[this pretty much says all that I wanted to say on the matter…]
Deflation Bonanza! (And the Fool’s Mission to Stop It) ~ Mike Shedlock (Mish)
[extracts – follow the link for the full story]
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
“Conventional wisdom is that Swiss exporters will be crucified and importers will benefit. Certainly there is an initial shock. But long-term, look at it this way: The price of materials used in exports (metals in watches and Swiss-made machinery) will get cheaper. …
Shoppers are shopping! They are even booking extra trains to Germany to do so. Fancy that! Other travel is up as well. Gee who coulda thunk? The widespread belief is that when prices fall, shoppers will wait and wait and wait. I Have been mocking that view for years.
Challenge to Keynesians
I challenge Keynesians and Monetarists to prove rising prices provide an overall economic benefit.
Sure, those with first access to money benefit (the banks, the already wealthy, and government bodies via taxation). But that is at the expense of everyone else.
The absurd underlying notion behind the battle cry for inflation is that if prices fall people will stop buying things and the economy will collapse.
Reality Check Questions
- If price of food drops will people stop eating?
- If the price of gasoline drops will people stop driving?
- If price of airline tickets drop will people stop flying?
- If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
- If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
- If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
- Will people delay medical procedures in expectation of falling prices?
- If deflation theory is accurate, why are there huge lines at stores when prices drop the most?
If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?
Krugmanites Cheer Abenomics
The idea that falling consumer prices will lead to a downward spiral is absurd. Everyone in Japan would have died long ago if that was true.
Instead of accepting the gift of falling prices (a clear benefit to consumers), Japan fought it every step of the way with the Krugmanites cheering every step of the way.
Japan Deflation Fighting Results
Japan has gone from being the largest creditor nation in the world to being the largest debtor nation in the world
- Japan now has the largest debt-to-GDP ratio of any developed country, roughly 250% of GDP.
- Japan has totally and completely squandered every bit of its savings.
- Keynesians cheered every step of the way, amazingly concluding, Japan failed because it did not spend enough!
Asset Deflation vs. Consumer Price Deflation
Central Bankers to the Rescue – Not.
The fear of falling consumer prices is absurd.
Ironically, by fighting routine price deflation, central banks create asset inflation, pent-up volatility (the Swiss franc is a prime example), speculative bubbles of increasing amplitude (housing is a prime example), and income inequality.
When those asset bubbles break, banks are inevitably in trouble over loans made on speculative assets (for example housing bubbles or more recently loans made on wells that need $90 oil to be profitable).
Then, the central bankers inevitably try to ease the shock, further encouraging moral-hazard speculation. The pattern repeats over and over creating bubbles of ever-increasing magnitude.
There is ONE area where inflation is good.
It is good for governments – they can inflate their debt away.
And for that dubious pleasure – the rest of us bleed.
We are bleed to feed .govt
But hey, we are just the cattle class anyway, aren’t we…
That is our natural function for our overlords – right?