How to avoid the horrors of ‘stag-deflation’

Nouriel Roubini writes in FT an Op-ed, "How to avoid the horrors of ‘stag-deflation’"

The U.S. and the global economy are at risk of a severe stag-deflation, a deadly combination of economic stagnation/recession and deflation. A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labor markets from rising unemployment will control labor costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 percent level leading to concerns about deflation. The worst is not behind us: 2009 will be a painful year of a global recession, deflation and bankruptcies. Only very aggressive and coordinated policy actions will ensure the global economy recovers in 2010 rather than facing protracted stagnation and deflation.

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