It is good to see Martin Feldstein, Professor of Economics at Harvard, President Emeritus of the National Bureau of Economic Research, and chair of Ronald Reagan’s Council of Economic Advisers from 1982 to 1984, join Joe Salerno (here, here, ), Mark Thornton who has revived the term, apoplithorismosphobia (ay-pope-lit-horris-mos-foe-be-ah) or fear of deflation, Richard Ebeling, Philipp Bagus (here and in his most definitive statement here), and most (but not all Austrians) is speaking out against the Fed’s and central banks in general fear of deflation and by implication their irrational commitment to a 2% inflation target (not to mention Paul Krugman’s among other Keynesians preference for 4%-5% inflation target under current stagnation). While not as strong as Austrian critiques, Feldstein pulls few punches in his recent web commentary, The Deflation Bogeyman. His conclusion about the misplaced fear of deflation which has led central banks to keep interest rates exceeding low for far too long:
None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.
