Explain to me why a general price deflation is necessarily bad

10 posts


I always hear that this is bad. This myth has come from our observances of the American depressions. (1921 and 1930) Noticing a trend of severe (not mild) price deflation, the case was then somehow made that steady and mild price deflation is bad for an economy.

One example that is brought up is the computer industry. These machines provide more functionality and more computing power for less and less money.

When this example is brought up, some mention that if there is a general price deflation, people and businesses will hoard money forever. Why would they hoard money forever? Because the money will appreciate in value and they can buy more in the future, so they withhold buying today. No I ask: Why does this have to be the case for the economy in general, but not for a specific industry? We see that the price deflation in computers far outstrips the general price increases, so on net we have general price deflation in this industry. The "hoarding for forever" argument does not hold for this industry as we see that people make purchases. And what is the economy made of? Industries. So if price deflation doesn't keep people from buying computers, why would it keep them from buying other goods in other industries? Put simply: If your money now can be held to buy more computer power/functionality later, but you buy it now, why is it that one would hold off indefinitely for other goods and industries?

Also, people buy food rather than starve.

Also, this:


I'll later bring up the milder form of the argument and address that as well later. The "problem" that consumer spending is less in a price-deflationary economy.

Because, in the presence of deflation, you're better off holding money rather than using it for its one purpose; intermediating economic transactions. Ezra Pound of all people convinced me that this is true.

I think with this essay: http://www.counter-currents.com/2011/10/what-is-money-for/

"It is the business of the STATE to see that there is enough money in the hands of the WHOLE people, and in adequately rapid EXCHANGE, to effect distribution or all wealth produced and produceable."

If your money increases in value within your own economy, effectively it becomes a valued commodity. The actual economic transfers stop, and people starve while food rots in warehouses.

Computers getting cheaper and better has nothing to do with anything.

It has several uses. This is only one of them. Unit of account and store of value being two of its other uses.

The deflationary spiral heat-death theory of the universe.

We've seen this happen in the great depression. It was a deflationary spiral proceeded by an inflationary (upward) spiral. Don't force the latter and the former won't happen.

General mild deflation has never led to those circumstances. The worst its done is cause some minor bank panics. (Who here has sympathy for the banks?) The deflation makes the money worth more, effectively allowing wage earners to buy more with their money. The "Long Depression" is only classified as a depression because poor bankers kept going out of business and there was mild deflation. Real wages went up steadily, per-capita earnings went up, GDP doubled, and the US became one of the strongest countries in the world only a generation after brutal civil war.

One of the effects of inflationary policy is to drive the savings rate (and possibly actual savings) to zero. Everything available for use in the economy is available to us because it is some form of savings. (i.e. it is something made but not fully used up)

The inflationary policy doesn't help the wage earner. It gives him a compromise: either live like a consumerist or live like a poor for 15+ years to acquire enough wealth to become a capitalist and be on the winning end of inflationary policy.
Trash World Conquistador

The overwhelming majority of people are debtors, not creditors. Inflation is gay, a lil extra tax, but ultimately a transfer from creditors to debtors. Deflation however is catastrophic. Your mortgage, student loan, etc becoming functionally unplayable due to economic policy results in an immediate violent response. Deflation makes insurrection rational behavior for the majority of people


Welund in reviving this thread you've ruined my day:

Typical to the libertarian / liberal mode of economic analysis, you're looking at things in terms of individual decisions and what they will be compelled or induced to do. I think that the essence of the problem lies not in that vein but in the vein of: how the different elements comprising the economy and their relations to each other are altered by downward shifts, dramatic or otherwise, in the price level - I say price level here because theoretically the money supply could remain the same but the price level would go down in the event of an expansion in the supply of goods; I find this unlikely to happen today but there is historical precedent for it in periods where the conditions for growth have been exceptionally strong. It is imperative to understand that A) the economy is a system and that B) men are governed by systems. Men may change systems, but as a baseline rule, they are governed by systems and the mindset following from the realization of this truth (necessary for this field of thought) is, to me, always maddeningly absent in libertarian / liberal economic analysis.

Since talk of price levels, money supply, deflation, inflation, etc. has been such a major point of miscommunication throughout economic history, for the sake of this post we'll just call it deflation. To distinguish between bouts of monetary contraction and decreases in the price level born not of monetary contraction but increases in the supply of goods at a stable money supply, we'll refer to these as normal deflation and simulated deflation respectively.

So, there's a lot of problems with deflation and they all need to be understood in combination with each other for the full effect of the argument. So it's important that any critique here be leveled in the context of the sum of the parts; a line-by-line dissection of the points won't do any good for the advocate or the critic.

