Deflating the Deflation Myth

Tyler Durden's picture

Submitted by Chris Casey via the Ludwig von Mises Institute,

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. And it is, remarkably, 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. If costs — which are after all prices themselves — also fall by the same magnitude (and there is no reason why they would not), profits are unaffected.

If deflation impacts neither aggregate demand nor profits, how does it cause recessions? It does not. Examining any recessionary period subsequent to the Great Depression would lead one to this conclusion.

In addition, the American economic experience during the nineteenth century is even more telling.

Twice, while experiencing sustained and significant economic growth, the American economy “endured” deflationary periods of 50 percent. But what of 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.

If deflation does not cause recessions (or depressions as they were known prior to World War II), what does? And why was it so prominently featured during the Great Depression? According to economists of the Austrian School of economics, recessions share the same source: artificial inflation of the money supply. The ensuing “malinvestment” caused by synthetically lowered interest rates is revealed when interest rates resort to their natural level as determined by the supply and demand of savings.

In the resultant recession, if fractional-reserve-based loans are defaulted or repaid, if a central bank contracts the money supply, and/or if the demand for money rises significantly, deflation may occur. More frequently, however, as central bankers frantically expand the money supply at the onset of a recession, inflation (or at least no deflation) will be experienced. So deflation, a sometime symptom, has been unjustly maligned as a recessionary source.

But today’s central bankers do not share this belief. In 2002, Ben Bernanke opined that “sustained deflation can be highly destructive to a modern economy and should be strongly resisted.” The current Federal Reserve chair, Janet Yellen, shares his concerns:

    ... it is conceivable that this very low inflation could turn into outright deflation. Worse still, if deflation were to intensify, we could find ourselves in a devastating spiral in which prices fall at an ever-faster pace and economic activity sinks more and more.

Now unmoored from any gold standard constraints and burdened with massive government debt, in any possible scenario pitting the spectre of deflation against the ravages of inflation, the biases and phobias of central bankers will choose the latter. This choice is as inevitable as it will be devastating.

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Seasmoke's picture

Why are lower prices bad ????? I've been asking why since 1989 !!!!!!


I've come to understand the question is WHO are they bad for ??


Anyone who likes Netanyahu !!! 

McMolotov's picture

Last time I went to the store, I bought two bottles of whiskey instead of one because it was on sale. That was bad for my liver.

Beam Me Up Scotty's picture

Deflation is only bad for idiots who are in massive debt.

Beam Me Up Scotty's picture

Yup. And of corse, Uncle Sam.

And a lot of those " most people" are in massive debt due to piss poor decision making.

Kitler's picture

Deflation is to fractional reserve banking what Muppet withdrawals are to Ponzi schemes.

All Risk No Reward's picture

The ignorance is astounding...  no wonder the Rockefeller Foundation funded Mises...

1. People are in debt because they have to be in debt to have money.  Money **is** debt. Ruminate on this fact as long as it takes to understand.

2. Central bankers work for the debt pushers NOT the government.  BTW, so do the politicians.  The polititions are gutting this country because it is a Bankster agenda, not because they are stupid.  This process is accelerated because the people believe they are stupid and not evil.  Now that's stupid.

3. The Fed's decisions benefit the Banksters - you know the guys who OWN/CONTROL TRILLIONS IN CASH AND TRILLIONS IN DEBT PAPER.  Yeah, they are going to inflate their criminal, ill-gotten wealth away while bailing out the morons who allow them to inflect Debt Money Tyranny them.  Was Mises this dumb?

4. The government isn't paying down debt with cheaper dollars...  do some math...  the government is going into more debt...  the government's debt doubles, but monetary (as opposed to price) inflation is only a couple percent.  The math doesn't work - and the government doesn't control money, anyway.  Private sociopathic Banksters do - and no the government won't take it back because they are Bankster operatives.  If the government was actually sovereign, THEY'D RUN THE MONEY.  They aren't, so they don't.  Capiche?

5. The Bnaksters leverage up and inflate to make trillions for themselves.  When that exponential function breaks, they offload trillions in debt on the stupid people (society, not them - only stupid people think otherwise) and loot trillions in money and debt obligations they conjure out of nothing...  they get the money and the dumb*sses get the debt.  When that game ends, they will, very predictable, call in the debts, bust the economy (they are TBTF&Jail and the stupid people put up with it), spend their trillions in loot BUY UP ALMOST ALL THE REAL CHIT and then, AND ONLY THEN, will they consider driving money into the ground as they will then own much of the planet.

