DEBUNKING THE DEFLATION FEARMONGERING

The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. Albeit the deflation risk is a great myth, for there is nothing inherently dangerous or damaging about deflation. Deflation is feared not only by the followers of Milton Friedman (those from the so-called Monetarist or Chicago School of economics) but by Keynesian economists as well. Leading Keynesian Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.” Presumably, he believes this delay in spending lasts in perpetuity.

But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase. Another common argument in the defamation of deflation concerns profits. With falling prices, how can businesses earn any as profit margins are squeezed? But profit margins by definition result from both sale prices and costs. Nonetheless is fair to comment that wages tend to be sticky and in a systemic deflation companies might fell a bit of squeeze in operating margins, since the price of the enterprise product or service tends to quickly fall in the described scenario, while wage burden usually takes a little while to fall in the same magnitude as the decrease in revenues.

So, there´s a mismatch that damages the business bottom line in the short term. If deflation impacts neither aggregate demand nor profits, how does it cause recessions? It does not. Examining any recessionary period after the Great Depression would lead one to this conclusion. Besides, the American economic experience during the nineteenth century is even more telling. Nominal USD Twice, while experiencing sustained and significant economic growth, the American economy “endured” deflationary periods of 50 percent. But what if the “statistical proof” offered in Friedman’s A Monetary History of the United States? A more robust study has been completed by several Federal Reserve economists who found: … the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-34). We find virtually no evidence of such a link in any other period. … What is striking is that nearly 90% of the episodes with deflation did not have depression.

In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears I will go even further to the status quo thinking treats deflation under a caution banner and elaborate on the thesis that Deflation is a corrective mechanism core in determining if a system can even be associated with Capitalism. The decentralized nature to plan economic output sets the responsibility and right to determine the price in the hands of the retailer who can access the price feedback of the customers by simple trial and error and reach the price that optimizes his top line. When his stock is almost empty he sends a purchasing order that reflects the demand function to the wholesaler that adapts his order to the producer. Creating the most prosperous economic system in human history that depends on individualism and freedom to allocate scarce resources in the uttermost efficiency. Recession is nothing more than the result of a systemic supply of malinvestments in an economy, Given the known process of a bottom-up planned economy, is fair to assume that when mal investments are made, retailers’ options to avoid bankruptcy are very limited. The company can either lower its prices and stanch the losses and/or cut costs not to run out of cash. Imagine a country with one business and one consumer. The business makes a bad product. The consumer won’t buy it. The business lowers the prices until it reaches its true value. And the consumer buys his products. By this price feedback loop, the business can elaborate if it is a cooling-off period in the demand, if his costs raised faster than the prices In both scenarios his only emergency exit is to lower his prices. With weak wiggle room to affect the demand, to remain above the water or profit, the retailer can only shout to the producers to deliver a higher standard product in hope that it will grant him more muscle in the negotiations with his buyer and/or cutting costs to limit or end the cash-burn. Moreover, independently of the measures he takes to get out of the red, his revenues will suffer a price drop. With time the demand will heal again and/or any unbalance in the supply side will reach equilibrium and prices will start to rise again and a bull business cycle will eventually overcome the market. Deflation is not a scary dumb-ass. inflation by character is not an event that influences the price of 1 or 2, 100 industry… It’s Economy-wide. And inflation almost does not correlate with stock prices, it’s practically a statistical error.

So during WWI most currencies lost parity with gold to fund the war. The United States was among them. If I’m not mistaken, by 1922 the FED started acting daily, the rates were low and banks were liquid. Part of the inter-banking was being loaned to traders short term speculation. Also, the FED reserve note became the main currency in the country. As you can see below, they are explicitly backed by 10 dollars worth of gold. >worth something.

However the other half of cash were Comercial Bank notes, backed by dollar not gold as you can see :(at the time banks made their money too) >Wothless And by the period of the 20’s banks were pumping valuables currency as seemed below :: And it created inflation, malinvests, and every horrible externality that comes with it. I’m guessing you’re not an economist, if you had an idea of how much money the government, FED, the capital markets industry, and the banks steal every single day from you, you wouldn’t be trying to bait me with oversimplifications without effort and purpose. The gold standard as better than fiat but it’s still a bad idea. As long as the monopoly of the money supply is within State’s hand, they will always find a way to keep the status quo. Only a free banking system has a chance to create the right incentive for all the stakeholder.

However, there’s no bitcoin, gold, paper, or diamond, to make the government give up this nefarious monopoly. It would great if a cryptocurrency started to be used on a reasonable scale because it would turn to the govt monopoly in minutes. Finally, it would at least raise suspicion that “maybe” that’s the major destruction of individual freedom and private wealth.