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Today's War Against Deflation Will Make Us All Poorer
Submitted by Frank Shostak via The Mises Institute,
The yearly growth rate of the US consumer price index (CPI) fell to 0 percent in September 2015, from 0.2 percent in August and, 1.7 percent in September last year.
The yearly growth rate of the European Monetary Union CPI fell to minus 0.1 percent in September from 0.1 percent in the previous month and 0.3 percent in September last year.
Also, the growth momentum of the UK CPI fell into the negative in September with the yearly growth rate closing at minus 0.1 percent from 0 percent in August and 1.2 percent in September last year.
The growth momentum of China’s CPI eased in September with the yearly growth rate falling to 1.6 percent from 2 percent in August.
Deflation Fears Gain Steam
Consequently, many experts are expressing concern regarding the declining growth momentum of the CPI and are of the view that rather than tightening the monetary stance, central banks should loosen their stance further in order to counter the emergence of deflation, which is regarded as a major threat to economic well-being of individuals.
For most experts, deflation is bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.
This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators believe that policies that counter deflation will also counter the slump.
Will Reversing Deflation Prevent a Slump?
If deflation leads to an economic slump, then policies that reverse deflation should be good for the economy, so it is held.
Reversing deflation will simply involve introducing policies that support general increases in the prices of goods, i.e., price inflation. With this way of thinking inflation could actually be an agent of economic growth.
According to most experts, a little bit of inflation can actually be a good thing. Mainstream economists believe that inflation of 2 percent is not harmful to economic growth, but that inflation of 10 percent could be bad for the economy.
There’s good reason to believe, however, that at a rate of inflation of 10 percent, it is likely that consumers are going to form rising inflation expectations.
According to popular thinking, in response to a high rate of inflation, consumers will speed up their expenditures on goods at present, which should boost economic growth. So why then is a rate of inflation of 10 percent or higher regarded by experts as a bad thing?
Clearly there is a problem with the popular way of thinking.
Price Inflation vs. Money-Supply Inflation
Inflation is not about general increases in prices as such, but about the increase in the money supply. As a rule the increase in the money supply sets in motion general increases in prices. This, however, need not always be the case.
The price of a good is the amount of money asked per unit of it. For a constant amount of money and an expanding quantity of goods, prices will actually fall.
Prices will also fall when the rate of increase in the supply of goods exceeds the rate of increase in the money supply.
For instance, if the money supply increases by 5 percent and the quantity of goods increases by 10 percent, prices will fall by 5 percent.
A fall in prices cannot conceal the fact that we have inflation of 5 percent here on account of the increase in the money supply.
The Problem Is Really Wealth Formation, not Rising Prices
The reason why inflation is bad news is not because of increases in prices as such, but because of the damage inflation inflicts to the wealth-formation process. Here is why:
The chief role of money is the medium of exchange. Money enables us to exchange something we have for something we want.
Before an exchange can take place, an individual must have something useful that he can exchange for money. Once he secures the money, he can then exchange it for the good he wants.
But now consider a situation in which the money is created "out of thin air," increasing the money supply.
This new money is no different from counterfeit money. The counterfeiter exchanges the printed money for goods without producing anything useful.
He in fact exchanges nothing for something. He takes from the pool of real goods without making any contribution to the pool.
The economic effect of money that was created out of thin air is exactly the same as that of counterfeit money — it impoverishes wealth generators.
The money created out of thin air diverts real wealth toward the holders of new money. This weakens the wealth generators ability to generate wealth and this in turn leads to a weakening in economic growth.
Note that as a result of the increase in the money supply what we have here is more money per unit of goods, and thus, higher prices.
What matters however is not that price rises, but the increase in the money supply that sets in motion the exchange of nothing for something, or "the counterfeit effect."
The exchange of nothing for something, as we have seen, weakens the process of real wealth formation. Therefore, anything that promotes increases in the money supply can only make things much worse.
