The two competing forces of deflation and inflation are now colliding in the US economy, and it's very difficult to predict which of them is going to net out, said a leading US business expert in a recent discussion at Harvard Business School.

Some people argue that the increase in money supply by the Federal Reserve and trillions of dollars in government-induced liquidity in the past year has planted seeds for massive inflation, while others argue that the US economy is still so weak that deflation, or a drop in price, is a more serious threat.

"The reason why the economists are in such disagreement and there is so much debate is that the two competing forces of inflation and deflation are of historic proportions and are colliding right now," said Robert Kaplan.

Kaplan is a co-developer of both Activity-Based Costing and the Balanced Scorecard, which are used extensively in business and industry, government, and nonprofit organizations worldwide.

Elected to the accounting Hall of Fame and receiving the lifetime Contribution Award from the American Accounting Association in 2006, he is the Baker Foundation Professor at the Harvard Business School.

"On the one hand, we have the biggest government spending program globally in the history of the planet. Left alone, it could be massively inflationary," said Kaplan.

Due to the past choices on foreign and fiscal policies, the US government has the highest debt in the world -- US$11.6 trillion, amounting to 73.6 percent of its GDP in 2009, up from 51 percent in 1998.

The US dollar is a debt-backed currency, and the government's action of increasing debt would increase the money supply, which causes inflationary pressure to the economy and tend to push prices higher in general.

"On the other hand, you have the most massive deleveraging force in the history of the planet going on in the western economies, including the US, but not the emerging market, where there is no leverage problem," explained Kaplan. "Left alone, it's massively deflationary and destructive in asset values."

In the aftermath of the outburst of financial crisis, both Wall Street and Main Street shifted from risk taking and optimism to fear and pessimism. The deleveraging of banks has discouraged lending, causing the deleveraged average consumer to demand less goods. This, coupled with the 10.2-percent unemployment rate and low capacity utilization, has presented pressure to push the price down in general.

However, Kaplan believes that the "net for a while is going to be that deflation may still appear to be winning."

Kaplan thinks that the reason behind the central bankers' recent remark of "no hint of inflation yet" was that the "deflationary forces were massive."

Deflation is generally viewed more destructive to the economy than inflation. The Great Depression of 1929-1933 and Japan's stagnation in the past decades both showed how damaging deflation can be and how difficult it is to be treated.

Kaplan believes that the central bank does not want deflation to overtake inflation because "they don't know how to solve deflation."

It is widely believed by economists that the Federal Reserve and the Obama administration, having injected a massive stimulus plan to the economy, will likely utilize further tools at their disposal to further pump up the domestic growth. The government's action, in the long run, will make the dollar worth less.

"I think inflation, for better or worse, is most likely a couple or three years away," Kaplan observed.

(Xinhua News Agency December 2, 2009)