Deflation delusion

According to the Merriam Webster, a delusion is “something that is falsely or delusively believed or propagated”.  

Mainstream economics, (central) bankers and governments repeatedly say that hoarding, especially in times of crisis, is an economic disaster. When problems arrive, it should not be tolerated that scary misers stuff money in their mattress instead of consuming it, they say. The whole economics system will fall in an apocalyptic spiral otherwise.

Why? The main idea is the following. Due to fear, spiritus animalis or whatever reason, people expect consumer prices will go down in a near future, thus postponing purchases (yes, when you wait until winter sales to buy your stuff you are doing exactly the same).

Problem? If you guys do not consume enough, companies will end up in bankruptcy. Vicious circle, layoffs mean less aggregated purchasing power, less aggregated purchasing power means less consumption, less consumption leads to even lower prices. And so on.

Moreover, on the financial part it is claimed that people become less willing to borrow and those who had already incurred debts will now face a bigger problem due to deflation.

This last part, at least, it’s slightly true. When prices are falling but the repayment costs remains the same, the real value of an old debt is higher. Indeed, that is the only reason why Governments promotes inflation: because they are hugely indebted.

The rest is a myth full of bad reasoning and half truths, but today I only have time to focus on one simple fact.

Keynesians and Monetarist cannot even establish this time a causality fallacy because, empirically speaking, for more than 100 years, there is virtually no evidence of such a link between depression and deflation.

On the other side, during the XIX century, the American economy “endured” deflationary periods of 50 percent and enjoyed great growth rates. Indeed, one of the periods of greatest growth ever recorded in the U.S. goes from 1820 to 1850 and from 1865 to 1900.

Perhaps deflation could be not that bad….but maybe inflation is good for some other people. Clue: a sneaky 2% inflation for 35 years reduces the value of your money by 50%. 

Have a good week.

Deflation delusion by Manuel Fraga is licensed under a Creative Commons Attribution 4.0 International License.

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