Posted by: Dirk | May 27, 2009

May 2009 – Deflation has arrived in Germany

The inflation forecast for May 2009, conducted by the Statistisches Bundesamt, is in: -0.1%. Yup, that is deflation. Disinflation was yesterday.

While in Brussels only 2 weeks ago, everybody we talked to dismissed my question “Will we not have deflation and won’t that be a problem?” as nonsense. I had a bad feeling about this, since the alternative view was based on some forecast which showed inflation stopping at around zero, then coming up again. Guess where the forecast part began? Yup.

I think it is about time for all policy makers to seriously question their models. Somehow, everybody thought that adopting a bit of Keynesianism (or Keynesian economics) will bring us back into the neo-classical world. Well, I wish it would be so easy. I wish we would not have deflation, which is a nastier thing to have then inflation. But the writing was on the wall, for those who read the General Theory.

Policy question for those in power: what are our priorities? A) Fighting deflation by fiscal stimulus or B) saving the financial system. Remember (Ireland, so) that you cannot have both at the same time, since both cost (government) money. Since you cannot have B) without A) but having A) makes B) look easier, I would tend towards another fiscal stimulus round.

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