Deflation threatens the U.S. economy and that could be dangerous, says Nobel Prize winner and Columbia University professor Joseph Stiglitz.
If serious deflation, not seen since the Eisenhower administration of 1953-1961, occurs, the Federal Reserve may keep interest rates near zero through 2010, Stiglitz told Bloomberg News.
"Deflation is definitely a threat right now," he said.
"The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while."
Deflation caused Japan's slow economic growth in the 1990s, according to economists.
In its more virulent form, deflation helped cause the Great Depression.
As prices fall, profits decline correspondingly and drag down wages and payrolls.
"A weak labor market in a competitive environment puts downward pressure on wages," said Stiglitz.
"So another actual decline in wages cannot be ruled out."
Unemployment is another serious problem, says Stiglitz.
"Unemployment is going to keep rising and should be the main focus for policy makers, and that gains in the stock market indicate investors have been 'irrationally exuberant' (echoing former Fed chair Alan Greenspan's famous remark) about a recovery," he said.
Stiglitz also predicted "lots of risk" for housing, commercial real estate and defaults on credit card debt as more workers lose jobs.
While deflation is a short-term threat to the economy, the major long term threat is inflation.
If China and Japan stop buying U.S. debt, inflation could soar to 20 percent, said Tiger Management Chairman Julian Robertson in a CNBC interview.
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