers are starting to fret about the chance of a phenomenon many see as even more deadly: deflation. ***

"Deflation is probably the worst case for the financial sector because it is very difficult to overcome. Therefore all central banks are going to do everything to avoid it," European Central Bank policymaker Ewald Nowotny said on Nov. 10.***

UK prime minister Brown expressed a similar sentiment:

Prime minister Gordon Brown told the House of Commons yesterday: "Next year, the problem is deflation and the problem of inflation close to zero."

Fortune Magazine writes:

Forget about inflation. The opposite threat - deflation - is what has policymakers sweating now.***

Bankers are worried that the destruction of trillions of dollars of wealth in the collapse of the housing and stock markets will stem demand for goods of all sorts, creating the kind of falling price environment not seen here since the 1930s. Among central bankers, there is "a real sense of concern about falling inflation," says Lena Komileva, an economist at interdealer broker Tullett Prebon in London. ***

Treasury bond investors are also betting on protracted deflation (and see this).

Update: Bloomberg writes:

"The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington.

Note: I think we've already got deflation, and that it will eventually give way to hyperinflation.