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Japan: Has it really been in deflation?

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In the comments to my recent post On Deflation (and “too-low inflation”), a commenter expressed a frequently-heard belief, that a negative “example of deflation is Japan from 1990 to the present.”

I appreciate all comments and, without picking on the person, I wanted to examine the claim. Is it true? Here is a chart (from tradingeconomics.com) that shows Japan’s consumer prices since 1990:


Points that stand out:

  • Japan’s CPI today is over 10% higher than it was in 1990.
  • It’s true that from 1998 to 2013, Japan had a slight CPI decline; perhaps 5% total, over the 15 years.
  • Japan’s CPI is now shooting up again.

Clearly, Japan has not had a large deflation. But perhaps the commenter’s (restated) point might be that Japan has had basically-stable prices since 1990, and the stable prices have done nothing to help Japan’s moribund economy. Here’s how I would answer that.

Japan has long had a relatively government-planned economy. And, over the period shown above, Japan has pursued inflationary, “stimulus” policies of government spending, deficits, expanded national debt, and money-printing. How has it worked out for them?

It hasn’t worked out well. As we see above, Japan’s inflationary policies may have prevented a large-scale deflation (not that that is necessarily good; see my other post). The inflationary policies also seem to have done nothing to fix Japan’s multi-decades of a debt-burdened economy.

In the midst of a 20-year lame economy, stable consumer prices have been a saving grace for Japanese households. But now that Japanese CPI inflation is on the rise in 2014, real living standards in Japan are dropping and “Abenomics” is gaining well-deserved unpopularity among the Japanese.

Japan is not an example of the failure of pro-freedom and sound-money policies, because Japan didn’t try them. Japan is an example, rather, of the failure of what they did try: Big Government, pro-debt, inflationary policies.

UPDATE: David Stockman tells the story of Japan, with charts. RTWT. They inflated massive stock, debt and real estate bubbles in the late 1980s; the bubbles burst; and ever since, they’ve piled up more debt and money-printing in trying to re-inflate their bubbles. Like we’re doing – with no better results.

On deflation (and “too-low inflation”)

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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.

Inflation: what is it?

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I have an “inflation update” post coming. Before that one, let’s review what inflation is.

Most people think it’s price increases. People have been trained to think that way (which I’ll address in a bit). But it’s not. Inflation is depreciation of the money, which may then result in price increases.

In olden times, money was physical metal. For example, the UK’s “pound sterling” was once an actual 12 ounces of 92.5% silver metal.

Over the centuries, they made it a paper note, and then they kept diluting the value of the note, until today it’s worth a tiny fraction of a pound of silver. A troy pound of sterling silver today would be worth about £126 (or about $210). In other words, they shaved off 125/126 of the pound’s value, over the centuries. That’s inflation.

Likewise, the U.S. dollar. It was once defined as about 1/20 ounce of gold. To say it another way, gold was fixed at $20.67/ounce until 1933, meaning that the U.S. Treasury would really give you near-an-ounce of gold, if you demanded it in exchange for a $20 paper note. But today, gold is around $1250/ounce. Today, (1) the dollar is NOT a fixed amount of gold, and (2) if you were to exchange it, on today’s date you would find that a dollar gets you about 1/1250 ounce of gold, or about 1/62 as much as before. That’s inflation.

When the money is depreciated like that, it takes more units to represent another value – a loaf of bread, a gallon of gas, a car you want to buy, medical services, etc. So, inflation tends to mean higher prices. People call the higher prices, inflation. Except it’s not; it’s only a symptom of inflation.

Think of it this way. When you have a flu, your temperature may be 102 degrees. That’s a symptom, not a disease. The flu virus is your disease. Likewise, when the government (or central bank) depreciates the money, prices may be seen at higher levels. That’s a symptom, not a disease. The depreciation is the disease.

Why do governments depreciate the money? Because it’s a hidden tax. It means the government can spend more, without having to openly raise taxes. The government is always the number one beneficiary of inflation; always the real reason it’s done.

The government gets the most benefit if people don’t understand inflation, or think clearly about it. If people understood inflation, then everybody would raise the prices of their labor, goods and services, the moment they saw the government (or central bank) depreciating the money. So the government’s added spending would not go as far. The government would still benefit from being able to repay its debts in depreciated money. But overall, the government would get that much less bang for its inflated/depreciated buck.

Thus, the government – and its acolytes in media, Wall Street and academia – have a vested interest in people NOT understanding inflation. And so they spew a lot of crap about it. They muddy the waters with false doctrines – including the one I’m correcting (that inflation-is-about-the-price-increases-and-we-have-not-had-any-price-increases-you-idiot).

Another false doctrine they spew is that we somehow *need* inflation, because deflation (opposite of inflation) is somehow bad for people and scary. Deflation is bad – to the beneficiaries of inflation, namely Big Banking and Big Government. But not to average Americans. I may address that one, in a future post.