This is so elementary.

A Nanny Moose's picture


It's a shame that people don't stand in lines long during Satan Clause Season, to buy a Flat panel TV, iThingy, DSLR, or computer, or other electronic device, because they will be able to buy it for 20% off in January, or for half price the following Satan Clause Season.

This is not the underconsumption you are looking for. Keep moving along.

Gaius Frakkin' Baltar's picture

Most are in debt because prices never go down; they are forced to buy inflated prices because they can't wait forever.

The whole point is to be a debt slave to the bankers. Why is this so hard to understand?

daveO's picture

Damn right! The ultimate goal is the same as Soviet Russia. It's just incremental slavery, instead of wholesale takeover. 

Beam Me Up Scotty's picture

Oh Baloney.  Lots of people make themselves debt slaves, not the bankers.  Have a kid at age 17?  DEBT SLAVE.  Buy too much house?? DEBT SLAVE.  Have 4 kids instead of 2?  DEBT SLAVE!!  Buy the brand new shiny red truck instead of one with 100k miles on it?  DEBT SLAVE!!  STill working at McDonalds at age 38?  DEBT SLAVE!!  Using your $5K credit limit on your credit card to buy ice cream?? DEBT SLAVE!! Who can afford to pay 18% (or more) interest for ice cream?

DO I NEED TO GO ON?  Most idiots are DEBT SLAVES because they make themselves DEBT SLAVES!!

Just another example of lazy assed 'Mericans blaming someone for their own shitty decisions.  I'm tired of it.

Beam Me Up Scotty's picture

Love down arrows and no rebuttals.  You idiots know I am right.  Lots of people waste lots of dollars on lots of shit.  And if they didn't they wouldn't be in debt, or wouldn't be in debt as bad as they currently are.  The truth hurts sometimes.

To those of you who have made piss poor decisions......piss off.  I am not your parent.  I'm not helping you when TSHTF.  You are the future zombies of america.

Gaius Frakkin' Baltar's picture

The system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

Beam Me Up Scotty's picture

Right.  I see people who make less money than I do who have nicer homes, nicer cars, all kinds of toys.  Don't tell me everyone is a debt slave because of the system.  Some people might be, but the vast majority of Americans are debt slaves because they ALLOWED themselves to be.  I could have bought a BMW 20 years ago, yet I never have.  Why?  Because I didn't want to OWE THE BANK.  Instead I bought an old 2005 Bonneville with 100,000 miles on it for $9K.  That was 2 years ago, and I still have that car, now with 170,000 miles on it.  Please quit making excuses.  You are part of the problem.

When everyone is using their credit card to eat food, then I will agree with you.  In the meantime, there are millions of Americans who waste their hard earned dollars on USELESS GARBAGE.

Gaius Frakkin' Baltar's picture

I doubt many people have $9k sitting around. It usually takes a loan just to get a car capable of traveling from point A to point B.

bigkahuna's picture

yer both right to an extent - Scotty has it with the fools who go out and buy the German car and house they dont need regardless what the monetary system is doing. Unfortunately those who manage debt properly (ie buy the right price house and ride the bus if they cant buy a good old Honda outright) are going to be harpooned by the fools who have no clue.

Beam Me Up Scotty's picture

Yup. When I was 25 years old I had to take out a loan for a car too.  And I worked my ass off to pay it off.  And now that I am 45, I am smart enough to go buy the $9K car.  And yet now, I see 25 year olds driving much newer nicer cars than I ever drove when I was 25, much less what I drive now as a 45 year old.  Funny how they can't afford $9k for an older car to buy it outright and not be in debt, but they can afford to get a $25K or $30k loan for a BRAND NEW CAR.  Quit enabling these people.

Gaius Frakkin' Baltar's picture

If you believe the system is more or less fair, and all a person has to do is work hard and save, then why are you here?

Beam Me Up Scotty's picture

I didn't say the system was fair.  Its not.  But there are ways to minimize your exposure TO the system.  Why would you work for $10 an hour if you could get $10 an hour from your fellow taxpayer and go fishing all year long?  .Gov wants to raise my taxes so someone can stay home.  Fuck that.

Gaius Frakkin' Baltar's picture

There are many people out there who are frugal, but still can't stay out of debt because the system is rigged to keep them in debt.

It's like blaming a steer for its own slaughter. Yeah, it should have planned for an escape, but really, fate is stacked against it.

