Stories
Slash Boxes
Comments

SoylentNews is people

posted by martyb on Thursday March 28 2019, @01:05PM   Printer-friendly
from the should-not-embrace-deflation-either dept.

Currently we can observe a general slowdown in the annual growth rate in price inflation across major countries around the world. [...] Most commentators are of the view that deflation generates expectations for a decline in prices. As a result, it is held, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators believe that policies that counter deflation will also counter the economic slump.

Inflation is not about general increases in prices as such, but about the increase in the money supply. [...] For instance, if the money supply increases by 5% and the quantity of goods increases by 10%, prices will fall by 5%. A fall in prices however, cannot conceal the fact that we have inflation of 5% here because of the increase in money supply. The reason why inflation is bad news is not of increases in prices as such, but because of the damage inflation inflicts to the wealth-formation process.

The economic effect of money that was created out of thin air is the same as that of counterfeit money — it impoverishes wealth generators. The money created out of thin air diverts real wealth towards the holders of new money. [...] So, countering a falling growth momentum of the CPI by means of loose monetary policy (i.e., by creating inflation) is bad news for the process of wealth generation and hence for the economy. [...] Furthermore, if a fall in the growth momentum of prices emerges on the back of the collapse of bubble activities in response to a softer monetary growth, then this should be seen as good news. The less non-productive bubble activities the better it is for the wealth generators and hence for the overall pool of real wealth.

https://mises.org/wire/central-banks-shouldnt-fight-deflation


Original Submission

 
This discussion has been archived. No new comments can be posted.
Display Options Threshold/Breakthrough Mark All as Read Mark All as Unread
The Fine Print: The following comments are owned by whoever posted them. We are not responsible for them in any way.
  • (Score: 4, Insightful) by slinches on Thursday March 28 2019, @02:48PM (2 children)

    by slinches (5049) on Thursday March 28 2019, @02:48PM (#821333)

    The really rich benefit whether there's inflation or deflation, so I don't see that as a reason to favor one over the other. But the impact to the non-wealthy of deflation isn't quite as damaging you imply. Yes, it makes debt cost more, but it also means that those with fixed salaries and hourly wages get more value out of the same paycheck. Both carry debt, but only employers pay salaries, so employers would be hurt more than the employees. I think we have been undervaluing the costs of inflation on the working class in our monetary policy. It's essentially a tax on them as the value of their income shrinks every year automatically and they have to fight for raises just to keep from falling behind. Due to the depressive effects it has on growth, deflation isn't something we should try to achieve long term, but I also don't think we should be taking extreme monetary policy actions like negative fed rates and such to avoid it. It really wouldn't be the end of the world if we dipped into deflation every once in a while. It would help give some relief to those most directly responsible for wealth generation, all those middle and lower class people who actually do the work to make things.

    Starting Score:    1  point
    Moderation   +2  
       Insightful=2, Total=2
    Extra 'Insightful' Modifier   0  
    Karma-Bonus Modifier   +1  

    Total Score:   4  
  • (Score: 3, Insightful) by Immerman on Thursday March 28 2019, @04:04PM (1 child)

    by Immerman (3985) on Thursday March 28 2019, @04:04PM (#821373)

    Except, if deflation were the norm, nobody would have fixed salaries - you'd get an annual cost-of-living wage reduction, instead of an increase.

    Of course, as you allude, one of the other less-discussed effects of inflation is that employers get to give you an automatic "invisible" pay cut every year by default, and you have to fight to get even a partial compensation for inflation.

    • (Score: 2) by slinches on Thursday March 28 2019, @06:56PM

      by slinches (5049) on Thursday March 28 2019, @06:56PM (#821450)

      True, that's why I said dipping into deflation temporarily isn't so bad. We certainly don't want to stay there, but monetary policy makers seem to act like the economy would instantly implode if the money supply were to ever shrink at all.