Why Falling Prices Are Good
Since changes in prices are just a symptom, as it were — and not the primary causative factor — obviously countering a falling growth momentum of the CPI by means of loose a monetary policy (i.e., by creating inflation) is bad news for the process of wealth generation, and hence for the economy.
In order to maintain their lives and well-being, individuals must buy goods and services in the present. So from this perspective a fall in prices cannot be bad for the economy.
Furthermore, if a fall in the growth momentum of prices emerges on the back of the collapse of bubble activities in response to a softer monetary growth then this should be seen as good news. The less non-productive bubble activities that are around the better it is for the wealth generators and hence for the overall pool of real wealth.
Likewise, if a fall in the growth momentum of the CPI emerges on account of the expansion in real wealth for a given stock of money, this is obviously great news since many more people could now benefit from the expanding pool of real wealth.
We can thus conclude that contrary to the popular view, a fall in the growth momentum of prices is always good news for the wealth generating process and hence for the economy.
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Well, it probably won't make ALL of us poorer. Someone benefits.
won't make us poorer
It already made us poorer.
You know, I made a calculation about the expenses in my company. I figured out that writing a letter to my customers costs me 40 euro's, sending a invoice costs me 19 euro's and the crap keeps piling up.
It's just unsustainable to let it all be done by humans anymore and I love my employees but honestly... I'm going to look to automate at leat 80% of my administration.
Everything is getting so fucking expensive that as a small company, it's getting crazy to survive.
Everybody looks at you like you're a rich bastard but the risk is getting out of hand. 1 bad month needs 4 good months to break even.
And employees don't get it. Most people who work for a boss don't understand that it's cheaper for that boss to have a small company of 3 to 6 people instead of having a company of 19 people.
Everybody thinks their income is secure and it will all keep comming in but automation is forced upon companies these days.
We run about 250K a month, my salary expenses are about 78K, product expenses plus transport is about 100K and all the rest of my expenses are about 25K. that's a pretty tight margin and I sometimes have months that I made 120K this year.
And every month, my expenses rise by about 1K. At a certain point people will be replaced. And most probably I'll be able to just keep the same or even a less profit margin.
If living expeses rise a bit for a person, they rise dramaticly for a company. I have more debt now then I ever tought was possible for a person to have. There's not a bank in my country where I don't have a open credit or factoring line to keep projects being funded.
People might not give a fuck about constant price increases but they'll start to care when they all end up on the street. And businesses are bleeding everywhere. Margins are just all to tight and with current crazy prices, nobody dares to increase their prices to much because the competion also tries to survive and will work just to keep their company running for another month.
And in this communist world, where everybody thinks like: "He's rich, I hope he loses it all" people should realize that the poor will be dirtpoor when shit turns even more bad and it's the better off who will become what is now middle class and they'll survive.
And sure, most prepper with a few hundred rolls of silver think they'll survive also but I wonder if they ever realized that this downturn will last 20 to 30 years at least and a little buffer for 4 to 5 years won't cut it AT ALL.
And businesss or people who start their own company don't do this to start a wellfare programm. They do it to make more money. How the fuck don't people realize that by being against people who think this way, that they're paving the way to poverty. Their poverty.
I love money. I want more money. I work hard for my money.
And honestly, I goes before me and all the rest comes later. And people who hate people who want to get rich are or will end up in the gutter. And there's plenty of those arround.
My father always told me: The more porches you see driving in the street the better off you'll be because that means there's money going arround.
And when people start to throw rocks at those porches and hate people who have money... THEY LEAVE! And the money won't go arround anymore!!!
And everybody who's left behind will be => WORSE OFF!
I'll probably get 50 downvotes for this post but that's life kids. That's how the world turns. And if you press that down arrow, think about why you did it. And what the implications will be for yourself for thinking like that because prospertity is a climate and when you hate that climate just becaue it doesn't sound fair to you, you should realize that it will get worse in your world for thinking like that.
And there's plenty of different worlds.
The world looks totally different for somebody who lives in Africa then to somebody who lives in europe or america. But even in Europe or America there are 100 kinds of different worlds. Most people don't even know all those worlds exist.
