The View From 1776
Saturday, November 06, 2010
The Deflation Bogeyman
Declining prices are not necessarily bad.
The Fed plans to add massively to the supply of phony money by monetizing the Federal debt with QE2, its latest multi-trillion dollar intervention to manipulate the financial system and to control business production and employment decisions.
The effect, in the short run, is to inflate further the developing stock market bubble, preparing the way for our next inflation-induced recession. In the long run, we the people are to be robbed of the purchasing power of our salaries, wages, and retirement incomes by the disguised tax of inflation.
Fed chairman Bernanke’s Keynesian, socialist rationale for this crime against society is his fear of deflation, a fear belied by prices of commodities that are increasing at an accelerating rate.
But let’s hypothetically accept chairman Bernanke’s fantasy and suppose that, in the present economy, prices were stable or beginning to decline. Is all deflation necessarily bad?
For several decades the computer world and its related products have experienced what Keynesian economists like Paul Krugman would call massive deflation. The price per unit of computing power, if there is such a thing, is a tiny fraction of the price in the late 1950s. The business result has been an explosion of demand, not an economic disaster.
The normally expected result of any production process is a drop in final prices to buyers, as businesses compete and become more efficient. This is by definition true if the money supply is held steady and the value of the dollar is sustained, because, as production increases, there are more goods in relation to the money supply.
A gradual decline in prices is an enormous benefit, not a problem, because it increases the purchasing power of people’s existing wages, salaries, and retirement incomes. A dollar will buy more, possibly of higher quality, today than it did yesterday.
Inflation, the beloved Keynesian goal, has the opposite effect.
The major reason for the receding American middle-class dream since the 1960s is that costs of living have increased faster than people’s money incomes. And every effort to raise wages, by organized labor union thuggery or legislative increases in minimum wages, has led politicians to increase the money supply faster than the increase in available goods and services, adding fuel to inflation. A dollar today will buy less than it did yesterday.