Peter Schiff: Meet "Lowflation" - Deflation's Scary Pal

Tyler Durden's picture

Submitted by Peter Schiff via Euro Pacific Capital,

In recent years a good part of the monetary debate has become a simple war of words, with much of the conflict focused on the definition for the word "inflation." Whereas economists up until the 1960's or 1970's mostly defined inflation as an expansion of the money supply, the vast majority now see it as simply rising prices. Since then the "experts" have gone further and devised variations on the word "inflation" (such as "deflation," "disinflation," and "stagflation"). And while past central banking policy usually focused on "inflation fighting," now bankers talk about "inflation ceilings" and more recently "inflation targets".  The latest front in this campaign came this week when Bloomberg News unveiled a brand new word: "lowflation" which it defines as a situation where prices are rising, but not fast enough to offer the economic benefits that are apparently delivered by higher inflation. Although the article was printed on April Fool's Day, sadly I do not believe it was meant as a joke.

Up until now, the inflation advocates have focused their arguments almost exclusively on the apparent dangers of "deflation," which they define as falling prices. Despite reams of evidence that show how an economy can thrive when prices fall, there is now a nearly universal belief that deflation is an economic poison that works its mischief by convincing consumers to delay purchases. For example, in a scenario of 1% deflation, a consumer who wants a $1,000 refrigerator will postpone her purchase if she expects it will cost only $990 in a year. Presumably she will just make do with her old fridge, or simply refrain from buying perishable items for a year to lock in that $10 savings. If she expects the cost of the refrigerator to decline another 1% in the following year, the purchase will be again put off. If deflation persists indefinitely they argue that she will put off the purchase indefinitely, perhaps living exclusively on dried foods while waiting for refrigerator prices to hit zero.

Economists extrapolate this to conclude that deflation will destroy aggregate demand and force the economy into recession. Despite the absurdity of this argument (people actually tend to buy more when prices fall), at least there is a phantom bogeyman for which to conjure phony terror. Low inflation (below 2%) is even harder to demonize. Few have argued that it has the same demand killing dynamics as deflation, but many say that it should be avoided simply because it is too close to deflation. Given their feeling that even a brief bout of minor deflation could lead to a catastrophic negative spiral, they argue for a prudent buffer of 2% inflation or more. But the writer of the Bloomberg piece, the London-based Simon Kennedy, quotes people in high positions in the financial establishment who offer new arguments as to why "lowflation" (as he calls it) is a "threat" in and of itself. And although the article was primarily concerned with Europe, you can be sure that these arguments will be applied soon to the situation in the United States.

The piece correctly notes that those struggling with high debt tend to welcome high rates of inflation. The math is simple. By diminishing the value of money, inflation benefits borrowers at the expense of lenders. By repaying with money of lesser value, the borrowers partially default, even when paying in full. The biggest borrowers in Europe (and the United States for that matter) are heavily indebted governments and the overly leveraged financial sector. Should it come as a surprise that they are the leading advocates for inflation? The writer admits that higher inflation will help these interests manage their debt burdens and in the case of the financial sector, profit from the increased lending that low interest rates and quantitative easing encourage.

On the other side of the ledger are the consumers, the savers, and the retirees. These groups want lower prices and higher rates of interest on their accumulated capital. Such a combination will lead to higher living standards for those who have worked and saved for many years in order to enjoy the fruits of their efforts. But these types of people are simply not on the "must call" list for our best and brightest economic journalists. As a result, we only get one side of the story.

The article also points out that higher inflation gives businesses more flexibility to retain workers in periods of weak growth. The argument is that if sales revenue falls, companies will not be able to lower wages, and will instead resort to layoffs to maintain their profitability. However, this is only true in cases involving labor union contracts or minimum wage workers. In all other cases, business could reduce wages in lieu of layoffs. Plus, if prices for consumer goods are also falling, real wages may not even decline as a result of the cuts.

