Author Topic: Does deflation really have negative side effects?  (Read 2756 times)

Offline ag2

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Does deflation really have negative side effects?
« on: April 02, 2011, 10:17:08 PM »
If inflation is the result of the erosion of the value of a dollar, then it would seem that deflation is the increase of the value of a dollar.  I have heard it said innumerable times that some slow, steady inflation is healthy for an economy.  I don't buy it.  Deflation seems to be a bad, scary word that economists and the MSM talking heads only say in a whispered hush off camera.  Deflation is supposed to be associated with an increase of unemployment because the theory is that demand decreases.  But it seems to me that this run-away inflation that we are starting to see as a result of printing so much bail-out and stimulation money has caused quite a bit of unemployment.  So the argument that deflation causes unemployment is hypocritical if inflation also has the same effect.

I’m sure we have some bright economists on the board and could shed some light on why deflation is considered taboo.

Offline chris

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Re: Does deflation really have negative side effects?
« Reply #1 on: April 02, 2011, 10:28:13 PM »
Kinda long, but pretty comprehensive.

http://mises.org/journals/scholar/salerno.pdf


Offline tamo42

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Re: Does deflation really have negative side effects?
« Reply #2 on: April 05, 2011, 06:51:13 AM »
If inflation is the result of the erosion of the value of a dollar, then it would seem that deflation is the increase of the value of a dollar.  I have heard it said innumerable times that some slow, steady inflation is healthy for an economy.  I don't buy it.  Deflation seems to be a bad, scary word that economists and the MSM talking heads only say in a whispered hush off camera.  Deflation is supposed to be associated with an increase of unemployment because the theory is that demand decreases.  But it seems to me that this run-away inflation that we are starting to see as a result of printing so much bail-out and stimulation money has caused quite a bit of unemployment.  So the argument that deflation causes unemployment is hypocritical if inflation also has the same effect.

I’m sure we have some bright economists on the board and could shed some light on why deflation is considered taboo.


Deflation is a big, scary word to the establishment because, as you pointed out, the dollar in your pocket becomes worth more. This benefits savers and disadvantages borrowers (inflation does the reverse).

Now who do you suppose the biggest borrower around is? Who do you suppose funds the people who do economic research?

Another issue that makes academics fear deflation is a mistaken view of the 1929-1945 depression. Milton Friedman and Anna Schwartz wrote a book basically blaming the Fed for not inflating enough to counteract the deflation resulting from bank loans gone bust. Of course they neglect to mention that the problem was the speculative skewing into housing and stocks that was caused by the combination of Fed printing from 1913 to 1928 (when Ben Strong died) and fractional reserve banking.

Offline Mr. Bill

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Re: Does deflation really have negative side effects?
« Reply #3 on: April 05, 2011, 07:21:41 AM »
I look at it this way.  Any change in the value of the currency is going to benefit some people and hurt others.  The beneficiaries of inflation have more political and economic power than the beneficiaries of deflation, therefore inflation is "good" and deflation is "bad".

Being slightly less cynical about it, slow steady inflation is "good" because:
  • It's better than wild erratic unpredictable inflation.
  • It's a tax (because the gov't gets to spend the new money before it loses value) but it doesn't look like a tax.
  • It causes savings to lose value, therefore it forces people to look for riskier investments to avoid loss.  Inflation artificially drives money into stocks, bonds, housing, and other investments, which is "good" for those who get to use the invested money.

Offline Mr. Bill

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Re: Does deflation really have negative side effects?
« Reply #4 on: April 05, 2011, 09:30:27 AM »
[Got interrupted before I could finish my post above.  To continue...]

Inflation transfers wealth from people who have saved their own money to people who want to do things with other people's money -- i.e., government, big business, and the middlemen in the financial industry who skim a good profit off the wealth transfer.

So if inflation is an artificial aid for the recipients of invested or loaned funds, then deflation is an artificial hindrance for those same people.  Therefore, deflation is "bad for business".

I think what's been forgotten in this picture is that other people's money is not the only way to do things.  You can do things with your own money, if you've saved some up.  This works just fine in a zero-inflation environment, and even better (although artificially so) during deflation.

But a your-own-money economy would look a lot different than what we have now.  I imagine it would be easier and more common for individuals to start small businesses, and harder for cash-poor large businesses to obtain loans or issue new stock.  And the banking industry would only be needed for warehousing savings and transferring funds.  I think this is why big business and the banks are so terrified of deflation.

Offline Crash

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Re: Does deflation really have negative side effects?
« Reply #5 on: April 05, 2011, 02:14:31 PM »
Yeah, that pretty much sums it up Mr Bill. It's all about protectionism.