As with so many illnesses, focus only on deflation as a state and you will end up more likely to get it and to mis-treat it when it happens.
Scarred by the lessons of the Great Depression, where an exceptional and self-reinforcing deflation, or general fall in prices, took hold, central bankers have fought signs of it since the financial crisis with everything they have.
This ignores several truths, some of them argued in a recent study by the Bank for International Settlements on deflations over the past 140 years.
The fall in the prices of goods and services has only a weak link with growth. Asset price deflations, such as the bursting of the property bubble, are more damaging.
Monetary policy leading up to a property bubble, rather than simply mopping up after one, is key. And to a central banker with a mop everything looks like a puddle.
To a central banker with a mop everything looks like a puddle
The emphasis on fighting deflation with monetary policy is strong precisely because it becomes so politically difficult to stimulate with government spending in the aftermath of a debt-fuelled bubble. Just because someone confiscated your shovel doesn’t mean you ought to dig a trench with a hammer.