"Concerns about the risk of
a "Japan-style deflation" in the U.S. are once again heating up, as
the Fed prepares to taper its bond purchases, something that's very likely to
happen either this month or next. The worry—echoed in a front-page article in
today's WSJ—is that tapering and eventually ending QE at a time when inflation
is unusually low runs the risk of producing even lower or negative inflation
(i.e., deflation), which in turn could doom the U.S. economy to very weak or
even negative growth for the foreseeable future, much like the problems that
have plagued the Japanese economy for many years. Without ongoing QE support,
the thinking goes, the U.S. economy could fall into a sort of deflationary
quicksand and/or lose all forward momentum. But is deflation really so
dangerous, and has growth really been so dependent on QE?"
