If inflation is about rising consumer prices, deflation means falling prices. If you have watched CNBC or any financial TV these last few years, you have seen people often raising the bogeymen of either deflation or his new buddy, “too-low inflation”. (A printed example here.)
The people raising these bogeymen are there to help Big Government and Big Banking. They gain from pro-inflation policies – such as high government spending and deficits, zero percent interest rates, massive money-printing (to cover the government’s deficits and boost the financial markets).
Who loses from such policies? You, the person with a productive job. Each year, the dollars you get from your wages, salary, pension or savings hardly go up – and buy you less than the year before. You’re the sucker at the poker game, and they frighten you into going along.
In reality, falling prices – or the steady, stable prices of “too-low inflation” – are a help to consumers in good times and bad. What sane person doesn’t benefit from (and desire) everyday low prices?
Inflationists claim that if consumer prices decline (as in deflation) or fail to rise (as in too-low inflation), the economy will suffer, because people will postpone buying consumer goods. You should ask: Really? When has the prospect of next year’s stable-or-lower prices ever stopped people from buying what they need and desire now?
Prices have been stable-or-declining for years on computers, smartphones, flat screen TVs, eye LASIK operations, game consoles, and more. Have people stopped buying them? Quite the opposite. Or suppose that prices stayed the same, or even went down, for gasoline, food, rent, health care and education. Would that hurt you and your family, or help you?
Inflationists also claim that deflation (or too-low inflation) means economic depression. And we’ve had an occasional episode, such as the Great Depression, where deflation was *correlated* with depression.
But remember the saying, “correlation isn’t causation.” In the Great Depression, the deflation actually helped a lot of people. By making paychecks go farther, it kept the number of people who were turned out of homes, starved, etc. from being even larger than it was.
And we’ve all been carefully ‘educated’ to forget that deflation and/or low inflation are historically *more correlated with good times*. Via Zero Hedge and The Cobden Centre, here is a chart on that. It shows how deflation prevailed in America in the 19th century, which century overall was the greatest for economic growth in our history.
Cobden Centre gives the source, and further notes:
In their research article ‘Deflation and Depression: Is There an Empirical Link?’ of January 2004, Federal Reserve economists Andrew Atkeson and Patrick Kehoe found that “..the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-1934). We find virtually no evidence of such a link in any other period.. What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.”
Which makes sense, because in the real world, economic progress means lower prices. As more things are produced with greater efficiency for lower costs, their prices drop – so that you can afford to buy them. It’s a good thing.
What frightens the inflationists is that if we stop the money-printing and other bad policies, they’re out of jobs. The government would have to balance its budget; so the government would probably have to cut spending (i.e., bureaucrats). Companies would have to cut unproductive consultants. Universities would have to cut economists, among others.
Interest rates would have to rise (to historically-normal levels). Real estate prices would come down (making homes more affordable). Stock and bond prices would come down (hurting Wall Street, but making retirement more affordable on Main Street). Bad investments would have to be liquidated (like some bad debts, or the craziest of the “green” or “dot-com 2.0” companies).
And, to allow for real growth and recovery, government would have to restrain itself (removing its jackboot from the economy’s throat; which Europe and even Japan have still not done). But at the end of it, we’d have a healthy economy where the working person can make ends meet; their wages, salary, pension or savings will buy them a good life. Which we don’t have, today.
It’s no coincidence that pro-inflation policies are pro-debt, anti-freedom policies. What we have today is the debt-bloated, gasping economy that you get after decades of such policies. An economy where the TV commentators tell you with a straight face that fast-rising prices (which make YOUR life harder) are required and, if we don’t keep inflation up at 2% a year or more, the world will collapse.
They’re partly right; their world (built on decades of bad policies) might collapse. But yours wouldn’t. Always remember the difference between their interests, and yours. Or who gains from inflation – and who loses.
Deflation also means not only lower prices, but lower wages.
The examples of deflation given were also before the U.S. went off the gold standard, unions became powerful, and government got involved in social spending.
Deflation today would mean that government would be faced with lowering payments, which they will NEVER do, and unions getting lower wages, which they will only do kicking and screaming.
CS, thanks for the comment.
Not necessarily. Again, in U.S. history, the Great Depression was the only significant episode where that correlation occurred in real terms. In the period 1792-1913, real workers’ wages (or equivalently, real living standards) rose massively – while prices tended to decline.
So then…mightn’t it be a good idea to return to sound money, appropriate union powers (i.e., somewhat scaled-back – though NOT banning them), and getting the government out of social spending?
Exactly. Big Government benefits from inflation (as does Big Banking). And fears deflation; or even just-plain-stable prices, which today they have turned into a bogeyman, with the scare-term “too-low inflation”.
Sorry, I have to correct what I said. Even in the Great Depression, deflation was *not* correlated with declining real wages. With declining nominal wages, yes – but real wages were high. (Which was part of the problem; by force of union law, price law and other government measures, wages were kept too high for many labor markets to clear).
So let me go farther. There is no episode in U.S. history, where deflation has been correlated with declining real wages for a significant length of time.
Almost by definition, inflation means shrinking real wages (living standards fall as life’s necessities get more expensive, and “sticky” wages fail to rise as much). While deflation means the opposite: rising real wages (living standards rise as life’s necessities get cheaper, and again, “sticky” wages fail to decline quite as much).
