10 February 2009

Falling prices are a good thing

Could not agree more with Mike Shedlock in his latest post:

The idea of a deflationary trap is in and of itself complete nonsense. Deflation is actually a natural state of affairs. As productivity increases, standard of living rises and prices fall. Absent government intervention, productivity would actually increase the amount of goods produced, causing prices to drop. Falling prices are a good thing not a bad one.

Fed and government policies rob taxpayers by promoting policies of inflation. Look at what accompanies rising prices: rising property taxes, rising sales taxes, and rising income taxes. Is that a good thing? The answer is no, especially when wages fail to keep up, which is exactly what happened.

Who benefits from inflation? The answer is government, banks, and already wealthy because they are first in line to receive money. Everyone else is screwed. Inflation is theft from the middle and lower classes for the benefit of government and the wealthy.

Over time, the government and the Fed so distort the economic picture, that a mentality sets depicted in the often heard phrase for a few years' back "Better get that house now, before it's too late".

The problem is not falling prices, the problem was the excess of debt that led to massive speculation and ever escalating prices.


  1. Deflation from rising productivity would be great. Crashing asset prices: not so much.

    Just got my super statement. It has taken another big hit but fortunately I don't have a lot and I've never contributed myself. I'm in collectables. ;)

    To be fair to Mish though I did notice a couple of consumer items a bit cheaper lately but I'm a bit sanguine about negative CPI happening in Oz. The US might see negative CPI but I don't think they'll depression style deflation though you never know.

    Chase up a chart of the CPI in the depression years and see how it compares.

  2. Bron, we think alike. Thanks for quoting Mish and Keen. As odd as it may seem, I think your voice carries a good deal of weight in the blogosphere. Yves Smith picked up Steve Keen's theory of credit expansion, for instance, and gave high profile space to reprint his work in toto. This is the first time in donkey's years I've found cause to be optimistic. The truth will out. Not in Canberra maybe, but the spectacular "stimulus crash" later this year will wipe out the monetarist orthodoxy.

  3. Thanks for the comments. So we have an optimist, although you do know that most conventional economists and average people out there would think you a pessimist.

  4. Actually, almost everybody loses from deflation. Only people with huge piles of cash win. Everybody else loses: companies lose because they can't sell product, workers lose because wages are reduced or they are laid off. Investors lose, bondholders lose (risk of default is much higher in deflation).

  5. The peculiar problem with falling prices in a fiat system is that repaying long term debt is all but impossible unless productivity gains are large and sustained throughout an industry's maturity cycle. Unfortunately this is rarely ever the case. As a result, no sane fiat issuing central bank would ever advocate a regime of falling prices. Indeed, the Federal Reserve was created in part to help finance the massive industrial expansion that was impossible under the classic gold standard (though it would have been possible under the Professor's Real Bills mod).