A while back, A Algerian woman called me a racist. I hadn't done anything so I asked her why she said that. The story changed, every white person was a racist.
So I asked why she said that. Nobody would give her a job, everybody was a racist, everybody was a bastard... and the mumbo jumbo kept on going.
So I gave her some advice. I told her, stop talking like that and imitate the people who are succesfull so you'll fit in. People will like that and your chances will rise.
My god... WHY SHOULD I CHANGE!!!... well, that was my exit cue.
I just walked away, I couldn't care less about how she would end up. Fuck her.
She should realize that I could indeed just walk away, I wasn't worse off at all, and for here it was yet another chance of learning something that passed by. And she was left in her missery. Maybe she said to other people "I told that guy the truth"... like that changes anything for me :) HA!
So when people stay angry, don't adapt, don't go for the goal and do what is needed and stay angry because the world doesn't adapt itself to their needs... They will be left behind, angry, upset and in a corner.
People are crowd animals. And they can only do great things in a group.
People who think they can take care of themselves, who don't need anybody.... don't bet on it, you'll suffer but you don't realize it yet.
People who think they don't need anybody else will get or have mental problems. Why do you think there's so many people on psycho drugs, with depressions, burnouts, boreouts and all those other mental disorders? Gosh... where did all that suddenly came from these last 2 decades. And why doesn't it happen that much with people who have a vibrant social life? A real social life, not the fake facebook kind of crap.
And to change this system, people need to come together and take initiative. And for some weird part, I don't think this is possible anymore. People only care about themselves.
We'll see how they end up but when people don't care about others, nobody will care about them. And add some desperation in that mix and stuff can get nasty.
great post!
I'm with you all the way brother, one hand needs to wash the other. We live with people who are fucked up, I mean the one's walking outside my work wearing adidas tracksuits that never visited a race track in their lives.
Saddos, lining up waiting for the liquer stor to open before 12, it's fucking sad. Yet, if you were to point this out then YOU ARE A SMART BASTARD, THE ENEMY.
I'm skilled at what I do. I make money also. Yet, if we show the way they still will not follow. If you lead they stand still, even if you show them how to fish, they will break the rod and attack you with it.
It's becoming impossible to even have a normal, down to earth conversation with people as they are incapable of intellectual rationalisation. I never realised that working your way up meant becoming despised. I thaught leading was good, it's bad because it increases the numbers behind you holding a knife.
I hadn't heard the term boreout before. Thats me, hence my stream of passive aggressive sarcasm here at ZH.
I think you're right though. I have a hard time seeing how the whole thing doesn't collapse before it gets any better.
very very important point!
Obama's overlord's goal - everybody gonna be sharecroppin' 'n pickin' cotton.
Yowsah.
When them cotton balls get rotton...
https://www.youtube.com/watch?v=Cd4S8FGoEJU
Let me be clear, with respect to the purchasing power of the average person, especially relative to everything required to maintain a decent standard of living, there is no such thing as "deflation".
No matter, such "let the majority eat cake" monetary experiments have been tried before. This one will end no differently.
But according to the inflationists I won't buy my coffee at $3 today if I could buy it at $2.97 in a year's time!!
Whatever. I'm just sick of watching the beating they put on Gold and Silver. At this point I'm this close to getting rid of of it all. I'm afraid I might kill someone. Only thing is I'm afraid I will really kill someone when it's over $20,000 the day after I sell it all. So instead I sit here and do nothing but read more BS about deflation today. Inflation tomorrow.
No shortage of buyers for high quality phyiscal.
In physical gold and silver, we trust. ;-)
I bought at $40, I bought at $15. Doesn't hurt at all to hold it.
Last time I checked, PMs are still the preferred collateral or "tier one asset" of all central banks.
Do as they do, ignore what they say.
When the reset comes, and it will, you can become your own bank. If not, you will have all the collateral required to save your business or start a new one. Win-win either way.
I tried to pay my property taxes in silver .....she wouldn't accept it as payment ,of course I live in New Jersey which explains a lot .Like the police car that followed me home.
