T Nation

What is Deflation?


"A disastrous economic confusion, one that is shared almost universally, both by laymen and by professional economists alike, is the belief that falling prices constitute deflation and thus must be feared and, if possible, prevented."


Deflation is the way out.


Link doesn't work

Anyway, deflation IS falling prices and it should be avoided because it will encourage people to not buy stuff now, but next month, or the month after next month, or the month after that...

And if people don't buy stuff, if companies don't invest, the economy goes down the drain.


It's what happens to a balloon over time.


You're the lone crusader for deflation. You should stand on street corners and protest.


You got it wrong. Deflation is coming regardless of any crusaders standing on street corners. It is just a matter of its severity.


"Contrary to The Times and so many others, deflation is not falling prices but a decrease in the quantity of money and/or volume of spending in the economic system. To say the same thing in different words, deflation is a general fall in demand. Falling prices are a consequence of deflation, not the phenomenon itself."


Is it not somewhat of a benefit to have lower prices when one is unemployed, albeit even if it means one will have to take a lower wage job in the future?


Does a decrease in price level really have the same effects as a decrease in money supply? I'd like to know someone with more knowledge on the subjects answer, but I'd think the answer is no.


Um no and no, but very Keynesian!


A decrease in price level could also occur when the money supply stays constant (as it more or less would with a commodity money), BUT productivity rose, i.e. when more and more products were chasing the same amount of dollars, a dollar would be worth more and prices would fall.

Therefore decreasing prices and a deflating money supply are obviously not the same, so they do not necessarily have the same consequences.



You are confusing cause and effect.

The decrease in the money supply is the cause (and actually is the effect of several other causes); one of the effects can be a lowering of prices since a drop in the money supply results in a general drop in demand for goods and services.

Prices can also drop when the money supply remains constant if production rises.

Either way, lower prices have their own effects. Generally, we can expect an increase in employment as producers seek to maximize the utility they can get from lower wages. Any action to artificially raise wage rates can prolong the "depression".

As a matter of fact, price fixing is the most disastrous thing that could happen. Any attempt to fix prices above or below market prices will create shortages -- this goes as much for labor as it does for any goods and services.


Is fever a rise in body temperature? Or is it a condition (being sick) and is the rise in temperature a result of the that condition?

Is the decrease of spending a result of falling prices? Or are the falling prices a result of decrease in spending?
It's all the same difference . . .


Oh, but yes and yes and yes.


In no way, shape or form.

There are simply so many false assumption in there that it would be impossible to address all of them.

It begins it with confusing falling prices with a strictly monetary phenomenon and completely ignores that people want to consume NOW.

If falling prices delay that for a while, the money is saved and ready to be invested into capital goods.

All that would mean is a shift towards saving and faster capital accumulation and that is what the US economy f.e is desperate in need of.

If you are even aware of your basic assumption just think about what "underconsumption" really means.

It states that it is not the entrepreneur who has misjudged the market, oh no, the consumer has failed in buying stuff he does not want.

So, we inflate the currency so that people are practically forced to take out loans to buy stuff they would not really want otherwise and companies invest on machinery to produce stuff that consumers would not buy otherwise.

When that bubble bursts, a lot of people sit on a lot of stuff they do not need, a lot of companies sit on machines that produce stuff nobody wants and everyone is up to their ears in debt.

That that sound vaguely familiar? Any chance we might be able to witness that anywhere right now?


But you may have a point.

Everyone in Zimbabwe spends his money as fast as humanly possible and that is why they are the economic powerhouse they are.