And even if you still disagree with that – can you at least agree that *stable* prices (neither inflation nor deflation) are good? Which means, “too-low inflation” is a made-up bogeyman. Would you agree there?
For the federal government, inflation also means a purported growth out of nominal debt in what is further currency debasement.
Inflation is almost always a result of an increase in the supply of money. A manifestation may be rising prices (and for the uninformed may be the best avenue of discussion) — except in a particularly volatile sector, perhaps — but in my view, prices mask the real causes of inflation and their motivations. So I would say that there are natural, market occurrences of inflation/equilibrium/deflation and there is manipulation.
It seems to me that for the most part, government policies have been in the direction of more control over the economy and people, not less. This, aside from the moral aspect, means that more money is wasted on regulations and complying therewith, rather than on actual, productive things.
If this is too cynical, my apologies. Not enough coffee yet for this night-shift person.
I am all for stable prices and wages. To my sometimes simple mind, this is easiest to work with. It takes longer for savings to grow, but on the other hand, the purchasing power is still about the same as when the money was put in, so there’s no trying for wild returns (with the associated risk) to keep steady.
Kevin, I think you’re right.
Iggy, can’t believe we agree 🙂 I put the “if” at the beginning of the sentence, because I do think inflation is really about monetary debasement; the rising consumer prices come as a symptom, after lags that are “long and variable” (Friedman).
Right now, we have inflation stored abroad (China’s $4 trillion holdings), in bank reserves, and in the asset markets (where prices are way up). The Fed’s newly-created money (and government’s newly-created debt) hits in those places, first. And they aren’t counted in the official inflation rates. So the inflationists say, “Who, us? We have no inflation. Too-low inflation!!”
ILC, in my experience, now is great time to lock in purchases at as long a low interest rate as you can get. In 2012, Volkswagen offered me Jetta Sportswagon TDI at 1/2% interest. I got it for seven years. The interest cost is negligible which matched average savings rates. So, instead of paying cash, I let Volkswagen of America take all the risk.
My point is that when money is a nearly meaningless store of value, if you use someone else’s money at nearly no cost, you are shifting the monkey onto their backs.
Am I off base on this?
Heliotrope, I agree. I’m sure you don’t mean that people should take on a lot of debt. People should especially avoid high-interest debt, like credit cards, and not invest on margin. But if you can get a car loan at 0-1%, or re-fi your long term mortgage at a lower rate….heck yes.
An example of deflation is Japan from 1990 to the present. People did not buy as they anticipated lower prices down the road. Now, with deflation, people will buy necessities like fuel, food, water, some clothes, and an occasional car. However, luxuries like rings, designer clothes, pricey cars will go by the wayside. So deflation is not all that it is cracked up to be. People don’t earn any interest from savings accounts.
Now I don’t concur with the Fed and their bond buying program. it is inflationary in nature, which will hurt the lower and middle income consumer in the future. But 2% inflation is not bad at all. What I think the Fed needs to do is increase the Fed funds rate from near zero to about 1.5% over the next 12 months. Yes, mortgage and car rates will rise, but it won’t be dramatic, and it won’t slow down our economy. As unemployment falls, wage gains by employees will go up, and thus low but not very low interest rates may keep inflation in check.
I have no good comments on your great recent posts other than, all this economic talk is getting me hot for Jeff.
Well, there ya go. All you need is the WSJ and a boner.
I think the best thing we could do for this country today is return to sound money.
Tim, aw shucks 🙂 I did work at it, to get the words right.
davinci:
So you think that, for the last 2 decades, Japanese haven’t been buying those things? Really? And supposing you’re right: you think that buying them is necessary for an economy to grow – Really? I’m not trying to make fun, just to stimulate thinking.
Actually, Japan has pursued the policies of inflation these last 2 decades: Massive government intervention, spending, deficits and money-printing. And those policies have largely -prevented- Japanese deflation, by which I mean the following two things:
(1) The overall, measured deflation in their consumer prices has been pretty minimal in fact. (Less than our inflationist commentators would have you believe).
(2) The bloat of bad debts/investments in Japan’s economy has been kept alive for much too long, giving them a zombie economy. (Kinda like we have, now.)
Guess what? Japan has just about reached the endgame. Today they have an unbelievable debt-to-GDP ratio well north of 200%, and consumer price inflation measured at 3% and climbing, with declining real living standards to match. “Abenomics” (the latest incarnation of their inflationary policies) is finally “working” and, as such, is becoming deeply unpopular in Japan. They would be in a better situation today if, 10 or 20 years ago, they had restrained their government’s meddling in the economy and allowed some genuine deflation.
If the inflation statistics were honest – perhaps. But they’re probably not. Where I live, food and rent are up over 10% in the last year. Gas has held steady overall (being a bit up, then a bit down), but medical insurance costs have doubled, for some people. This is not progress. And, even after averaging it with the things that didn’t go up, it is not low inflation.
I partly disagree. I think our economy, which has not been strong anytime in the last 6 years, is already starting to slow down. And that the Fed knows they will crash our current stock and bond market bubbles, if they raise short-term rates even to 1.5%. (They might still do it – just to prove to people how much we “need” the Fed to continue their inflationist, QE and ZIRP policies.)