In circumstances where wages cannot be legally reduced, as is the case for unionized or minimum wage workers, layoffs are often the employer's only option for keeping costs in line with revenue. However, inflation allows employers to do an end run around these obstacles. In an inflationary environment, rising prices compensate for falling sales. The added revenue allows employers to hold nominal wage costs steady, even when the raw amount of goods or services they sell declines. When inflation rages, higher skilled workers will often demand, and receive, pay raises. But low-skilled workers, who lack such leverage, are usually left holding the bag.

In other words, politicians can impose a high minimum wage to pander to voters, but then count on inflation to lower real labor costs, thereby limiting the unemployment that would otherwise result. So what the government openly gives with one hand, it secretly takes away with the other. Workers vote for politicians who promise higher wages, but those same politicians also create the inflation that negates the real value of the increase. But while government takes the credit for the former, it never assumes responsibility for the latter. The same analysis applies to labor unions. Based upon political protection offered by friendly officials, unions can secure unrealistic pay hikes for their members. But the same governments then work to reduce the real value of those increases to keep their employers in business.

Of course, what the Bloomberg writer was really arguing is that governments need inflation to bail themselves out of the policy mistakes they make to secure votes. But two wrongs never make a right. The correct policy would be to run balanced budgets rather than incur debts that can only be repaid with the help of inflation. On the labor front, the better policy would be to abolish the minimum wage and the special legal protections offered to labor unions, rather than papering over the adverse consequences of bad policies with inflation.

So be on the lookout for any more hand-wringing over the supposed dangers of lowflation. The noise will simply be an effort to convince you that what's bad for you is actually good. And although it's an audacious piece of propaganda to even attempt, the lack of critical awareness in the media gives it a fighting chance for success.

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knukles's picture





deeply indebted's picture

Real economic growth? What's that have to do with THIS economy?

knukles's picture

I'm so SSRI, I get so excited and carried away and well, vengeful, restless, irritable and discontent ... maybe I need some anti-depressants or something... and... um  um  um 

Harbanger's picture

This bible quote from pulp fiction always does it for me.

0b1knob's picture

Nearly 10 % inflation (real rate not government BS) is LOW?


Spitzer's picture

Which computes to negative 10 interest rates

dryam's picture

It’s called metastatic cancer, and it kills the host.  There will not be any ‘inflation’, ‘deflation’, or 'low-flation'.  We are in completely uncharted waters. 

Why do you think the masses are being completely bullshitted by TPTB in regards to the economy?

Once we went off the gold standard the debt-based money system kicked into full gear. Credit (the cancer) started replacing the function of real money.  The cancer has now fully metastasized.   Those cells have been dividing & dividing in an exponential manner.....debt as far as the eye can see, personal debt, government debt at all levels, corporate debt, hundreds of trillions of derivatives, etc.  That ‘inflation’ is anything but positive.  Those inflation cancer cells squeeze out normal functioning tissue and slowly makes the entire body sick in a variety of ways.  This economy will only get sicker and will die a painful & certain death, and the only way to protect yourself in the long run is to get completely out of the ‘financial’ economy by storing your wealth in productive assets within your immediate environment.  All debt-based money economies will perish.  It’s inevitable.

Crisismode's picture

There IS no real econcomic growth.


Are you in touch at all with reality?


ALL Growth is in the hands of the few (1%) who grow their wealth at the expense of the many.


To dream of economic growth for the masses is to be totally delusional.


Take another puff.



MontgomeryScott's picture

Naw, it's not quite so complicated as all that, 'dryam'.

Definition of parasite (n) Bing Dictionary
  • par·a·site
  • [ párr? s??t ]
  1. organism living on another: a plant or animal that lives on or in another, usually larger, host organism in a way that harms or is of no advantage to the host
  2. scrounger: somebody who exploits others without doing anything in return

Leech. Maggot. Scum. Bankster. One who uses up the host in a way that kills it, after extracting all the nutrients; and then discards it to die (or continues to feast on the dead carcass).

Those who are aligned with the F.S.A. are in perfect symbyosis with the above-mentioned parasites (but will be consumed as well).

RaceToTheBottom's picture

Sad but true.

The FSA are only responding "rationally" to the situation.

The best prices for drinks on the Titanic were available right as it was going down

Anusocracy's picture

Technological free market economies would naturally create deflation.

Unfortunately government, which turns everything it touches to crap, destroys that ability and creates inflation in its place.

