Blaming Deflation

Tyler Durden's picture

Submitted by Alasdair Macleod of,

With the Eurozone going to the extreme of negative interest rates and the IMF belatedly revising downwards their expectations of US economic growth, deflation is now the favored buzzword. It is time to untangle myth from reality and put deflation in context.

Keynesian and monetarist economists commonly use the word to describe the phenomenon of falling prices, or alternatively a rising value for money. Deflation is loosely meant to be the opposite of inflation. But the term inflation originally applied to an increase in the quantities of currency and credit, not to the rise in prices that can be expected to follow. The definition has drifted from cause to supposed effect. Taking its cue from this transfer of definition, deflation is now taken to describe falling prices, usually linked to failing demand, and not a contraction of money in circulation.

Keynes decided that falling prices discourage consumers because they are likely to defer their purchases. He also argued in his Tract on Monetary Reform that deflation benefited the rentier class at the expense of the borrower, calling to mind an image of the idle rich enjoying a windfall at the expense of the hard-working poor. Keynes and his followers subsequently developed this argument against falling prices to justify government intervention as the remedy. No recognition was given to the normal process where stable money leads to lower prices, the hallmark of genuine economic progress. Sound money became tarred with the deflationary brush and ruled out as a desirable objective.

The deflation problem according to another economist, Irving Fisher, is that the losses suffered by businesses from falling prices can lead to collateral being liquidated by the banks, feeding into a debt-liquidation spiral and ultimately banking failure. Fisher was describing the natural response of banks to a widespread slump, and not the normal course of business in a sound money environment.

However, while swallowing Keynes' and Fisher's arguments central bankers are ignoring the law of the markets, commonly referred to as Say's Law. It states that we make things to buy things so you cannot divorce consumption from production, and money is just the temporary lubricant for the process. Tinkering with monetary value solves nothing. This was the accepted wisdom before Keynes turned it on its head in the 1930s. Today governments and central banks think they can do better than markets by monetary intervention and state direction. The result is businesses that should fail are supported and uneconomic activities promoted. And when this support operation shows signs of collapsing, we are told it is deflation.

If the word has any meaning, it is nothing of the sort: markets are merely trying to embrace reality and cleanse themselves of the accumulated distortions. The fact that this cleansing process has been suspended, at least since the Reagan/Thatcher era of the early 1980s, warns us that the accumulation of distortions is great; so great that when they are corrected Irving Fisher's warning about slumps will be proven to be correct.

The marker of course is the accumulation of debt, which strangles everything. My conclusion is that use of the term deflation is passing off the accumulating problems created by government and monetary interventions as the failure of markets.

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Skateboarder's picture

Want 'change?' Hang an 'expert.'

Urban Redneck's picture

Overly simplistic... The Saudi's are playing with fire but they know it and the risks that this does create. The error in the piece is viewing the Saudi establishment as monolithic, when there are inter-clan rivalries for power, succession, and a bigger slice of pie.

nope-1004's picture

We need a third variable to this debate.


The three are: Inflation, or Deflation, or Corruption.

Then it would be easy to classify this gong economy.

hidingfromhelis's picture

Reminds me of the quick, accurate, and cheap scenario where you get to pick two.

Stoploss's picture

Deflation and inflation are fiat terms used, and thrown around for purposes of instilling fear, while they rob you, by relentlessly reducing the said fiat value.

In the fiat price arena, there are only high prices, and low prices. The cure for high prices, is high prices. The cure for low prices, are low prices.


If you get the motherfucking FED out of the way, COMPETITIVE RATES do a lot to control those price swings, and along with non interventionist monetary policy, it might leave those stupid fukkers an opportunity to actually, for once, actually do what they told us it was going to do when they lied to us the first time.


The FED was created to finance the WAR RACKET.

That is all.......

deflator's picture

 Governments and central banks are not Keynesians any more than they are Austrians. They are whatever is politically expediant to justify maintaining and growing their power.


 Yes deflation is their threat but inflation is their promise.

Greenskeeper_Carl's picture

What always kills me is how you can do a little research and find a huge number of societies who have crumbled due to the inflation of currencies, and printing of money, this destroying it's purchasing power. What you won't find is a society that collapsed due to the purchasing power of its citizens growing too much. The only people who this benefits are indebted govts and their central banks. And you never hear anyone mention this.

deflator's picture

 We all know what inflation and deflation is in the context of sound money, how there can be an inflation/deflation debate in the context of fiat money is beyond me. Inflation is the law in a fiat currency system. Deflation in a fiat context is for those without the power to create money by decree.

jonytk's picture

so the euro states...

