Wolfgang Munchau's recommendation that "central banks should keep cool" and refrain from cutting interest rates for fear of stoking inflationary expectations sits very oddly with his reminder that the bursting of asset price bubbles triggered both the Great Depression and Japan's lost decade in the 1990s ("Rate cutting will not get us out of this mess," December 3).

Mr Munchau correctly recognises that failure of central banks to respond to a sharp fall in inflation is what turned the 1930s and Japanese crises into calamities. He also acknowledges that monetary policy can be rendered toothless if deflation is allowed to take hold.

One would have thought that those historical lessons would have sensitised Mr Munchau to the serious deflationary risks inherent in the bursting at present under way of the largest US asset and credit market bubbles in the postwar period. Might not a hands-off central bank policy approach to the bursting of these bubbles run the risk of a real seizing up of the already fragile global financial system that could lead to a major world economic slump?

Faced with these risks, central banks would be ill advised to look solely in the rearview mirror when assessing the inflationary outlook. Rather, they would do well to anticipate the very likely opening-up in the period immediately ahead of significant labour and product market gaps that must be expected both to damp inflationary expectations and to exert downward pressure on international commodity prices.

Desmond Lachman is a resident fellow at AEI.