Which brings us to America, turned to crap by its government.

hobopants's picture

Inflation, deflation or any varying degree there-of is not the issue. These idiots think that by increasing or decreasing the unit of account they can magically create productive capacity and erradicate resource scarcity.

All "flations" are an effect not a cause, The cause is a shit economy that is not being allowed to restructure over capacity and malinvestments. The effect of a shit economy can be either inflation or deflation, or like we have here bi-flation in which we see deleveraging of shit investments that have been slowly dying since the last financial crisis in tandem with rising cost in the basic necessities of life.

The Fed is like an off balance kid whose pet died, but instead letting go and burying the thing he insist on putting a leash on it and dragging it's corpse around the house.

Harbanger's picture

Inflation is the only thing that's real about a keynesian debt-based economic system.  Destruction of the currency is built right into the play rules.

Stoploss's picture

And use this to choke the life out of middle class small biz..

Manthong's picture

"Ponziflation" might be fitting.

buzzsaw99's picture

they can call it whatever they like and they will battle it with MOAR 4 the 1%

New_Meat's picture

"... mostly defined inflation as an expansion of the money supply, ..."

nyet tovarich, inflation is a result of the above.

ya gotta' get ur head out of ur ass.

- Ned

MontgomeryScott's picture

I guess I gotta look the quote up, again.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."

INFLATION is, classically, the GROWTH of a money supply. DEFLATION, classically, is the REDUCED amount of said money supply. The banks, in Jefferson's insightful comment, print money, thus 'stimulating' the 'economy', and when everything gets rolling, they then REDUCE the supply, thus causing an inability to purchase (or to pay debts).


How about 'the crash of 1929', as one of the most often misunderstood but quite relevant ones...

INFLATION is NOT the increase in prices. This is a RESULT of the inflation of the money supply.

I tried to down-arrow you, but it doesn't seem to work over here in Realityville.

You GOTTA get your head out of your ass, you poor Keynsian acolite. Too many sessions over at PMSNBC watching Kramer will do that to you...

Kirk2NCC1701's picture

GOLD = Hedge against INflation.

CASH = Hedge against DEflation.

Plan accordingly.  Smart people have some of both.

daveO's picture

After the Great Depression and 'students' of it, like Bernanke, you don't need to ever worry about deflation. 

N2OJoe's picture

GOLD, SILVER = Hedge against monetary shennanigans.

CURRENCY = Trust and faith in the Regime.

Hedge accordingly.

Spitzer's picture

Wrong Kirk, dead wrong.


Show me one non gold backed currency ever that increased in value as the economy was retracting...


Russia ijn 1998 ? Thailand in 1997 ? And those central banks werent even printing money.

Redneck Hippy's picture

Japan's currency is not backed by gold and has increased in value as the economy was retracting for decades, Spitzer, until recently when Kuroda has become hellbent on printing until he gets inflation,

Spitzer's picture

Real physical output increased. Not the same ...

MontgomeryScott's picture

GOLD = Hedge against fiat currencies; a store of purchasing power which does not vary.

CASH = A way to start fires when there is no kindling wood available.

CONTRACTS = A fool's way to think that he owns either one.

PPD = A way to protect gold. Smart people won't rely on others to protect them, or on what they think they have on paper.

LawsofPhysics's picture

"flation" is a myth.  Name one society/currency that has collapsed/died because their purchasing power was too strong.

cash in physical paper and PMs in physical coin (plenty in barter amounts).

common denominator?  physical

Why?  Simple, when fraud is the status quo, possession is the law.

Its_the_economy_stupid's picture

LoP lays it down. End of story...cept firepower to protect posession.

Its_the_economy_stupid's picture

wwell, ok, maybe 2 dozen cases of hooch in 1 pt bottles as a hedge.

Hulk's picture

Just found out today that puerto rican rum in a spray bottle kills aphids and also makes the ladybugs happy, so I got that going for me !!!

MontgomeryScott's picture

(True story)

If you put some beer in small jar lids near your garden, the snails head for it and drink so much that they die of alcohol poisoning. it's kind of cool going out to the garden and seeing the snail trails going in aimless circles...

