And with fixed nominal debts, lower inflation would trigger redistribution from borrowers to creditors, which would prolong the debt overhang and exacerbate the contraction due to the different propensities to consume and invest of those two groups. This is not an argument for raising inflation targets, as that would only create redistribution in the other direction.
Now in the US, UK and Eurozone there are signs of recovery – green shoots, we are told – but we are advised not to rule out the possibility of a double-dip recession, meaning another likely downturn in 2010, or an L-shaped recession, meaning that we may just face a prolonged period of slow, tepid growth or virtual stagnation.