Deflation Is Always Good for the Economy

Mises Institute ^ | 08/04/2016 | Frank Shostak

[ConservativeMind]

For most experts, deflation, which they define as a general decline in prices of goods and services, is bad news since it generates expectations for a further decline in prices.

As a result, they hold, consumers postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. This weakens the overall flow of spending and in turn weakens the economy.

Hence, such commentators hold that policies that counter deflation will also counter the slump.

If deflation leads to an economic slump then policies that reverse deflation should be good for the economy.

Reversing deflation would imply introducing policies that support general increases in the prices of goods, i.e., inflation. This means that inflation could actually be an agent of economic growth.

According to most experts, a little bit of inflation can actually be a good thing. Mainstream thinkers are of the view that inflation of 2% is not harmful to economic growth, but that inflation of 10% could be bad news. (Indeed the Fed’s inflation target is 2%.)

Thus, we can conclude that at a rate of inflation of 10%, it is likely that consumers are going to form rising inflation expectations.

According to popular thinking, in response to a high rate of inflation, consumers will speed up their expenditure on goods at present, which should boost economic growth.

So why then is a rate of inflation of 10% or higher regarded by experts as a bad thing?

Clearly there is a problem with the popular definitions of inflation and deflation.

[Freedom_Is_Not_Free]

We debated the snot out of this in 2007.

[metmom]

There has been anticipation of a market adjustment for years.

Nobody was ever sure when it would happen, why it would happen, or how bad it would be.

One thing I’m sure of is that nobody expected something like this to trigger it.

Anyways, for the time being gas is cheap and people are learning that they cannot depend on anyone else to take care of them and that they need to be prepared.

I can see a lot of good coming out of this as people priorities get straightened out and they learn what’s really important.

[mulligan]

Is inflation good?

[LRoggy]

Sometimes academics on BOTH sides need a reality check, both tend to live in their own bubbles too much. Deflation is only good if it comes from innovation, not because there’s too much supply.

Whether society has too much debt or not is a moral judgment in economics and society, but it’s also a modern reality that has to be accounted for and plenty of seniors need an income stream that debt issuance can help alleviate.

[Rockingham]

Golly, who knew? For all these decades, the Great Depression has been getting a bum rap when it should be praised as a golden era of deflation. Of course, the author would likely contend that the less happy aspects of the Great Depression such as mass unemployment and poverty were unconnected to deflation and were due to an inevitable economic hangover after the speculative, inflationary excesses of the 1920s. Few historians or economists though would endorse such a formulaic view of the era.

The better point is that the policies of monetary and price stability, low taxes, spending restraint, and limited government urged by Milton Friedman and other free-market economists offer a more secure formula for prosperity. Experience though shows that policy errors and the dislocations of events will inevitably call for remedial action by central banks and national governments. And in such extremities, it is ludicrous to urge "Deflation! More deflation!" like a carnival sideshow pitchman peddling a universal health elixir.

[Crucial]

I see gas under two dollars so I’m going to fill up the tank instead of halfway. I anticipate that in the future I will pay more so I buy. Its not a loss if prices go down further while I have a full tank. It’s a loss if I wait and pieces go up.