Is it the call to another Great Depression?

"The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy."

Milton Friedman

After the financial crises of the 2008 Federal Reserve (C.B of US) injected money to uplift the credit market. Interest rate was cut down which was already been kept low for about a decade. Normally when interest rate are kept low and large amount of capital is injected in the market it leads to inflation, and as it was expected in the case of Federal Reserve’s easy monetary actions. But the symptoms are showing that another economic depression is going to hit the global economy and large economies are going to face deflation.

One of the drastic reasons is that the US economy is facing and unemployment rate of 9.5% and a fuller picture of unemployment shows a full 16.5% is not been paid. Thus inflation is not possible when people have no money to spend and when they have so much debt to pay. The individual saving rate has increased from 2% to 6%. So it will be helpful to individual to pay off their debts but it means less money to get the economy moving.

Meanwhile with all the C.B’s money and assurance, the financial institutes and not willing to lend and the investors are not willing to spend and sitting on the sidelines. They're waiting on a better economy - and the fact that worker productivity has yet to skyrocket (increased productivity is usually a sign that precedes increased hiring) suggests that they may be waiting for a long time.

So as the economies become slower the risk of deflation is increased. In US during June the overall prices (excluding food and energy) was up just 0.9% the slowest increase in last 44 years in US. Federal Reserve had announced to adopt the easy monetary policy as it will continue to buy treasury bills from the market in order to help the economy by keeping interest rate low.

The plunge in the housing market has been great news for anyone who could buy a house (and get a loan). But on the whole, it's been devastating to communities (which have been decimated by foreclosures), homeowners (who lost so much equity), and the overall market (many homeowners chose to stay put rather than sell for less). And no one knows when it's going to end, both because some buyers are still hoping that prices will fall further and because there's so much inventory out there. It's a vicious spiral that just keeps swirling.

Imagining this scenario on a broad scale explains why everyone is so worried. Once deflation starts, it's hard to stop it.

Unfortunately, the only solution to deflation is increased employment, investment and spending. After two years of heavy monetary intervention, we're not even close. The Fed is right to be concerned. Now it's time for Washington to start paying attention.

This article appeared on page E - 10 of the San Francisco Chronicle, Reviewed by Muhammad Abubakar Ali