If you are buying gold, why do you value it in dollars?
grams or ounces...
When silver was in the low 40s I had a new sewer line installed for 10 ounces.
Don't overthink this folks.
You made a killing...not on the silver. On the sewer line. It so happens I need a new sewer line and the quotes I'm getting are up around ten grand. I'm still shopping. I know how to do plumbing but it is illegal to work on your own sewer line in this town.
Reality is infinitely complex.
By the feeble measure of this mundane article, an increase in the amount of heroin in the streets makes all of us that much richer.
It seems that's not the only logical boner that comes out of this sort of feeble reasoning.
It also appears that any increase in the amount of cancer coming from nucelar power plant leakage into the environment, makes everyone that much richer too, because this necessitates the need for that much more cancer treatment, which is a commodity in the marketplace.
I suppose if everyone but me died tomorrow, I'd all be richer too, since there'd be great mountains of commodities, and just me left to consume it all. In fact for every person who is murdered, we all become richer too. War is a tremendous benefit apparently. The 14th Century's Black Plague? Phenomenal for the economy.
If we all became bank robbers, this would neither hurt nor help the economy since there would be no inflation or deflation as a result of taking the banks' money. But kill someone during a bank robbery, and the economy of the rest of us benefits.
Who said economics is a tough subject to master. Just get a shotgun and start shooting to improve the economy!
Wait for negative rates, then we will really feel how poor we are.
Yellen and her 12 minions web dream is hyper-inflation.
They'll just deny it exist. Quote the 2% inflation figure like they always do.
Inflation is basically never good for the economy but the central banks argue that just the reverse is true. Inflation boosts the wealth of people who own assets, i.e., primarily the wealthy (simply because they own most of the assets). Inflation hurts ordinary people because wages always lag the rise in the cost of living and unsophisticated investments tend to yield returns far below the rate of inflation, especially after taxes.
Deflation is bad, too...it makes it hard to repay debt and hard to recover from losses,e.g., the $300 my 91-year old mother said was stolen out of her purse when she went through airport security down in Florida, today.
Deflation is great if you don't have debt.
See the problem with deflation now?
Read my post before you respond, if you do not mind. If what you are saying is that people should not carry any debt, I agree. I've always said debt is slavery. But, the reality is that most people are in debt, so deflation will hurt most people.
The only DEflation that most people see occurring is in wages. Food is more expensive with evert=y trip to the store and despite the falling price of crude it hasn't made that much difference in the price of gas or heating oil.
All this talk of deflation is a propaganda ploy to distract people from the very real INFLATION they're seeing in their every day lives. The cost of damn near everything is going up while wages are static and savings (if you have any) are earning nothing.
Commodities have taken a dive over the past year but everything is still going up in price. What isn't going up in price buys you less than it did.
20 cans for $5 instead of 24. 10oz instead of 14oz.
The toys my son like keep going up 20% every year and quality keeps going down. What was $8 in 2010 is now $20. It is insane.
Normally savings would be passed on to consumers, but they are being kept for increased margins to goose EPS.
We are in textbook stagflation.
Your post is music to my ears...I went on a strategic spending spree during 2012 and 2013. Books, music, movies, appliances, electrical supplies, tools, clothing, household goods, etc. During 2014, I gradually ran out of things to buy. This year, I've bought very little. Since last summer, I've bought virtually nothing. My discretionary spending has fallen to near zero, and I mean literally zero.
hey that is my story too, other than the entertainment.
When I buy a pair of Lee jeans on Amazon for 30 pounds, the next day it goes up to 50-60 pounds.
I've done this for nearly half a dozen different pairs of jeans and each time the price has gone up, so I move on to a different style or type.
They change the prices constantly, but when I find a good deal I need to be sure to get 2 or 3 pairs, otherwise the price will skyrocket straight away.
Welcome to modern day inflation, it's elecric!
