Just a few weeks ago, Mario Draghi, President of the ECB–the Central Bank for the eighteen countries that share the same currency, the EURO–stated that Deflation might be on the horizon. He wasn’t convinced, at the time, that it was imminent; however, he apparently wanted to get the possibility “out there”. Deflation is the absence of growth and, with the absence of Inflation, it’s evil twin was to be feared.
Generally, central banks target a rate of approximately two percent as the ideal rate for Inflation. Not too hot, and not too cold! If it rises too much above that target rate, an economy can overheat. But, if it falls too far below it, stagnancy can move in. When interest rates and prices fall, people put-off buying and borrowing, which leads to businesses decreasing production. And, that merely leads to reduced business spending and the ultimate reduction in Employment.
Well, today, the ECB lowered it’s key lending rate to a Negative 0.5%. Now, doesn’t that send a message? If the Consumer isn’t spending, and Businesses are not spending, doesn’t lower rates merely lead to the so-called self-fulfilling prophecy? The economy would just continue to slow-down. Ask Japan!
I do not claim to be an expert when it come to monetary, or any economic, policy; but. I believe that Draghi and Company are barking up the wrong tree. There must be other options–lowering interest rates in a potentially Deflationary environment seems to be counter-productive. Europe has largely failed to rebound from the Great Recession of five years ago, while other countries have rebounded–even if at a moderate rate. When it comes to Economic Growth, there is a certain Critical Mass that has to be achieved, lest a country fall back into the morass of stagnancy–read Deflation.