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Like I said, people stop spending because prices are dropping. Would you buy anything non-essential if you knew it would be cheaper next week? It is almost the exact reverse of hyperinflation (where people rush to buy things before price goes up). Since people aren't buying, business slow production, leading to unemployment, even less demand, lower prices still. And so on.

The whole idea is to keep inflation reasonable, which is not too high, not too low. Too close to zero risks deflationary spiral. Too high is unpopular, and may risk hyperinflation.

As many have pointed out, it is possible to simultaneously have high consumer inflation, but deflating investment assets. That is bad, because your home is going down while food may be going up.

Again, I can't under emphasize the role of productivity. All the other stuff isn't nearly as important. Can we as a society influence productivity? Hard to say, but bubbles hurt it by misallocating resources. As do protectionism, strong labour laws, high taxation etc.

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What is generally thought of as undesirable is UNEXPECTED inflation. Even that isn't as bad as thought. Contrary to popular belief (and what gold bugs and coin collectors like to tell you), it doesn't devour wealth. It simply redistributes wealth between long term lenders and long term borrowers. That leads to nervousness and excessive risk premiums, but other than that no big deal.

High inflation does "tax" cash, so one has more incentive to keep as little around as possible (think hot potato). If inflation is TOO high, we do risk an inflationary spiral, but that is fairly extreme and easily remedied. The other danger is of course a deflationary spiral, which I think is a tangible risk at this time. In one of those, nobody buys anything because prices are falling, stalling the economy. Cash literally earns a real return (and tax free to boot).

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Not necessarily. Our grief is the result of excess liquidity and the related bad lending and excess consumption.

Low rates need not be bad. If productivity is high, we can have low rates AND a strong economy. This is the missing link that all the talking heads are oblivious of.

Productivity growth is THE true reason why we have had a rising standard of living, and is truly the fruit we've been picking. But how many times do we hear it in debates? Never. Instead it is about consumers driving the economy, RE going up up and up just because. Tragic really.

Our problem stems from Greenspan's miscalculation. He felt that he could keep rates lower than what previously was thought prudent because he felt that productivity would increase sufficiently to provide goods to absorb all the liquidity. He though this because of:

a) The IT revolution finally bearing fruit.

b) The fall of communist Soviet Union.

He calculated WRONG and we are all paying the price.

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That said, isn't one of the major components of our grief right now because of easy credit, ie., low interest rates?

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When the interests rate became laughable ie 1/2 to 1/3 of what they one were….many people shifted their investment focus.

You are forgetting that it is real interest rates that matter, not nominal. What good is 13% savings rate when inflation is 12%?

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My message was about sharing few observations with readers of this blog. Everyone is free to interpret them.

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I am old enough to recall the days (not that long ago)when one received double digit interest for a basic savings rate.

When the interests rate became laughable ie 1/2 to 1/3 of what they one were….many people shifted their investment focus.

Many were literally forced to enter the stock market, and later the real estate market, in order to attempt to acquire returns on par with what they once had with "safe" bank deposits.

In my view, this forced rampant speculation, ie we saw this over the past 20 years is based on (i) phoney money with the ink still wet "off the presses" that is also ( ii )lent out cheap. This is the equivalent of a loaded gun to a drunk.

The only ones that gained were the ones who pimp it…ie Gov'ts with bogus economies to placate the masses,and stock brokers and realtors, whose vested interests is to sell this fantasy and walk away like this was an economic equivalent of a one night stand.

When I see the CEO of Lehman brothers before Congress and admitting they will walk home with $400 Million for running a 100 + year old company that is now , finito…history…thats pretty much sums it up.

Solution is to raise the interst rates and keep the speculation D-O-W-N !!!!

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