Extraordinary economic times require extraordinary measures

“Opposition to extending the Bush tax cuts is spreading among Republicans, reports Walter Alarkon: "Sen. George Voinovich (R-Ohio), President Reagan's budget chief David Stockman and former Federal Reserve Chairman Alan Greenspan have each argued that extending the tax cuts -- set to expire at year's end -- would increase the nation's $13 trillion debt. 'It's like tax reductions; you don't need to pay for them? To me, that's nonsense,' Voinovich said."

“Economic growth slowed to an annual gain of 2.4% in the second quarter from 3.7% in the first three months of the year. The second-quarter figure is likely to be revised lower. The slowdown has led the Fed’s preferred inflation gauge to moderate to an annual 1.4% in June from 2.1% in May as prices fell for the second month in a row.

If things get bad, the Fed has an incentive to move early because deflation is harder to fight than inflation, especially now that rates are already close to zero. When there’s inflation, a central bank can at least raise rates as high as needed to counter rising prices.

Deflation is dangerous because it discourages businesses from investing and can lead consumers to borrow and spend less, thus hurting the economy. It makes the large and rising public debt harder to repay, leaving less scope for the government to boots the economy with tax cuts and spending programs.

Inflation is lower today than in it was in Nov. 2002, when Fed Chairman Ben Bernanke, then a Fed governor, vowed to make sure deflation wouldn’t happen again in the U.S. Bernanke knows the risks of deflation all too well from his studies of the Great Depression, when prices plunged around 25% from 1929 to 1933. He’s therefore going to take the risk seriously.”