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However, we rarely discuss deflation in economics courses. The last time it happened in the US was during the Great Depression. Japan deal with deflation during the 1990s and off and on since then. China has come close, but central bank actions seem to have prevented it. And now the Euro Zone is facing possible deflation to which the European Central Bank has finally started to respond.

This week explore the causes of deflation, why it is considered to have negative consequences for an economy and how can it be prevented or stopped once started. Is there a linkage between inflation and deflation?

Do respond to all of these parts so as to provide a complete picture.

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Article:

INTRA, Portugal--Leaders of the world's top central banks warned Wednesday that escalating trade conflicts could ricochet through financial markets and hurt the world economy, potentially prolonging the era of ultralow interest rates.

Rising tensions over trade come at an awkward time for major central banks, which have started moving away from easy-money policies introduced since the global financial crisis.

In a moderated discussion in Portugal, the heads of the Federal Reserve, European Central Bank, Bank of Japan and Reserve Bank of Australia called for calm and warned that the costs of further escalation could be high.

Global stock markets sagged this week after U.S. President Donald Trump called for a fresh round of tariffs on $200 billion of Chinese goods, upping the ante after he previously approved tariffs on $50 billion of goods.

"It's very worrisome and again, I can't see any positive," said ECB President Mario Draghi, who was hosting the event, Europe's answer to the Fed's annual economic symposium in Jackson Hole, Wyo.

Mr. Draghi warned that disputes over trade have created "considerable uncertainty" for the 19-nation eurozone economy, which has slowed sharply in recent months.

The European Union said Wednesday it would impose tariffs on U.S. goods worth around [euro]2.8 billion ($3.2 billion) in response to American import tariffs on steel and aluminum. But the EU's move is unlikely to discourage the U.S. from a second round of tariffs, possibly targeted at European autos, which would hit exports worth 0.3% of the EU's economic output, said Oliver Rakau, an economist with Oxford Economics in Frankfurt.

In a shift reflecting those concerns, Mr. Draghi warned Tuesday that the bank could delay plans announced only last week to phase out its [euro]2.5 trillion bond-buying program and suggested the timing of a first interest-rate increase could be pushed back.

Jerome Powell, chairman of the Federal Reserve, warned in the discussion that changes in trade policy "could cause us to have to question the outlook." The Fed last week raised short-term interest rates and signaled a quicker pace of interest-rate increases to keep the U.S. economy from overheating.

While the tensions haven't yet dented U.S. economic growth, Mr. Powell said businesses increasingly were expressing concerns to the Fed about how the conflict might affect their plans for investment and hiring.

For Japan, whose central bank maintained its aggressive stimulus policies last week to support a softening economy, the trade conflict is "a matter of great concern," said Bank of Japan Gov. Haruhiko Kuroda.

The indirect impact on Japan's economy could be "quite significant if the escalation between China and the U.S. continues," Mr. Kuroda said, because it could affect the Asian supply chain centered on countries like Japan and Taiwan and across southeast Asia.

While the tariffs themselves might not derail the global economic recovery, the fallout could be magnified by investors through financial markets, said Australia's central bank governor, Philip Lowe.

"I believe what is happening [on trade] is incredibly worrying," Mr. Lowe said. "It wouldn't take that much for financial markets to turn this into a very big global event."

The problem for central banks, in Japan and elsewhere, is that they appear to have little ammunition left to deal with any new economic downturn after years of aggressive stimulus. The value of assets held by the Bank of Japan is set to exceed the nation's annual economic output over the coming months, while the ECB's balance sheet also will continue to grow through the end of this year. Both central banks are still holding short-term interest rates below zero.

Asked how the ECB could respond to any new recession, Mr. Draghi said he didn't expect economic growth to turn negative between now and 2020.

Mr. Powell acknowledged that central banks would have less capacity to fight any new recession because interest rates are already close to zero. The U.S. government also has less scope to increase spending than in the past, though it still has room to react, he said.

"I really hope that this escalation could be rescinded and a normal trading relationship between the U.S. and China would prevail," Mr. Kuroda said.

As there any positive outcomes of rising trade tensions, according to central bankers? . What actions would central banks in theory launch, in theory, to counteract any problems with economic growth in their countries? Why are central banks worried about these policy moves at this point in time?

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