Deflation is the economic bogey man governments use to justify the printing press. Yet there is nothing to indicate it would necessarily be a bad thing. It has been a natural part of economies in the past, even over successful periods of progress, and the concept of a deflationary spiral destroying the economy has little basis.
Matthew Lyn at Bloomberg: In reality, anyone with a sense of economic history would have been aware that the whole deflation story was oversold. In the U.K., the House of Commons Library publishes data on prices going back to 1750. From 1814 to 1914, prices rose a bit in some years, and dropped a bit in others, so there was no real change in the price level over the century.
In other words, there were plenty of deflationary years. Yet over that period, the U.K. became the greatest economic power in the world: Its relative decline only started once inflation took hold. Deflation didn’t stop the Industrial Revolution, one of the most sustained times of economic creativity ever seen.
Likewise, a 2004 study by the Federal Reserve Bank of Minneapolis looked at the data on deflation across 17 countries over 100 years. It found that although the Great Depression of the 1930s was linked with falling prices, that wasn’t true of any other historical period. There was, it said, “virtually no evidence” that deflation caused a depression.
The concept of deflation triggering an endless downward spiral for demand, due to consumers delaying purchases in the hope of prices falling further, isn’t born out by either experience or logic.
Lyn makes a good point that the tech industry already faces deflation yet is able to stimulate demand regardless. People still buy flat screen TV’s despite knowing the price will fall in the future. Time, and delayed enjoyment, have a cost.
There are also many necessities in life we simply need now and will buy, even if we think prices will fall further. You can’t postpone food purchases infinitely. The same goes for types of education and healthcare. Even delaying enjoyment for life’s luxuries has its limits.
In fact, if you are a consumer and a saver, then deflation is your friend. You enjoy falling prices for products and your savings aren’t eroded by inflation. Yet if you are a heavy spender or a leveraged borrower, such as a bank, then you’re likely to prefer inflation. Thus inflation isn’t really about stimulating the economy (or even, necessarily, devaluing the currency) it’s about preserving the old, broken status quo.
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