Flakmeister's picture

Peak oil is a powerful deflationary force, more and more capital is sucked into the energy vortex for increasingly less return...

$3.5 trillion since 2005 and they couldn't even keep production flat... 

headhunt's picture

It's a black hole and when you get too close eventually you are sucked in.


CrashisOptimistic's picture

Yes my comment was gonna be "in a world of scarcity of that which is vital, price need not be informative". 

The first layer of thought would be . . . if you have to have it, you'll pay any price so the price can increase. 

The second layer is if you have to have it, and you can't get it, your activity will decline. 

So supply and demand is not a "LAW".  In fact, there are no laws of economics.  It's an invented discipline of some imagined universal behavior. 

Generally, ignore it, and seek farmland.

TuPhat's picture

Generally ignore Flakmeister and read wiser comments.  He's got it so backwards as usual.

CrashisOptimistic's picture

Uhm, I was somewhat agreeing with him.

deflator's picture

"Peak oil is a powerful deflationary force, more and more capital is sucked into the energy vortex for increasingly less return..."

 but they have maintained the illusion of more return...or has all your arguments with, "cornucopians" been in vain?


 Even if there is, "plenty of oil" doesn't mean that there is "capacity for growth" in producing crude oil, coal and natural gas. The past 150 years of parabolic lower left to upper right on the charts of energy production and technology that consumes it is IMO at least partly responsible for legitimizing strictly fiat money. You don't have to believe in PO to conclude that at some point production numbers can eventually get too big to extrapolate the lower left to upper right any further into the future. 


 People always ask me, "What do you mean capacity for growth?". In a debt based fiat currency system you don't have to run out of something, you just need to run out of capacity for growth in producing that something. If you can't extrapolate growth in production then debt money fails. Even if production is flat a debt based system has major problems.

Confidence that the past 150 years of lower left to upper right on the chart production of energy is confidence in lower left to upper right debt production.


 Now if we believe that economics is political bullshit in the context of fiat money world then we can see that all the talk of energy renaissance is there to soothe us and tell us, "don't worry, the debt is still all good."

Cognitive Dissonance's picture

Control the language and you control the mind. The body soon obediently follows.

pakled's picture

Whe you got 'em by the mind....

A Lunatic's picture

End the FED.......

RaceToTheBottom's picture

I keep getting email notification of sex offenders moving into my neighborhood.  Part of an effort to keep citizens informed and thereby empowered.


I think it is more important to send these emails about the latest FED governors...  They have a higher probability of molesting your kids.

Seasmoke's picture

I think it's WAY PAST time to check the deflation myth. 

rbg81's picture

I have yet to see deflation except in the real estate market every now and then.  However, I DO see inflation on a daily basis.

Cognitive Dissonance's picture

You're doing it wrong. Look only in the places you are told and no where else. How many times must I explain this to you? Sheesh!

moneybots's picture

"I think it's WAY PAST time to check the deflation myth."


Deflation isn't a myth.  It is the inverse phase of the inflation/deflation cycle.

100% of financial bubbles burst and deflate. Math does not allow any exceptions.

Flakmeister's picture

And not all types of deflation lead to failing prices, cost push inflation can certainly occur during a period of declining output...

Tulpa's picture

"Today governments and central banks think they can do better than markets by monetary intervention and state direction."

Some/most of them don't actually believe they can do better, they just enjoy having extra power over the economy.

headhunt's picture

The fact is the laws of physics apply to all things including economics.

The master of the universe is gravity - it always, always wins.


Skateboarder's picture

Actually the Strong Interaction fourth wins by a whopping 38 orders of magnitude. ;-)

Bollixed's picture

For some reason I had a lisp when I read that...:)

Skateboarder's picture

Just having fun with words. ;-)

Flakmeister's picture

Yeah but very short ranged and its asymptotically free.... 


logicalman's picture

Very short range, however.

The effects of gravity however are infinite in range and always additive.

I think gravity wins, maybe it's dark matter, though I'm still on the fence with the dark matter thing until there's more evidence.


Skateboarder's picture

Quick summary of my take on 'dark matter':

- Any mathematical computation may require three-dimensional space for physical storage of information. It may be that all higher order computations have base cases in the three-dimensional space.

- If you have a computation active, it requires computational overhead (space) for the computation to be carried out.

- We perceive the active computation as 'regular matter' and the inactive, or overhead space, as 'dark matter.'

- Atomic computations may not necessarily require the concept of time, but sustained sequences of atomic computations that require the notion of a continuing state, do require the concept of time.

