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Published online by Cambridge University Press: 05 August 2011
When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
(John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936, p. 159)Deflation is also harder to fight than inflation. Over the past two decades central bankers have gained plenty of experience in how to conquer excessive price increases. Japan's on going inability to prevent prices falling suggests the opposite task is rather less well understood. Although it is true that heavily indebted governments might be tempted to erode their debts through higher inflation, there are few signs that political support for low inflation is waning.
(The Economist, ‘The deflation dilemma’, 3 June 2010)The current macroeconomic development of the USA as well as of most major industrial economies is characterised by boom-bust cycles. Such boom-bust cycles start with overconfidence, expectations of high returns and overleveraging. Often an asset price boom goes hand in hand with a credit boom and rising prices. When a downturn is triggered, often initiated by a sudden bankruptcy or similar event, frequently entailing long-term protracted periods of low growth and low employment, prices may fall and periods of debt deflation are experienced. Normally such boom-bust cycles are driven by specific sectors in the economy. In the most recent boom-bust cycle, the credit sector and the real estate sector were the main driving forces.
To study such phenomena, this book takes a macroeconomic perspective. It uses a dynamic framework that builds on the theoretical tradition of non-clearing markets.
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