Beam Me Up Scotty's picture

Like I said, people who use credit cards to pay for food, I have sympathy for.  People who use debt to "keep up with the Jones's" I don't.  Simple as that.

chinoslims's picture

That is not true.  Tell me how an illegal immigrant from let say Mexico is able to work for less than minimum wage, have little or no access to credit, is still able to send money home to mrxico.  Please explain that one to me.  The problem is many Americans or those in Western Civilizations are not welling to sacrifice anymore.  The need for unproductive material goods mostly from foreign countries is so great that it is sending the government and it's people to debt.

Tegrat's picture

I have three times that just counting my checking account simply because i dont do debt and im saving up for a cash purchase soon. 

FredFlintstone's picture

Right on, brother! Frugality is currently not in style. People just can't take the baby steps, too impatient. People who gorge on debt will eventually choke.

NickVegas's picture

Save up to buy a house with cash, fucking pipe dream idiot. Save up to go pay for college with cash, fucking pipe dream idiot. They control the money supply, they push the bubbles. The FED has a perfect track record of inflating the dollar since it's inception. They helicopter cash in to their friends, derive the first use benefits, and deflate my Mom's retirement savings. Your 2% raise, if you have a job, doesn't cover the shrinking food packaging. It's called debt slavery, and the whole fucking country is basically a debt slave to foreign banking interests. Look around, your argument might of held water before Nixon.

All Risk No Reward's picture

Yes, people make bad decisions and this leads to marginally worse outcomes.

However, DEBT IS MONEY.  This is fraud.  This is what any thinking person focuses on first and foremost.

Debt Money Tyranny

Your approach is the mental equivalent of blaming the rape victim for wearing a short skirt.

Poverty is NOT a Choice

Think this through and you'll notice that debt / money is an artifical zero sum game that is enforced on a nescient or ignorant society of gullible chumps.  For every net $1 of money someone has, someone else has to, BY DEFINITION, have $1 of inextinguishable debt.  They can pass the debt to someone else, BUT THE DEBT CAN'T BE EXTINGUISHED UNLESS THE ORIGINAL $1 IS ELIMINATED BY EXTINGUISHING THE DEBT.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Henry Ford

"The one aim of these financiers is world control by the creation of inextinguishable debts."
Henry Ford

How to be a Crook

Do you know why coinage was designated as non debt money?  Because they Debt Money Tyrants know that a certain amount of cash is lost throughout the year so they use coinage as a type of "control rod" to feed money into the system to cover some of the lost or burned up debt receipts the indentured servants consider only to be money.

Federal Reserve Debt Money Notes are, first and foremost, A SOCIETAL ASSET STRIPPING MECHANISM.

They aren't a government bailout mechanism...  governments will be burned down after handing all their resources over the Banksters... electric plants, water plants, roads, national parks...  it will all be handed over to Rockefeller types who conjure debt money from the ether like a Sun Tzu inspired Machiavellian sorcerer.

I'm not a rhabdomancer, this is basic human nature, basic Econ 101 and some 5th grade math.

In 1984 they had to torture Winston Smith to believe 2+2=5.  In 2014, everyone demands to believe it without even being tortured!


Duh!  Double Duh!

Wahooo's picture

You forgot the most important part: people become debt slaves because there are no consequences for it.

All Risk No Reward's picture

Hang around a bit longer and you will witness THE BIG CONSEQUENCE with your own eyes.  Taxes are for little people, as well as consequences.

The Gang Banksters blew a bubble and siphoned off all the mass murder technology they could ever desire, if their desires could be limited, and now it is time to save the remaining resources for themselves...  and out of hands like yours.

daveO's picture

Debt Slaves on the Bankster Plantation. They be homeless without Massa's Hospitality.

lotsoffun's picture

scotty - TBTF is actually in massive debt, owed to the taxpayers, held by the FED.

and i think that debt trumps the fear of the banks for the loans that they make, because the banks

are now much larger borrowers than they are lenders.

the traditional 'banking' syndrome has gone in reverse, the banks haven't been lending to people or private entities since 2009.  they've been borrowing from the taxpayers, via the fed/tsy game and gambling in stocks and derivatives, to the tune of trillions.

they've bought up all the assets possible, stocks, homes, cmbs, art work, land. everything in sight.

if the lenders ever dared asking for the cash back, they can only get the cash by selling those assets.  which wouldn't be possible to pay back the loan, since they themselves artificially pumped up the price.

it's a vicious circle.

we are the losers.  they have to keep inflating.




kurt's picture

Southern California 

Food for Less

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Stackers's picture

Lower prices are not bad, but deflation - i.e. a collapse of the money supply - through a collapse of loans or fractional reserved banks is bad, IN THE FRACTIONAL RESERVE FIAT DEBT MONEY SYSTEM WE OPERATE UNDER. There are two types of deflation, falling prices through increases in productivity, and a collapse in the money supply of fractional reserve bank system due to non performing loans and bailins. This article is somewhat disingenuous. The Fed is right to fear deflation under the current system. The fix is changing the system.

