Deflation… Please… Don’t… Stop!!!

Posted: February 15, 2011 in Commentary, Economics, Politics
Tags: , , , , , , ,

Deflation has become the new dirty word in the government and financial stratosphere where our political and corporate masters dwell.  The Fed has printing money at an alarming rate to stave off deflation in the markets.  According to the Keynesians, the bankers, and the government it is the greatest disaster that can hit an economy.  But what is it?    

Deflation, as used today in common parlance, is a decline in the price of capital, resources, labor, or in the overall price level of an economy.  It can be caused by a decrease in demand, an increase in supply, an increase in productivity, or a reduction in the money supply.  If Americans decide they want to buy fewer houses for whatever reason, housing value will go down.  If more cars are available in the market than there are buyers, car prices will decrease.  If steel mills can increase their productivity, steel prices will decline.  If the central bank reduces the supply of money the value of a dollar will increase causing overall prices to reduce.

In the realm of the buyer deflation means lower cost.  For the seller it means losing the value of an asset that has already been purchased.  In our vaunted financial debacle of the last few years we hear about the trauma of deflation.  Everybody is hurting because prices are going down.

This is bunk.  Only the people who have purchased assets that they want to sell that don’t have as many potential buyers are in pain.  This is why we heard the call go out from New York to “Save the economy!” so that holders of financial instruments that people no longer considered reliable investments (bankers, brokers, and traders) wouldn’t go out of business.

Think about it.  Bernanke is trying to cause a constant inflation level of about 2% supposedly to stabilize the economy.  Never mind that the express purpose that the Fed was created was to prevent the decline of monetary assets via inflation.  It used to be that we saw deflation as leading to a rise in the standard of living for consumers because they get more for every dollar they had earned.  The computer that cost 1000 bucks a year ago costs 500 now.  What’s not to love?

In fact, throughout the nineteenth century a mild deflationary trend reigned, only being interrupted during periods of major wars, such as the Napoleonic Wars in Europe and the American Civil War, which the governments financed by printing fiat money. Specifically, in the U.S. from 1880 to 1896, the wholesale price level fell by about 30 percent, or by 1.75 percent per year, while real income rose by about 85 percent, or around 5 percent per year.  There was not an all-encompassing destruction of the economy.

Deflation can be caused by political policy as well as has occurred in Argentina several times, and in numerous other Latin American countries in just the last 30 years.  Governments when printing money will seek to restrict the flow of other assets in order to support the value of the currency that they are so fervently printing.  When people’s property rights to their own money are abrogated by politicians’ confiscatory deflation the process tends to abolish monetary exchange and sends an economy back to inefficient and primitive conditions of barter that undermine the modern division of labor.

The people who fight most strenuously against deflation are the ones that benefit from inflation, primarily borrowers.  Borrowers want inflation because it means they are paying the lender in dollars that are worth less than when they originated the loan.  That would mean governments of the world and mega-corporations have the most to gain.

The thing to understand is that deflation per se is not a bad thing.  It can be a sign of institutional manipulation of an economy to succor the priorities of the elites, not the interests of the common man.  It can also be a sign of a healthy economy becoming more productive with its capital, labor, and resources meaning a rising standard of living for the general population.  So, like anyone having an orgasm, with deflation we should be yelling, “Please… Don’t… Stop!!!”


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