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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
(Score: 3, Interesting) by Immerman on Friday March 29 2019, @05:01PM
You're basically right, but I think overstating the severity of the inflection point.
Lets look at a typical small business with an inflation-tracking rate of interest rate of ~4%, in the face of ~2% inflation. A 2% "Real value" ROI if there was 0 risk, (and unless it's an unsecured loan that's pretty close to true - while an unsecured loan will typically incur a significantly higher interest rate)
Inflation falls to 0%, they're no longer getting the benefit of having their wealth not evaporate while sitting in the vault, but are still getting the full 2% real-value ROI
Inflation falls to -1%, they're only getting a 1% real-value ROI compared to the money in the vault, but it's still better than not lending
Inflation has to fall all the way to -2% before they're actually better off not lending the money.
Essentially, low deflation amounts to giving everyone the option of a low-risk, low-reward investment opportunity to compete with the market alternatives. So long as it's substantially lower than the typical real-value ROI, it will only chip away at the least-profitable investments, which pretty much translates to the least-effective avenues of economic growth.
Now, if you compare it to inflation, instead of stable-value money, then you also need to consider the investment-stimulating properties that inflation brings to the table. But even with inflation, there's always the option of storing wealth in stable-value assets rather than investing or letting it evaporate into the pockets of the central bank.
And that's the biggest thing that often goes undermentioned when discussing managed inflation - it isn't just a economy-stimulating game, it's also a transfer of wealth directly into the hands of the people printing more money. And as such, the opinions voiced by them and their allies should be taken with a grain of salt, as they have a substantial personal incentive to increase inflation as high as the economy will bear.