Blanchflower Says Keep Stimulus to Avoid Deflation `Nightmare'
Former Bank of England policy maker David Blanchflower said the risk of a deflation “nightmare” means officials including Federal Reserve Chairman Ben S. Bernanke should keep stimulus in place until there’s more evidence that private companies are spending again.
“Deflation is Ben Bernanke’s and my nightmare,” Blanchflower said in an interview with Tom Keene on Bloomberg Radio. Most of the global economic recovery “is being driven by stimulus,” he said. “Caution to you if you start to take it off.”
Fed policy makers last month cut their outlook for inflation this year to a range of 1.0 percent to 1.1 percent, down from 1.2 percent to 1.5 percent in April, according to minutes released this week. Some policy makers expressed concern about “some risk of deflation,” and officials saw no need to boost stimulus, the minutes showed.
“The Fed has it right in its minutes, evidence recently looks like the global economy maybe has reached a turning point and it’s hard to see much evidence that the private sector is hiring or investing,” Blanchflower said.
Fed policy makers last month restated a pledge to keep the benchmark lending rate at around zero for “an extended period.” That kind of action has helped avoid another Great Depression, Blanchflower said.
“The folks who say the stimulus hasn’t worked don’t understand the scale of the shock,” he said. “The crisis was really very deep and the stimulus, monetary, fiscal and rescuing the banks, are what prevented us going back to the Great Depression, back to unemployment rates of 25 percent.”
Blanchflower’s three-year term at the Bank of England ended in March 2009, and he is now an economics professor at Dartmouth College in Hanover, New Hampshire. He writes a column for Bloomberg News.