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Viewpoints: Deflation


Until recently, inflation had been a real concern for entrepreneurs. But with commodities prices tumbling, some experts warn of deflation. How big a worry is deflation, and how should business owners prepare?

Robert McElvaine, professor of history at Millsaps College and author of The Great Depression: America 1929-1941

• People are scared of where things are going and are cutting back on spending. We are much more likely to go into a decline in spending and demand, which is a major part of a deflationary cycle.

• Government action to fight deflation usually means trying to stimulate spending and the economy. In 1929, they started by trying to balance the budget, whereas we are running up new and enormous deficits.

• Deflationary periods harm debtors. If dollars are worth more today, they are harder to pay back than the dollars you borrowed. So if possible, minimize the debts you have.

Michael Mussa, a senior fellow at the Petersen Institute for International Economics, and the International Monetary Fund's chief economist from 1991 to 2001

• We're not in this situation now, but if consumer spending fell rapidly for a while, it is possible the general prices of goods and services would fall. I am not anticipating that there is much likelihood we will see that.

• In the 1920s and 1930s, general price deflation was almost always associated with an actual contraction in the supply of money. In this circumstance, we are not tightening the money supply.

• There is not much that individual businesses can do about deflation. Typically, they will need to adjust by lowering their prices.

Back to BWSmallBiz December 2008/January 2009 Table of Contents


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