The first problem of deflation is the most obvious, namely that for the existing available produce brought too market, the means of payment does not exist in sufficient quantity to buy it back. The typical response to this is Say's Law; prices will adjust downward. In order that this assertion to hold true it should be scrutinized further. How are changes in prices expressed in the market? By way of selling and buying, and by way of the re-evaluations of the buyers and sellers in the interim of their actions. Let's imagine a regular economy in which the money supply has suddenly been halved overnight. In order that the disappearance of the media of exchange manifest into a lower price level it must go through the market's way of expressing itself: buying, selling and re-evaluation. The first effect of this monetary contraction will be a lack of demand; people will not have the money to buy the product at the given unadjusted price level. What will businessmen do in response to lowered demand? Liberals / libertarians hold an assumption that they will, as good stewards of liberal ideology, adjust their own sale prices downwards and facilitate the necessary changes to the new normal. But we must ask, why would a businessman, in the face of lowered demand, lower his prices before the costs of his inputs have been lowered? Think about this: will he lower his prices with the faith that his fellow businessmen will lower the prices on their goods which serve as his inputs? In order for this to work perfectly such that none of the businessmen suffer any adverse effect, it would have to occur unanimously and simultaneously. There is no reason to believe that that would ever happen. There is no reason to believe that, especially when the businessman has a superior alternative presented to him, which is not to lower his prices but to lower his costs. He can still conceivably, in the face of this calamity of absent demand, reduce his exposure to a bad marketplace by cutting his costs. Usually the first costs to go are labor costs. This is because, as a good rule of business, an entrepreneur will keep on staff enough labor such that the firm would not be overwhelmed by a surge in demand; good businesses keep slightly too much labor. It follows then that the natural decision for the businessman, during sudden deflation, is not to sacrifice himself by selling his goods at the “new” lowered price, while paying at the “old” higher price, ultimately at an unprofitable rate in the hopes or confidence that others will follow suit. That saintly behavior can't fairly be attributed to a normal businessman. So he'll do what is the natural, safe, and profitable (economists must always expect businesses to do what is profitable over what is unprofitable) option: reduce labor costs. From here the answer should be obvious. When businesses en masse, and, in terms of rational self-interest, for good reason, decide to reduce their labor costs, unemployment spikes, the labor pool grows, wages must concordantly fall, and thus demand must fall also, thus intensifying the original root-problem; a positive feedback-loop in the market economy. Here we see clearly one of the many paradoxes of a market economy, where enlightened self-interest breeds destruction and mass irrationality would have produced stability (some libertarians read this as a Keynesian endorsement of hysteria, when really it's just a recognition of the inherent shortcomings of an economy directed by the cost-cutting logic of the business community).

The second problem of deflation was Irving Fisher's claim to fame: deflation has effects on debt contracts. Namely, it makes the effect of debt held by the economy more severe. As debt contracts are agreed to in nominal rather than real terms (for who can predict what the real terms will be years from now? It can't be done otherwise), a change in the price level such that today's dollars are much dearer than the ones agreed to earlier will increase the debt burden on society. Let it stand as a general rule that the debtors are the many and the creditors are the few. From this it follows that any significant change to harshen the debt-burden will change the ability of the economy to buy back its own product, as this itself is heavily contingent upon the financial well-being of those that don't live off of rent and interest (the vast majority of the populace). Moreover, when the debt-burden suddenly increases, there will predictably be an increase in bankruptcies. In order for the true severity of this point to make sense, we have to bring to light the inherent fragility of our monetary system, as Irving Fisher did in his books ('100% Money' is a good one for any type of person to read). Banks create money in the form of loans. When loans are matured or defaulted upon, the money supply shrinks. This is usually fine because, once repaid, the bank can usually find another loan-seeker. But sometimes it isn't fine. To keep it short here: as the stability of the money supply is dependent on the stability of the money-creating class (the financial sector) a sudden string of bankruptcies which destabilizes the financial sector (banks failing, restricting credit, etc.) will further contract the money supply, intensifying the debt-burden, leading to more bankruptcies, leading to a smaller money supply and so on. One more positive feedback-loop in the market economy.

The third problem of deflation is the one which libertarians / liberals point to the most because it most conforms with their wirtschaftanschauung as nothing more than the relationship between deep-pocketed consumers and retail stores. The problem is this: deflation causes people to expect that prices will be lower in the future and so they should wait for a little while until that point. On the inverse, inflation causes people to expect that prices will be higher and that they should spend now, causing a little boost in demand. Personally, I don't really think that people behave this way; waiting for a laptop to drop from $1000 to $900 in 6 months. They just buy a used one for $500. Maybe this is the case with things like real estate. Anyways, I'm happy to concede this to libertarians / liberals as a “not good enough” or “pro-consumeristic” argument as, to be frank, it is ineffectual as a proof of deflation's ills in comparison with the above two structural contradictions / problems (employer cost-cutting and debt-deflation), which have nothing to do with consumer preference.