Bay of Pigs's picture

We dont have falling prices or a collapse in money supply. WTF are you talking about.

The FED is the problem, and always has been.

Beam Me Up Scotty's picture

We don't have lower prices, we just have smaller package sizes.

Stackers's picture

When debt = money and debt goes bad that = collapsing money supply. Fed tries to offset this by printing. I'm not saying it is right, what I'm saying is it's built into the system. The Fed in and of itself is really not the problem. The problem is the debt money fractional reserve banking / credit money system that the Fed operates under


You need a currency supply that can expand or your economy can't expand. This is possible to do with a "hard money" system.

socalbeach's picture

Lower prices for assets are bad for banks if those assets collateralize loans on the asset side of their balance sheets.  And lower prices would be bad for the US government since they would collect less tax revenue. For example, lower asset prices would mean less capital gains taxes, and lower nominal wages would mean less social security and income taxes to service their debt. And the NY banks and the US government just happen to be the 2 constituents the Fed was created to help.  Read G. Edward Griffin's book The Creature From Jekyll Island for details. 

In the current instance QE has bailed out both the big banks and the US government at the expense of dollar holders and those on fixed incomes, through currency depreciation or foregone price deflation.

dutchTender's picture

one additional point, since our economy is based on finacing, deflation also increases the real value of debt ....

socalbeach's picture

True. Poster Salah made that point below in regards to banks when he said "the loan's life-cycle cost goes up and up" (ie, their deposit liability).

dutchTender's picture

i hate paying less for stuff ... really cramps my style

daveO's picture

Bankers are stealing all productivity gains!!!

If prices are falling in the face of level(or rising) money supply, then productivity is rising. In the name of saving the economy the banksters want to capture every bit of productivity gains and then some(2%). It's outright theft of our living standard. It's not our responsibility to bail out crooked banksters when they make horrendous decisions. 

SilverMoneyBags's picture

It comes down to a matter of perspective. If you are a venture capitalist you probably don't like deflation because its harder to pay back loans. If you are the average person, you love lower prices.

RiverRoad's picture

Whatever happened to the Fed worrying hard about all those Yankee dollars out there floating around?

Berspankme's picture

They want the deflation meme to take hold all the while ass fucking you with inflation. Inflation is good for debtors and since we have many more debtors than savers, savers are being sacrificed in favor of the irresponsible. Not complicated

Bay of Pigs's picture

Most of the hard core deflationists have been dead wrong for decades, and make no sense whatsoever when it comes to economics and Central Bank actions of today.

Inflation is rampant worldwide right now, yet they will say the exact opposite. Bunch of dummies if you ask me.


NOTaREALmerican's picture

Aren't they saying: deflation is good?   Not that it's happening, but it should be allowed to happen? 

Salah's picture

In 'classic banking' the banker can only profit from his asset, the loan.  A deposit is his liability.  Ergo, for "bankable clients"...i.e. those with acceptable collateral, gradual inflation is a godsend.  Deflation is a double whammey: the collateral is impaired, while the loan's life-cycle cost goes up and up.  

The problem as Nassim Taleb warns us, is that 'black swan event' in the midst of an abnormal period (like now); something's up with the Grand Cardinal Square (first in many, many decades) later this month, May, June and on into 2025.

Get ready, Buckaroos.

daveO's picture

We're so far removed from 'classical' that they now talk of bail-ins(did in Cyprus). When the bank's liabilty becomes the depositor's liability, then said depositor better wise up fast! The banker's taking from both sides of the ledger.

NoWayJose's picture

We will have deflation - following the economic collapse. Normal people cannot afford homes, and prices are exceeding the available paycheck. That condition cannot last. The Fed wants wages to increase to keep up, but as we see in Japan, global workers prevent companies from paying higher wages. Just walking through a grocery store reminds me so much of 2007-2008...