I started buying Merrell shoes 8 years ago for $100. The same exact pair now costs $140. Inflation only brings demand forward . I now have enough clothing to last 20+ years. I wish I could go back 10 years and buy more. In terms of quality and price inflation is skyrocketing at an astounding clip! Why doesn't the Fed get this???
The economic effect of money that was created out of thin air is exactly the same as that of counterfeit money...
Not true!
There is a huge, important difference that many people overlook. That is, when so-called "money" that is created out of thin air, and equal quantity of debt is also created out of thin air. In fact, the so-called "money" IS debt (just read the green piece of paper).
And debt is a huge drag on economic activity once a great deal accumulates.
This is why hyper-inflation hasn't happened yet, and high inflation has mostly only existed in the bond, stock and real-estate markets (and education, and health-care).
If the quantity of "money" that has been created was not created with an equal quantity of debt... hyperinflation would have happened long ago.
You are right Ann. That's why the Fed is trying to increase the velocity of money with the wealth effect. It isn't working because NIRP tells everyone that their money in the bank is actually worth very little. The Fed will never get it right. I don't think they want to get it right.
Base money created by the Fed is not debt. It really is created from thin air. The Federal Reserve assumes no debt when it prints money. It used to be a note redeemable in gold. Now it is a note in name only because it is redeemable in nothing. That's why it's fiat.
Only commercial bank lending-created money that is pyramided on top of base money (reserves) is debt. A debt redeemable in paper Federal Reserve Notes.
Moreover your argument that money borrowed under a fractional reserve system is somehow not inflationary because the borrower is cognizant of his debt doesn't add up. The borrower immediately spends that money into the economy where it's treated on par with every other dollar, credit and paper alike. Its recipients don't know or care anything about other people's debt. Those credit dollars proceed to bid up prices in the economy just as effectively as if the debtor had been handed money off a printing press.
Now I agree, unlike the Fed or any CB using a printing press, the debtor has an incentive to deflate the money supply proportional to the amount his loan inflated it by earning the money to pay back his loan and extinguish the credit money created for his sake. The problem is banks typically immediately re-extend that credit keeping it perpetually in circulation, effectively never allowing the money supply to contract.
If credit money is kept perpetually in circulation bidding up prices, that money impacts the money supply just the same as if it had been printed by a press.
The "war against deflation" is, IMHO, currency debasement. I looked at my first dollar "contributed" to Social Security in 1966. Using Inflation Calculator, which I call debasement calculator. That 1966 dollar is the equivilent to $7 plus change as of now. There is no way to protect saved dollars [capital]Until all the capital is worthless from losing value excepting deflation. Question, how far can the debasement go? Until all the capital has been destroyed??
I forget where I heard it, but recently someone made a point by saying something like this: When the economy is doing well the government doesn't have to say anything because everyone knows its doing good, NOTHING NEEDS TO BE SAID, but when its bad they have to repeat how good it is so everyone thinks it is. If someone is telling you things are good right now and you feel they really arent, trust your own feelings.
The Satanists that orchestrated all this shit isn't going to get poorer. You can bet your ass on that.
No
the 'problem' is that in our monetary system if there is no growth in the money supply there is death of the system.
I don't think Janet is concerned about the price of a burger.
The fiat fractional reserve system of banking NEEDS inflation or else the house of cards loans collapses. It works until it doesn't. Did you do the experiment with play money as kid?
No, it doesn't need inflation. Inflation through money printing or fractional-reserve based credit extension just tricks people into thinking they are more wealthy than they are and distorts their capital allocation decisions. But if money printing stopped and credit was held steady at some cap, money supply reality would re-assert, people would adjust and tighten their belts, and the banking system would continue. Inflation and fiat fractional reserve banking are two seperate evils, not intertwined.
Millions of American workers come face to face with the "counterfeit effect" every time they get paid. They look at the dollars received (after being pecked through with taxes and Obamacare), knowing those USD's were ginned up out of thin air, and think they just sold 80 hours of their life that they can't get back or make more of. They resent it. They feel like chumps. I understand why more and more countries are not willing to trade their resources and human capital for FRN global reserve dollars. Can't blame them for a second. Sadly, America's workers don't have a choice. They're forced, by law, to work for USD's.
