It’s actually not Krugman this time, although he brings it to our attention:

Makin is even more gloomy, warning that we might enter deflation this year.

Which would be a bad thing, in case you didn’t know. I’ll excerpt some, but as always , read the full text if at all possible. John Makin on deflation:

As we enter the second half of 2010–the “postcrisis” year–while markets have been obsessed with Europe’s debt crisis, they have failed to notice potentially more ominous developments. The United States and Europe are heading toward–and Japan already suffers from–deflation, a classic prolonger of crises that boosts the real burden of debt and crushes profit margins.

U.S. year-over-year core inflation has dropped to 0.9 percent–its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe’s year-over-year core inflation rate has fallen to 0.8 percent–the lowest level ever reported in the series that began in 1991. Heavily indebted Spain’s year-over-year core inflation rate is down to 0.1 percent. Ireland’s deflation rate is 2.7 percent. As commodity prices slip, inflation will become deflation globally in short order.

You want to hear a real shocker? This guy is from the American Enterprise Institute, a conservative economic think-tank. If he’s saying deflation is not only possible but probable, it might be time to listen and quit saying the economy is rosy like the bloggers over at WSJ are. It never ceases to amaze me how people can read the same things I do and just completely deny that which is factually based. I’ve been reading people who are saying that the problem is one of “lack of confidence” among American businesses. That all we need to do is believe that the economy is doing well and it will.

These are also the same people who are telling us the economy needs to contract and “correct” itself because it was overvalued to begin with. That the current deflation and contraction is a response to inflationary policies that over-inflated the market. One of the commentators on the WSJ article I posted had this to say:

It is amazing how the monetary interventionists have rear-view mirror blindness beyond the onset of deflationary crisis times. Listen to Benrnake talk about the great depression: No mention of inflationary policies prior to the crash of 1929. By the same token, Makin does not include Greenspan’s inflationary policies in his comments which caused the current crisis. Inflationary policies, mind you, designed to fight deflation.

I don’t know how anyone could pretend to understand the economy and so fundamentally misunderstand the Great Depression. The so-called “inflationary policies” were not policies so much as a runaway market that was not sufficiently regulated. This did not devalue real assets; you could speculate on land because of lax lending policies, but the vast majority of Americans were not land speculators. “Land” in the capital sense, back at that time mostly meant farmland. Remember, people in the cities had only just begun to outnumber people in the country, and a lot of that was immigration. The rural south was as rural as it ever was. The midwest was (as it still is) largely agrarian. Overvaluation on the stock market did not coincide with overvaluation of real assets because the stock market was fantasy all along. If inflation was the problem that deflation was the solution to, the poor farmers would have been helped, not hurt, by it.

To continue the Great Depression parallel, the end of it only came after massive government subsidies to the public began because of World War II. People were paid for that work. Employment ran sky high because of the massive effort the US was making in the war. Millions of men were drafted or enlisted and millions of women joined the workforce. But before all that, the country had been in a depression for a decade because the US government would not take on the burden of debt required to stimulate the economy to fruition. A deflationary trap was sprung and the US could not get itself out with a policy of austerity. This is because economic activity requires money to take place.  People need jobs to make money; businesses need people to spend money in order to make a profit. Without an infusion of cash from an outside source, how do you get this cycle started? And yes, I do expect you to believe that the normal economic cycle, once started, will actually produce wealth. That’s how business works, which, ironically, is the reason conservatives say they’re so pro-business. Business creates wealth. Of that there is no doubt, although liberals and conservatives will argue over how it should be regulated and who should get most of the wealth.

To bring this back to today, we have people telling us that we’re in for another recession and possibly a deflationary spiral. On the other hand, we have people who are telling us that we are either not heading for a recession or that it’s a correction to the economy which we need. Now, if we’re not heading for a recession, a cautious economic policy couldn’t hurt us too bad, although it could dampen growth. But if we are heading for a recession, hedging our bets could help us out a lot. And if we’re heading for deflation, perhaps now is not the time to be talking about deficits which will bankrupt us in the future. Again, people seem to forget that we have historical examples of the exact same problems we’re facing now.

Bah, I could go on about this forever, but I get tired of saying the same things when I know people won’t listen. We’re not likely to be in for good times, folks.