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Some Experts say US Economy Faces Deflation Risk

Economic growth in the United States has turned negative in recent months and some experts say falling commodity and asset prices pose a risk of a downward spiral economic activity. VOA's Barry Wood has more.

At a recent conference at the American Enterprise Institute here in Washington, several experts predicted that economic activity will slow dramatically during the next six months. They say the credit squeeze and financial crisis on Wall Street is beginning to affect the economy at large. Unemployment is rising and consumers are cutting back, fearful that they may lose their jobs, leading many experts to warn of possible deflation.

Economist Nouriel Roubini of New York University said that rapid decline in oil prices indicate that deflation is more of a problem than inflation.

"I think deflation is going to be the story, or what I refer to as 'stag-deflation,' a period of economic recession and deflation," said Nouriel Roubini. "And why do I say that? We're now seeing the beginning of a slacking goods market with aggregate demand falling relative to supply."

Roubini says the commodity prices that were at very high levels six months ago have fallen dramatically as demand suddenly fell as companies and consumers conserved cash. Oil prices are down more than 50 percent from their record highs in July.

Desmond Lachman, an economist at the American Enterprise Institute, says the way to break out of a deflationary spiral is to sharply boost government spending. While opposing deficit financing in principle, Lachman said that in an emergency, government must act to maintain a minimum level of economic activity.

"There is absolutely no question that many of the solutions are going to create big problems down the road," said Desmond Lachman. "But I would think really that you don't have an alternative. The alternative is just to let the thing play out, in which you [the economy] just spiral down. When your house is burning, you really have to put it [the fire] out. You can't wait to ask what is going to happen next time."

Christopher Whalen, an expert on banking, predicted that U.S.-based banks will need more government money to remain solvent. He said that some major banks will be taken over by the government because financial losses yet to be revealed will be much greater than generally thought. U.S. and global banks have incurred losses of three quarters of a trillion dollars from bad loans, most of which are associated with defaults in the U.S. home mortgage market.