Gold just hit a record high, Bitcoin is on the march, and the middle class is disappearing, with rampant and destructive inflation as the most obvious signal of declining prosperity. And yet, even now, it has already started: the warnings of the coming deflation.
It’s all because we’ve experienced some price declines in some sectors. The CEO of WalMart expects more. Many people do.
That’s a welcome relief. It should be expanded to all sectors, including food, which is up by at least 30 percent over four years.
Consumers are still waiting for a return to 2019 prices, hoping against hope. Keep in mind, that would require a solid 20 percent drop in prices across the board. This would bend the curves in the right direction and thus eliminate the wild distortions of the past four years and get us back to the prosperity we once knew.
Yes, such a dramatic price decline would be rather alarming, especially considering that wages and salaries would sag alongside the change. But remember that there are two ways to get a raise: more money incoming or spending less money on what you buy. They’re two sides of the same coin.
All told, a dramatic fall in prices would go a long way toward saving the U.S. standard of living from its current downward slide.
Now, the mainstream economists show up to assure us all that this would be a disaster.
CNN goes on to say: “But the problem with deflation is that when people begin to expect lower prices in the future, they have little incentive to make purchases right now. For instance, unless it was absolutely necessary, why would you buy a new oven today if you thought the price would go down significantly in a month? When enough people think that way, it causes massive pullbacks in spending. That can prompt a recession if it means businesses can’t afford to employ as many workers.”
That paragraph is a typical load of Keynesian poppycock. When consumers aren’t spending, they’re saving, which is great for capital investment. It results in lower interest rates and forms the basis of future prosperity. Contrary to the conventional wisdom, economies aren’t built by spending but by saving and investment. It was the burden of supply-side economics to explain that, but one supposes that the lesson will never stick.
It’s correct that an overall deflation is rare. But it’s incorrect that it’s always associated with economic stagnation. Between 1870 and 1900, the United States experienced the greatest economic boom ever seen until this point in history, complete with world-changing technologies, including communication, flight, internal combustion, and the commercialization of steel.
During this period of the gold standard, the dollar gained in value relative to the goods and services it purchased. There was no panic, no depression, no weird warnings about deflation, and so on. The increased value of the dollar was widely seen as a strength.
Why is it that economists are so often in a frenzy about the prospect of deflation? It traces to the great phobia about the 1930s, in which prices across the board really did fall. In those days, there was a widespread and frantic debate about what was causing the problem. Theorists made a huge error. They deduced that the falling prices were causing the depression.
The solution, then, was to raise prices.
This is completely wrong. Falling prices aren’t a cause of economic depression. They can be a symptom, to be sure, but they also serve as a salve for the consuming public during hard times. Indeed, if we were to find one bright spot of the entire period of the Great Depression, it was precisely that goods and services were cheaper for the public. That’s another way of saying that the dollar was gaining in strength. That’s a benefit.
But wouldn’t falling prices kill business profitability? Not at all. The costs of everything else fall as well, including inputs and transportation. There would be bargains available everywhere, and entrepreneurs are uniquely suited to adapt to such conditions.
We can see this at work in the most productive sector of the U.S. economy in the 21st century: computers and technology generally. We’ve seen at least a 75 percent fall in prices in the entire industry at a time of rising profitability and productivity. From this one example, the point is made: Declining prices can fit very well with rising prosperity.
Monetary economist George Selgin distinguishes between good and bad deflation. The bad kind comes in response to a collapsed money supply. An economy can eventually adjust to that, but the level of rough-and-tumble to make it through is more than most people can tolerate. That does indeed threaten productivity.
At the same time, prices can also be pulled down by productivity increases, as we saw with computers. It can be a sign of great economic health. As author John Tamny frequently points out, great economic growth doesn’t cause overheating and drive up inflation but just the opposite. Economic growth puts downward pressure on prices.
Where do we stand now with the money supply? The money stock as measured by M2 is $20.7 trillion, which is down from a height of $21.8 trillion, or a 4 percent drop. Still, in January 2020, the money stock was $15.4 trillion, which means that we’ve seen an astonishing 34.4 percent increase in a mere four years. That wholly accounts for the price increases that we’ve seen.
How could the Fed manufacture a deflation? There’s no clear path for it to do so. The damage of its vast inflationary policies of the past few years is already done. The best and really only path now is simply to shut down its discount window and cease operations completely, leaving it up to banks to manage the supply and demand for money through normal loan markets. That would certainly put downward pressure on prices, which is exactly what we need right now.
As Ludwig von Mises wrote: “Economics recommends neither inflationary nor deflationary policy. It doesn’t urge the governments to tamper with the market’s choice of a medium of exchange. ... By committing itself to an inflationary or deflationary policy a government doesn’t promote the public welfare, the commonweal, or the interests of the whole nation. It merely favors one or several groups of the population at the expense of other groups.”
That said, inflation is always a far greater danger than that of deflation. Lower prices necessarily mean that the dollar goes further. A solid 20 percent decline in prices would be a blessing right now. Yes, that would affect financials, too. But recall that all through 2020, even in the depths of lockdowns, stocks rose, which makes no sense. This was the first sign of the terrible inflation that we’ve been through. A deflation now would help to reverse the damage, even if it would cause many economists to fly into an unwarranted panic.
Right now, everyone is talking about how inflation is now subdued. The Biden administration is even threatening corporations to stop raising prices. That’s ridiculous, since the most recent reading of sticky prices is that they’re still rising 5.6 percent year-over-year. We aren’t even close to experiencing real deflation yet. Would that this day would come sooner rather than later.
