Deflating the Deflation Myth

The Mises Institute ^ | 4/2/2014 | Chris Casey

[expat_panama]

An important one is a strong decline in economic *velocity*.

I disagree. The velocity of money is an interesting but, ultimately, meaningless metric.

If we're talking transacted prices then velocity is everything because if the money isn't moving (like maybe it's sitting in some bank somewhere) then it's simply not involved with defining some price.  That's why velocity can track inflation even while money supply growth stays unchanged:

Aw hell, I know all this mussin' 'n fussin' with all this here fancy dancy book learnin' gets a might high-fallutin', but ya know business is like they say, business...

[Toddsterpatriot]

But the economy can only be "starved" for money when it has previously been fed too much by the government which suddenly yanked it away.

Of course that's not true at all. What if the previous supply was just right, and then doesn't keep up with growth. That would result in deflation as well.

A free market in money would adapt to changes in its supply

Right. By dropping prices, reducing employment and reducing production. Increased defaults, reduced borrowing and less new business creation.

[BfloGuy]

Of course that's not true at all. What if the previous supply was just right, and then doesn't keep up with growth. That would result in deflation as well.

No! What you say is "not true at all".

The only "just right" supply of money is that which the free market determines is "just right". The government cannot determine it for us.

If you believe it can, then you must examine your premises. They seem to land heavily on the planned-economy side.

[Toddsterpatriot]

The only "just right" supply of money is that which the free market determines is "just right".

If the free market supplies the "just right" amount now and in the future supplies less, deflation can result.

Why does that make deflation a good thing?

[BfloGuy]

If the free market supplies the "just right" amount now and in the future supplies less, deflation can result.

Why does that make deflation a good thing?

Because deflation is an increase in the purchasing power of the currency. It isn't any more complex than that. Why do you continue to reject that a dollar growing in value is a bad thing?

I suspect it's because the only deflation you've witnessed in your lifetime is the wrenching kind caused by government price-fixing of the interest rate. A free market wouldn't see that.

[Toddsterpatriot]

Because deflation is an increase in the purchasing power of the currency.

And?

Why do you continue to reject that a dollar growing in value is a bad thing?

I don't reject the idea that deflation is a bad thing. Because it hurts investment, reduces employment, increases loan defaults, reduces borrowing and shrinks business creation.

[BfloGuy]

Because it hurts investment, reduces employment, increases loan defaults, reduces borrowing and shrinks business creation.

I don't know why I continue to waste the pixels.

The only deflation that does what you state is the deflation created by the Federal Reserve Bank when it raises interest rates above the artificially-low rate it had imposed previously.

Are you truly unable to see the difference between that and the price reductions caused by improvements in productivity? If so, why?

[Toddsterpatriot]

The only deflation that does what you state is the deflation created by the Federal Reserve Bank when it raises interest rates above the artificially-low rate it had imposed previously.

I guess you missed the Panics, Depressions and Crashes that occurred when we had no Central Bank and which caused the deflation that you claim is impossible?

Are you truly unable to see the difference between that and the price reductions caused by improvements in productivity? If so, why?

Are you truly unable to remember post #5? If so, why?

[Oceander]

Interesting discussion; I just wish I had enough book learnin’ to really follow it.