In making the case that policymakers might need to reduce the cost of credit sooner than they realise, your editorial (February 2) omits to mention two key factors supporting that case.
The first is the mounting evidence of deepening problems in the US and European commercial property markets. As the IMF has noted recently, those problems risk derailing the economic recovery by increasing financial system strains. Underlining the immediacy of this risk is this week’s report of steep commercial property related earnings declines at a US, a Japanese and a Swiss bank.
The second is that there has been an unusually sharp decline in money supply growth. Indeed, in the US, the broad money supply (M2) is declining for the first time since the 1930s. If Milton Friedman is right that inflation is always and everywhere a monetary phenomenon, deflation rather than inflation might soon become the central banks’ most pressing problem.
Desmond Lachman
American Enterprise Institute, Washington, DC, US