Hulk's picture

The rum really works too. Made the ladybug part up, but I do imagine ladybugs eating rum soaked aphid bodies and having a good ole time !!!

Yen Cross's picture

   It must be nice for the Bloomturd staff to sit in their offices/conference rooms with a bunch of retards(peers) trying to come up with with new Websters definitions for all the miscalculations and policy screwups the people they shill for have made.

logicalman's picture

Inflation is a back door tax.

(ass rape?)


MontgomeryScott's picture

No, not actually.

You are paying them to fuck you in the ass, so there must be some type of 'contract' involved there.

One of the parties is paying for the other one to do things to them, so I guess that means that the one taking it up the Hershey Highway must be the whore...


kchrisc's picture

Inflation is "printed" money. "Printed" money is theft--"Printed theft." Theft destroys savings, investment, the returns on capital and capital. Less capital is less production; less life. Therefore: "Printed theft" is death.

I’m going to write the mathematical proof of this in the margin of my copy of Arithmetica for later generations to discern.

i_call_you_my_base's picture

"Lowflation" is one of the dumbest things I've ever heard. Utter bullshit.

Let me tell you about corruptflation. It's when you lower wages through illegal immigration, don't enforce it, take campaign bribes from both sides, and allow investors to bank the overhead. It's when you subsidize food by taxing the same people that pay for it, and enrich yourself in the process. It's when doctors take funds to promote high cost drugs in medical schools. It's when banks jack up lending rates via fraud and no one enforces it. And on, and on. Rising prices are largely about corruption. Is this not the reason people don't understand it? Is this what doesn't fit the models?

kchrisc's picture

Interesting video.

Unfortunately I think that most viewing it will see the people on the panel, correctly, as malevolent, and immigrants, illegal or otherwise, as the enemy. However, the bigger picture is that people saw worth in expending time and money to host and attend such a conference. That is a statement toward the level of maleficence that is the DC US today.

Think about it. Thousands of dollars and many hours were expended so that people could discuss ways to exclude viable employment candidates that they obviously need so they can bring over an indentured servant using a loophole in the DC US' controls.

The enemy is the DC US, at all levels.

IPA's picture

I prefer masterflation, but there does become a point when the chafing is to much to bare.

i_call_you_my_base's picture

Well, you'll need salves, so Krugman approves.

Seize Mars's picture

Shit is getting real. You can feel it.

Spitzer's picture

House prices in Calgary just hit an allllll time high.

JuliaS's picture

Wasn't there a flood recently? Shit always floats to the top.

Seasmoke's picture

I keep telling myself hedge with some paper cash. But then I look at physical gold coins and I can't help but trade them all in for more Gold. I guess Im going down with the Gold ship.

rsnoble's picture

Since when is deflation scarier than a $25 big mac?  Since the .01% say it is.

MontgomeryScott's picture

When I moved back to the CONUS in '69, a Big Mac was $.45. FORTY-FIVE FRIGGING CENTS! it actually tasted fairly good as well. REAL American beef, no GMO crap...

Maryland just passed a law raising their 'minimum wage' incrementally, so as to appease Obama; to equal $10.10 by 2018.

That socialist prick Roosevelt pushed for, and got Congress to enact, the first minimum wage laws, in 1938.

"The minimum wage had its highest purchasing value ever in 1968, when it was $1.60 per hour ($10.64 in 2012 dollars)."


The PTB's get this number wrong, though. Gasoline was $.269 (twenty-six and nine-tenths cents) per gallon, in '69. You had to choose the station that had the S and H Green Stamps, the Blue Chip stamps, the dishes, or the 'Noah's Ark' animals, AND; there was NO SUCH THING as 'self-serve' back in '69. Gasoline is currently averaging $3.64 per gallon right NOW. Conservatively-driven, a 1965 Chevy II Nova with a 283cid could get gas mileage in the low 20's. You could still buy a house for less than 20 grand, in a good area.

McDonald's was always (back then) a first job (part-time) for those in High School. it was a step up from a newspaper route.




quasimodo's picture







It's all just mental masturbation......all these ations.



Circle Jerk