Neil Irwin tries to summarize last week…

There are two problems when I read the very nice summary:  (1) If the stock market rises 3% this week, does that mean his analysis of last week is wrong?  Always a bad idea to theorize about the longer term in order to explain short-term stock market fluctuations.  (2) He does not explain why deflation is going to be a bad phenomenon… do his readers know?

The world economy still hasn’t recovered from the last recession. Moreover, investors lack confidence that policy makers have the tools they would need to avert a new slide into recession after years of throwing everything they have at it to try to encourage recovery and prevent deflation, or falling prices. Coincidentally, commodity prices are declining largely because of supply, but the timing of that decline is bad: It makes the risk of deflation that much more severe.  Add it all up, and the markets aren’t betting on catastrophe per se; if they were, stock prices would be down more. But they are betting that central banks and other policy makers aren’t going to be able to get a handle on global deflationary forces that have been unleashed. That means we could be in for a slow grind in which global growth and inflation both stay below where people across the advanced world would like it to be.

via The Depressing Signals the Markets Are Sending About the Global Economy –

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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