This is a problem shared by all national currencies today, not just the Dollar.
I don't entirely agree with Mr Shostak.
I agree with most of his statement about the benign nature of deflation to economies IN GENERAL, and about the harmful nature of inflation IN GENERAL.
But he isn't being complete in his analysis before jumping to a policy recommendation. He implies that a departure from inflationary monetary policy will involve only the bankruptcy of those sectors who exist solely to service those with newly created currency to spend. And he implies that though painful, the currency will quickly stabilize at its uninflated value, and we will all carry on.
Firstly, he has not told you why there is an inflationary regime in the first place. Inflationary monetary policy exists to curb the natural tendency of bank who loan out money WHICH THEY DO NOT HAVE to collapse.
That's why infationary monetary policy exists. It has nothing to do with a general macro or micro economic benefit.
And, today all banks are Fractional Reserve banks, who loan out money either already pledged to the immediate demands of depositors, or made up whole cloth, using whatever assets it has as reserve.
When you take out a loan, the bank is loaning you NOTHING...but which can be used to pay by general agreement amongst banks...until the owner of the asset used to secure the loan, who doesn't know it has been sold as collateral for the bank, wants his stuff back. THEN only he or the loan recipient, and in reality neither, will get the money. Neither, because the bank is allowed to use the depositors asset to secure loans ten times larger than the deposit... And then the banker collects fees for selling the depositors assets!!!
So you can expect pretty much all banks to bankrupt if we take Mr Shostak's recommendation. People living in assets stored in those banks will get wiped out. But it gets worse. Much worse.
The second essential element Mr Shostak neglected to tell you is that the Federal Reserve is also such a bank, and that the Dollar itself is issued with zero unencumbered collateral. Specifically, less than 1% of the Dollar is backed by anything real. Most is backed by debt at face value, which means there CANNOT be enough Dollars in existence to cover both the interest and the debt... Meaning the debt must be acknowledged as unpayable in a deflationary environment, and it, and all assets based on it -MEANING THE DOLLAR ITSELF !! - must be written off.
The Dollar as currently composed will cease to exist in a deflationary environment, because it has no backing, except unpayable debt.
So, he's not telling you that you will have to realize the bankers stole your savings long ago...
And then the Dollar itself will implode.
The other currencies are as bad...and some much worse than the Dollar... And they'll all come down.
This is why the debt ceiling debate has no meaning. The additional borrowing is the amount necessary to back creation of new currency so that the old treasury debt can avoid default. This inflation is built into the Dollar since we allowed the INSANE creation of the infernal Federal Reserve.
The only way out is to gain hard backing for the Dollar by revaluing whatever hard assets the treasury has to a value capable of credibly backing all the Dollars being traded. I believe the legacy, but still in force law on the matter says 40%.
THEN you can allow deflation to run its course, and wipe out the unpayable credit such that we can start over. THEN a retired who gets only $.01 or less of what he's owed by the bank may find that $.01 of hard money buys as much or more than the large number of fiat currency he thought he had before.
"Reversing deflation will simply involve introducing policies that support general increases in the prices of goods, i.e., price inflation. With this way of thinking inflation could actually be an agent of economic growth."
Reversing deflation???
This is insane. There's half as much meat in my hamburger and it costs twice as much.
Even the butcher injects water into the meat, and quantities in products are dropping despite rising prices.
Now you want to convince me that raising prices further is gonna' help!?!
Doesn't anybody understand the doubling period or a log scale anymore?
A hundred years ago, a movie cost a nickel. Today, the worst movies cost the most to make.
A hundred years ago, an ounce of gold would buy you a nice suit. Today, an ounce of gold will still buy you a nice suit.
"The rich stay healthy while the sick stay poor." -Vox
House prices and government charge keep going up.
Most other things are coming down.
We need to see hous eprices etc fall.
Then we will all be better off.
Keep our wages the same.
Let asian wages catch us up, then some jobs will return to the west.