Economists conventionally argue against monetary policy that may contribute to unsustainable inflation, and the US central bank, the Federal Reserve, has for months kept its benchmark Fed Funds interest rate at or near zero to help prevent a flare up. However, the chief executive of one of the Fed’s regional banks has issued a research paper that cautions that current policy could potentially lead to equally harmful deflation in the national economy.
Deflation occurs when prices trend lower and spending slows in anticipation of even lower prices in the future. The broad economy, in consequence, contracts, which results in lower employment and lower income.
In a paper published earlier this week (http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf), St. Louis Fed president James Bullard pointed to Japan, which has administered a long term low interest rate policy, and as a consequence has suffered from slow economic grow and low prices. Mr. Bullard contends that the Fed’s holding of interest rates at or near zero for a prolonged period, in an effort to stimulate the economy, may have not succeeded, and that the continuation of such a policy may limit future efforts by the central bank.
As an alternative, Mr. Bullard proposes a concerted effort by the Fed to purchase US government debt in the form of Treasury securities, a policy adopted in the United Kingdom. Such a policy would put more money into circulation, thus preventing the possibility of a deflationary threat to the economy.
Questions: In what ways is it important to the cotton industry for the US economy to avoid a period of deflation?
To what level of inflation can the industry continue to operate efficiently?
What would be the initial impact on the cotton supply chain of a period of either deflation or inflation?