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Mix-Ansicht- The Blessings of Deflation / Artikel mises.org - - Elli -, 01.06.2003, 19:16
The Blessings of Deflation / Artikel mises.org
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<font color="#002864" size="1" face="Verdana">http://www.mises.org/fullstory.asp?control=1241</font>
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<font face="Verdana" size="2"><font color="#002864"><strong><font size="5">The Blessings of Deflation</font></strong></font>
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<font size="4">by Llewellyn H. Rockwell, Jr.</font>
Posted May 30, 2003
according
to Martin Wolk at MSNBC, for example). He explains as follows:"As
prices keep going down, money grows more valuable...." So far so good!
But he goes on to say that this is actually a bad thing because it creates
"an enormous disincentive for consumers and businesses to spend money.
Economic activity slows, unemployment rises and demand continues to decline."
Well, but that presumes that consumers have something to gain by forever
stocking up on dollars and never buying anything, which is absurd. It's true
that falling prices create incentives to save, but so long as the preference
of consumers is to save instead of spend, that can only prepare the way for a
future of economic growth. Consumers save for a reason, namely, to spend later.
Wolk's next point concerns the implications of deflation for debt.
Deflation makes it"far more difficult to pay back existing loans."
It's true that loans are paid back in dollars that are more valuable than the
ones borrowed. But that is part of the risk one takes when deciding to borrow
in the first place. If we all had perfect foresight, our behavior would change
substantially. But that is no case for pressing the pause button on economic
affairs. What deflation does is provide a disincentive to borrow and an
incentive to use current savings for purposes of investment. It means a reward
for well-capitalized companies and individuals—a good thing all around.
Now we get to the crux of the matter: the Great Depression. The assumption
is that falling prices somehow caused the economy to crumble. In fact, it was
the after-effects of the boom combined with massive government intervention
that caused the depression. The only silver lining in the entire period of the
1930s was precisely the falling prices that made the dollar count for more.
Falling prices (a falling cost of living) are what Murray Rothbard has
described as the"great advantage" of recessions. If you can imagine
the Great Depression without falling prices, you have conjured up an image
that is far worse that the reality.
Ask yourself whether during economic downturns, you want your money to grow
or shrink in value? If your future job security is in doubt, do you want to
pay more or less for goods? If your savings are meager, do you want them to
have more or less purchasing power in the future? If you answer these
questions rationally, you can see that deflation is wonderful for everyone,
and the saving grace of a period of economic contraction. Throughout the 19<sup>th</sup>
century, prices fell in periods of economic growth, which is precisely what
one might expect. This is all to the good.
As Rothbard has said,
"rather than a problem to be dreaded and combatted, falling prices
through increased production is a wonderful long-run tendency of untrammelled
capitalism. The trend of the Industrial Revolution in the West was falling
prices, which spread an increased standard of living to every person; falling
costs, which maintained general profitability of business; and stable monetary
wage rates—which reflected steadily increasing real wages in terms of
purchasing power. This is a process to be hailed and welcomed rather than to
be stamped out."
If we must have recessions, make them deflationary recessions. What's far
worse is the phenomenon of the inflationary recession that Keynesians are
always trying to foist upon us. For the same reason that deflation is a good
thing, rising prices during a recession are the worst possible thing, because
they provide a disincentive to save and invest for the future. They encourage
present consumption and thereby gut the capital base necessary for future
growth. They prolong suffering in every way.
Thus can we see that the widely-approved prescription to prevent deflation,
namely inflation, is the worst possible path. But this is precisely what
the Fed has endorsed as a matter of policy. It is hardly surprising that
the central planners managing our lives would adopt the exact policy that will
make us so much worse off.
Fortunately, the free market contains mechanisms that can work around
attempts by the Fed to inflate. It could be that the banks have a hard time
foisting new money on people and instead work to protect their balance sheets.
Businesses too, stung by economic contraction, might avoid going further into
debt, no matter how cheaply they may be able to borrow. In this case, prices
could fall whether the Fed wants them to or not.
[img]" alt="[image]" style="margin: 5px 0px 5px 0px" /> In
economics, it is a good rule that what is good for individuals and families is
also good for the economy. Everyone wants a bargain, which is to say a low
price. Sadly, in our present age of inflation, lower prices mostly affect
specific products and sectors. May the joy we take in falling prices for
electronics be expanded to anything and everything we buy. Let the
commentators fret and worry about what their fallacious macroeconomic models
tell them. The rest of us can sit back and watch our standard of living rise
and rise.
Sadly, I doubt we will see any deflation. Even based on the last ten years
of data, overall price increases are still the norm.
In fact, since 1913 and the founding of the Fed, the dollar has lost 95
percent of its value. It is far more likely that this robbery will continue
rather than for our lost purchasing power to be restored to its rightful
owners: you and me.
<hr align="left" width="33%" SIZE="1">
<p class="MsoNormal" style="MARGIN: 0in 0in 0pt">
<p class="MsoNormal" style="MARGIN: 0in 0in 0pt">Llewellyn H. Rockwell, Jr. (Rockwell@mises.org)
is president of the Ludwig von Mises
Institute in Auburn, Alabama, and editor of LewRockwell.com. See
his Mises.org
archive. (For more on this topic, see Mises.org
on Deflation<font size="2">)<span class="279192912-30052003">.</span>
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