Stagflation, Stag-deflation

Prof. Roubini mentioned about Stag-deflation in his RGE Monitor web site. He said that in coming years or a period of time, not yet defined, there will be Stag-deflation. To understand what is Stag-deflation, then you may need to know how price level relates to output. According to Roubini, Stag-deflation means Stagnation and Deflation happen at the same time. This means low output and low price level. The effect to the society is low employment rate and price of good becomes cheaper. This is in constrast to Stagflation that means Stagnation and deflation happen at the same time. When this happens, price level increases but output stays at low level meaning low employment rate. This happens until economy becomes better, price rise again, and output rise again.

Therefore, to make output back to normal, companies shall cut cost and the most effective way is to cut headcount and layoff employees. Government needs to increase expense while Government needs money to spend. Officers in Hong Kong Government has indicated a big deficit next year. There are only three ways to increase Government income. 1. print more money, 2. rasie taxes, 3. borrow money. I think Hong Kong Government cannot go for 1 and 3. Will they increase tax to get money or just do nothing?

Let's see what happens.