Re: Broseph's response to Perkunos

There is an attitude among libertarians that, as long as something is bad for banks, then it is good for people. This is sometimes right and sometimes catastrophically wrong (exclusively the latter being supported by libertarians). Because the banks are the money-creators and therefore the gatekeepers to the money supply, we, as subjects of their usurpation of money creation are obligated to protect their well-being purely as a matter of self-preservation. If banks did not create money, then I wouldn't care two shits whether they lived or died. But because they are, structurally speaking, the stewards of the lifeblood of the economy and until our leaders both understand the state's exclusive right to seigniorage and have the balls to enforce it, we are forced into a position of protecting them as a means of protecting ourselves from deflation. It's only the insanity of libertarians that could allow them to cheerlead something like this (flash deflation), as it is their one opinion on economic policy that's an opportunity to flaunt anti-elitist credentials... by ruining everything.

The Long Depression... what can you say other than, the President could have signed a law forcing every man to chop off his right hand and you still would have had %6.0+ annual GDP growth from 1880-1890 due to the exceptional economic conditions of the time (newly constructed railroads creating a massive interconnected national market, dozens of revolutionary new technologies in chemistry and mechanical engineering, etc.). The one valuable thing that Mises taught me was that you cannot point to episodes in economic history as proof of a successful policy. It is an absolute epistemic non-starter; economic issues must be solved theoretically or intuitively.

What should be a good tip-off for anyone with healthy class instincts is that the Long Depression was initiated in 1873, when a coalition of East-Coast gold-rich bankers, the protagonists in this libertarian happily-ever-after tale, succeeded in convincing the legislators and executors of the nation to demonetize silver, thus putting the whole of the country under their gold-rentierdom (new discoveries of silver out West threatened their power as sole possessors of the country's supply of loanable funds) and halving the money supply overnight. What followed from this demonetization (The Coinage Act of 1873) was the weakening of the mid-western Yeoman class; the farmers' debts were intensified, many went bankrupt, and a long chain of property transfers from the farmers to the bankers and land-speculators occurred.

Talking about whether inflationary policy either compels a wage-earner into consumerism or into ineffectual savings is a misunderstanding of the terms. It's a conflation between our current monetary system, which expresses inflation as lowered interest rates and additional bank reserves, and inflation qua inflation (a simple increase in the money supply). Conflating the two prevents the conflater from conceiving of deflation and inflation as pure events, unconditioned by policy. It's essential to be able to do so. Whereas our system expresses inflation as lower interest rates and higher bank reserves, one could easily create a system of political economy in which inflation is expressed as lower taxes or increased infrastructure spending, both of which would result in a higher household income, not encouragement of indebtedness like with our current system. The policy of inflation under our current political economy kind of helps the wage-earner, but its true beneficiary is the asset-holder. It helps the wage-earner only inasmuch as he is not subjected to deflation (unemployment, lowered wages, worsened debt), so I'd still say that's a plus.

Also, equivocating financial capital with capital goods is wrong, but that's a different topic...

Inflation is bad for savers, ie, any intelligent worker that wants to better himself. If you want to create a population of slaves you reward debtors for mistakes. A mortgage and student loan debt in many if not most ceases should not have existed in the first place.

If only there were some way to store money in such a way that it appreciated in value outside of a savings account at a bank...

What I really mean is saving money for something you want to buy, like a car, rent/house or materials for a business. Mortgages as the basis to "investment" are a problem when we're trying to get away from an economy based on infinite growth through immigration, which is what drives up housing these days.

The takeaway here (if you're an economist) is that literal physical expansion grows an economy and not much else. Otherwise you're competing over the same resources.
Productivity increases (aka muh faster computer) grow the economy, as does starting new businesses. The latter is less likely to happen in deflationary economies. Why invest in a new business if your returns from sitting on a pile of money are bigger? You'd only invest in businesses which are extremely high margin, which rules out virtually everything which employs people and keeps the economic system humming.

The problem with the word "money" is it is used conceptually for several things. Wagecucks look at money as a store of value. It's not, really. It's a medium of exchange (and unit of account). Using money to store large amounts of value is deranged. Interest in a savings account doesn't come from some magical place; it comes from investing the money in other, presumably low risk ventures. Generally, loans.

FWIIW, when money was gold based, this actually made a lot of sense for one simple reason: the cost of getting the shit out of the ground, and so, the supply of the stuff was largely proportional to the size of the economy. This was true in medieval times, and it remained true through industrial days. When the service economy grew larger than the industrial economy, though, it stopped being true. When you look at the events where there were bursts of gold injected into an economy (aka Spain, etc), things were inarguably deflationary and more or less ruined the economy as an economy.