Three months later, Kan is faced with the dilemma of trying to spur growth without pushing those debts even higher, with the added complications of a surging currency and continuing deflation.
So why not then break free of the euro and have that deflation as a currency devaluation rather than an internal devaluation of wages?
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The price level can only be altered through a change in the value of money itself, and with the dollar at near all-time lows against gold and nearly every foreign currency, the presumption of deflation promoted by Sumner is laughable, and also sad.
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And for those who wish to avoid both inflation and deflation, what about a digital currency programmed to maintain stable prices, avoiding mischief by central bankers as well as the possibility of deflation?
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"I'm not sure you can break Japan out of deflation with just moving the currency, " said Jan Dehn, co-head of research at Ashmore Investment Management Ltd.
To be sure, southern European countries are running huge trade deficits with the northern tier (especially Germany), but as long as all are tied together by the common currency, internal cost and price adjustments (deflation in the south, inflation in the north) will be slow and painful, and will do little to spark growth for Europe as a whole.
Deflation, simply put, is a currency phenomenon.
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Given all of the factors that contribute to inflation in the short run, this correlation is truly remarkable, but there are near-term deviations in times like this when central banks are fighting deflation trends actively or due to economic swings, currency changes, spikes in oil prices, or other factors.
Adherence to an unsustainable currency union - the Gold Standard - then forced governments to continue deflation-worsening policies, provoking social unrest and inter-country tension over unpaid debts (in this case war reparations, but still debts).
However, because the Fed and ECB have both proclaimed that they are on hold from debt monetization and currency debasement, the same monetary environment that led to the pronounced deflation that occurred during fall of 2008 has arrived once again.
Currency devaluation largely avoids dealing with the short-term negative consequences of debt deflation in favor of prolonging the period time that the bad debts remain embedded in the system.
Wanniski says the first wave of deflation to hit the U.S. was a result of the currency crisis in Thailand that spread to the rest of Asia in 1997 and severely affected U.S. commodity producers like hog farmers and oil drillers.
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