Would Deflation Be a Good Thing or a Bad Thing?
Posted November 20th, 2008 by xntryk1
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Wednesday, November 19, 2008
Would Deflation Be a Good Thing or a Bad Thing?
A headline from Associated Press today reads "Dow slips below 8,000 on growing fear of deflation". See also this and this.
But would deflation be a good thing or a bad thing?
Well, lower prices are good for consumers. As Business Week puts it:
"A bit of deflation that boosts real wages may be the best way to get American households out of the hole."
(higher "real wages" means that people's wages will go further because the prices of things we buy will be lower).
But Nobel economist Paul Krugman argues that deflation would be bad because it would drive up the cost which corporations have to pay to borrow money.
The Guardian points to other adverse effects from deflation:
Another effect of falling prices is to increase the burden of any given amount of debt, even as banks and households are sharply paring debt, or deleveraging, in reaction to financial turmoil and a wave of bad economic news.
"The problem with negative inflation is that the real value of your debts is increasing," Societe Generale economist James Nixon said. "In a deleveraging cycle you need negative inflation like you need a hole in the head." ***
Deflation would be problematic because, if sustained, it could lead consumers and business to curb spending further, shrinking economic activity and reducing demand even more, and pushing prices lower still.
So its a mixed bag. On the one hand, lower prices would bring some relief to consumers, at least in the short-run. But consumer and corporate debt would be more burdensome, and deflation would lead to a further economic slowdown, which could eventually lead to salary cuts and further layoffs by employers, and - ultimately - a depression.
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Good thing if done on product by product basis
If you look at something like computers and electronics, their prices have gone down over time (even with dollar inflation). So this is effectively deflation in one sector. We used to pay way more for computers that did a lot less, but today you can get a $200 computer that does things the old ones couldn't do.
So if we could get deflation due to increased efficiency in other sectors like food production, clothing, housing, automobile, etc... then that would undoubtedly be good. It would benefit the poor people incredibly because they could afford to lead a prosperous lifestyle.
However, if the Fed or some other body artificially makes deflation happen by manipulating our money supply, something tells me that would be bad.
So deflation under a free-floating commodity based currency = good
Deflation by manipulation = bad
I always try to put questions like this in perspective ....
I read it as ....
Will deflation quicken our journey to freedom.
The answer is yes it will ...
The rich will get richer and the poor will get poorer, not good when you are trying to prevent a revolution.
Also, I have no doubt, even if you tend to think that this crisis is a result of a plan, that it would be hard to see that deflation was planned. It is an animal that can not be controlled.
You want a little seredipitous irony to add to this answer ...
Gold may actually skyrocket in a deflationary cycle. Not saying it will, but it might.
The haves may start hoarding gold anticipating the potential for a near hyper inflationary cycle that could follow.
Here is a little double irony ....
The inflationary cycle will only come about if Keynes is successful once again at staving off the inevitable.
WAHOR!!
http://www.dailypaul.com/...
Good for savers and bad for
Good for savers and bad for those in debt.
Aesop
One day a hare saw a tortoise walking slowly along and began to laugh and mock him. The hare challenged the tortoise to a race and the tortoise accepted. They agreed on a route and started off the race. The hare shot ahead and ran briskly for some time. Then seeing that he was far ahead of the tortoise, he thought he'd sit under a tree for some time and relax before continuing the race.
He sat under the tree and soon fell asleep. The tortoise, plodding on, overtook him and finished the race. The hare woke up and realized that he had lost the race.
The moral, stated at the end of the fable, is, "Slow and steady wins the race."
Read Deflation and Liberty
Read Deflation and Liberty by JÖRG GUIDO HÜLSMANN
Here's a free copy:
http://mises.org/books/de...
http://www.1776solution.b...
I would remind you that extremism in the defense of liberty is no vice! And let me remind you also that moderation in the pursuit of justice is no virtue. Barry Goldwater
Bumped for the late risers....
http://groups.yahoo.com/g...