- 'Dark Matter' is like cigarette ash left behind by the ever-burning-computation-machine cigarette we call 'The Universe.' It is indeed matter, but it's spent. There are likely many uses for it which we do not yet comprehend.

NickVegas's picture

Here is my take on 'dark matter'. None of the ivory tower academics equations and theories match actual observation, so they made up this fairy tale that there is this fungible unobservable stuff that fixes everything with their theories. Most important of all is to keep the funding coming, and make sure we don't get any closer to Tesla style free energy as we pursue the unicorns and fairies in space.

Flakmeister's picture

This is Hedgetardery in perhaps its most classic form...

i) Gross misunderstanding of a scientific issue,

ii) Implies basic research is a waste of money,

iii) Gratuitous reference to "conspiracy theory involving Tesla"....

NidStyles's picture

Here's the explanation for dark matter. Humans watch the sky for a few decades and immediately assume they have an idea what is going on despite lacking enough information to verify. 


Sounds like everything that is actually wrong in the world is involved with everything else humans do, it lacks foresight and verification.

Skateboarder's picture

Attempt to follow the logic that I presented. It's not extraordinary or magical. There are things we will never know, but it is not impossible to conclude the bounds of unseeable things through logical means. Yeah, the 'scientists' are/can be circle-jerking arrogant assholes, and you may discount them by discretion, but don't discount individual contributions of logic from 'non-scientists' out of the assumption that they don't know jack shit. They might not, but logic constructs have a neat way of bringing absurdity into order, and all people have all shapes, sizes, and varying degrees of quality/soundness of logic constructs to offer. It is your responsibility to decode that accordingly.

Now, knowing that probability spaces have members, and members have complements, and 'visible matter' as a member of the universe's space most certainly has a complement, I logically conclude with good confidence that 'invisble (dark) matter' exists. What that invisible matter actually might be, I presented in my previous post.

Since when did hypotheses about the unknown become taboo?

Flakmeister's picture

It is never taboo, but your idea must be *testable* at some level, i.e. consistent with all known data. All Dark Matter is 
"stuff" that interacts gravitationally but not electromagnetically. This is known by two independent means.

Powerful constraints on any DM theory include the primordial abundances of various elements and isotopes from Big Bang Nucleosyntheis. We know the production propabilities, and prevailing conditions must be just so...

We also have incredible maps of the Cosmic Microwave Background Radiation. We know how smooth the universe has to be at different angular scales.

Edit: Here is the latest data

NidStyles's picture

Not taboo in the least. If it's complete nonsense and the testing proves that it's not 100% accurate it not really something that should be trsuted and worked further upon. 


General Relativity is pretty good with localities, it's miserable once you start trying to explain where everything came from. They had to come up with a replacement to Aether to make General Relativity to "work". 

Flakmeister's picture

Why do you feel compelled to pollute the boards with your gross misunderstanding of damn well near everything?

What the fuck does the above dribble supposed to mean?

So, just what replaces the Aether then? We are all ears....

(not really)....

Flakmeister's picture

Nid, you might very well be the Hedgetard with the strongest case of Dunning Kruger ever observed here...

NidStyles's picture

Well it beats being the biggest dick head on here. :-)  Even if it is not true.

You're also the one that accepts General Relativity and the Big Bang even though everyone in the field know's that they are both flawed but they keep working on it as they are getting paid to do that sort of research. Say all you want Flak, everyone in the field admits this to be true. 

Magical patchwork theories that can not be tested do not make for an accurate picture of reality. 

Flakmeister's picture

Wow, a post that is almost coherent...

Completely fucking wrong, but at least it is coherent, and I suppose that is a start...

pakled's picture

Funny you are getting down voted. I was looking for a way to say something similar. A bit more to it than just what goes up must come down, but everything seems to flow from a few basic "laws" (or constructs). Perhaps this is why we inadvertently create new problems as we attempt to solve existing problems. And I guess you can divide the world between the people that understand that (vision, experience, wisdom) and the ones who don't. The so-called 'bleeding heart liberal' is certainly well intended, but they might not realize that not all problems can be solved. We often make it worse by attempting to fix it.

lunaticfringe's picture

“Most of the harm in the world is done by good people, and not by accident, lapse, or omission. It is the result of their deliberate actions, long persevered in, which they hold to be motivated by high ideals toward virtuous ends.”
? Isabel Paterson, The God of the Machine

Anusocracy's picture

Private morality fails to create public good when it is applied through coercion.

logicalman's picture

Entropy is a pretty big deal too.

KickIce's picture

But I think it's Wile E Coyote physics, we just have to get the SOBs to look down.