is worth reading.<P>True enough the classical definition of inflation is that it involves too much money chasing too few goods and services. <P>On the other hand, productivity improvement can result in too little money chasing too many goods and services.<P>The loss of money occurs with a decline in demand for lines of credit as products become less costly at the producer and wholesale levels. This drives down interest rates, and as they decline fewer and fewer people invest in lending institutions.<P>The United States has been banging away with 4%, 4.5% and nearly 5% productivity improvements each year since something like 1995 so we should have already seen the effect. Even a 2.5% productivity improvement sustained over several years in the ramp up to the higher levels ought to have destroyed many retail credit operators ~ e.g. Savings and Loan Associations ~ and we saw them wiped out during such a ramp up period.<P>There are other ways for liquidity to be reduced by productivity improvement ~ bet some of the guys at Bear-Sterns will be on the lecture circuit telling us about them in the next few months.<P>But whatever impact inflation might have the deflation created by productivity improvement can be equally devastating, or worse. One of the problems in dealing with deflation is that you can't go below 0% interest rates in the effort to control the growth of money. Rather you have to bite the bullet and start up the presses.
If interest rates fall, prices for loans fall, and firms borrow more. So the argument in your snippet doesn’t make sense.
Deflation is good for lenders, bad for borrowers.
Inflation is good for borrowers, bad for lenders.
Why should one be ‘better’ than the other?????
Why is deflation (a gradual lowering of prices) necessarily “bad”???
Deflation does not mean people “won’t invest”; real capital gains are still an incentive to invest in that particular situation.
I am not a deflationist, I am simply saying that inflation has it’s downsides, too — and in a number equal to those of INflation. Neither is “better” or worse than the other.
This is textbook stuff. But we're not close to a textbook environment. For one thing the interest rates are not set by the market, essentially they are set by the Fed. The Fed is all for low interest rates to make lots of money available. Investment in lending institutions, or lack thereof, has almost zero to do with the money supply in todays world.