In the past, I have demonstrated that economic growth and deflation is

century was a deflationary boom. Declining prices led to strong real income

gains. As time went by, workers could buy with their incomes a larger and

larger basket of goods because prices for consumer goods and commodities

money increases. In deflation my 100 dollars today are worth more in a

year’s time since they will buy a larger basket of goods and assets, whose

prices are declining. In my opinion, there is, therefore, nothing wrong about

deflation. So why is the US Fed so concerned about deflation that Mr.

Bernanke even suggested dropping US dollar bills from a helicopter in order

to combat it?

There is one condition under which deflation is a disaster and this is when

total credit market debt is high as a percentage of the economy (see figure 1)

Figure 1: Total US Debt as Percentage of GDP, 1916-2005

Cont..............

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