U.S. Faces Deflation Risk Due to Indebtedness (Linda Yueh/Oxford Economist - Video)

Oxford University Economist Linda Yueh was on Bloomberg on 8/30/2010 talking about the Yen (BoJs recent move) and deflation risks in the U.S. and portions of Europe.
"I think there is a real (deflation) danger for the United States. It's less of a danger for Europe even though this was the big thing at Jackson Hole. Trichet is very worried about Europe going into a 1990s style Japanese deflationary trap because of all this debt de-leveraging which can cause a deflationary price spiral. As debt gets shed, prices fall, output falls, and then it's reinforcing. However, in the U.S. where this is more likely to be the case because of the scale of the financial crisis and the scale of indebtedness, Bernanke wasn't worried about deflation and he's really viewing the U.S. more as a slow growth story".

"But I think it's a real danger for both areas. Not all of Europe just in the highly indebted countries like Spain, like Ireland, like UK, like Greece. It's less of an issue for the stronger Eurozone countries".

"Basically Bernanke said we'll have to wait and see, so, at the moment the price momentum is fading in the U.S. and there is a lot of debt de-leveraging going on. I think what he said was, they will use unconventional monetary policy to try and change it if that does come to pass. But I think there is a real danger there and again the only way to get out of it is to change peoples expectations of prices. So therefore, growth has to pick up, unemployment has to fall, and we also heard from Jackson hole that the U.S. may be in for 7 years of slow growth and high unemployment." (as does Jeremy Grantham at GMO)

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