Ever since the Great Depression, central bankers have, curiously, striven to avoid deflation at all costs. But benign price deflation caused by increases in productivity — as opposed to “bad” deflation caused by a reduction in money supply — leads to a proportional increase in the purchasing power of a dollar. As a result, deflation — unlike inflation — leads to higher living standards and directly benefits savers, retirees, people with minimal debt, and folks living within their means.
The bottom line: Forget government and banker claims. For the fiscally responsible, mild deflation should always be looked at as a blessing — not a curse.
Photo Credit: Derek Jensen
Paul N says
I SO agree with you.
There is this fear that if prices come down then people will see that and wait to see if the prices come down further before making their purchase.
I disagree with that. It’s a line of B.S. If anything it would ramp up some purchasing in the economy. People can’t wait even when something is too expensive. Imagine if they get a deflation sale!
Len Penzo says
Exactly, Paul. Computers and televisions are a prime example that dispels the myth that people will simply wait and wait and wait to buy products in a climate of gradually falling prices. Deflation is even beneficial to the banks because they end up getting paid more in (real) interest for their loans. The truth is, it is our government who wants inflation. Inflation allows them to slyly tax us without having to account for it through legislation — which robs everyone of their purchasing power. It also encourages the government to raid the Treasury and spend recklessly because it ensures its debt will always be paid back in cheaper dollars.
Another bonus of deflation: regular folks like you and me no longer have to worry so much about investing, because the value of our saved dollars increases over time “automatically.”
Jon - Free Money Wisdom says
Great points—loved this article. 100% agree with everything said. Whoever said deflation was a curse doesn’t know what their talking about.
The government fears deflation because it would increase the magnitude of its debt… and I agree completely with you: we’re more likely to see inflation than middle class tax increases or spending cuts.
Deflation on it’s own isn’t automatically death for consumer products. think about technology – prices always come down on hardware, and usually on software and services are well… and tech companies do perfectly fine.
Len Penzo says
In my opinion, the main reason government politicians want inflation is because it allows them to buy votes from a self-interested electorate and spend with (relative) impunity while avoiding the tax hikes that would otherwise be required to cover their purchases. In other words, inflation is a form of taxation without representation.
Bret @ Hope to Prosper says
This is exactly what I was going to say Paul.
The Government needs the inflation to reduce the size of the Federal debt in relation to the GDP. But, they also have to hide inflation from the public to keep the bond interest low and avoid triggering COLAs on entitlements. So far, they have been fooling most of the people, most of the time. But, it’s bound to blow up at some point.
I always hear economists talking about how deflation is bad and inflation is good, but I’ve never understood what they were talking about. The closest I ever got to thinking they weren’t insane was when someone explained that deflation encourages people to hoard their money, while inflation encourages investors.
Except upon closer inspection, that’s idiotic. Deflation means that investors don’t have to be as careful about where they put their money. If you experience 5% inflation, you can have as bad as a 96% return on investment and still come out ahead. If you experience 5% inflation, you need to have a 105% return on investment just to break even!
To pick up the economy, we need to encourage risky investments. The best way to do that would be to promote deflation.
Len Penzo says
True. In fact, if you look at your example — in a deflationary environment, if you “invested” by hiding your money in your mattress, you’d end up earning 4% annually without even trying. Unlike in times of inflation, which our government and the Fed strive to maintain — we don’t have to take any risks investing at all! I can hear the naysayers now: “but Len, then nobody would invest in any businesses at all if that were true.” I disagree because, in a capitalistic society, there will always be people around who will accept bigger risks in exchange for the chance at bigger returns.
Len Penzo says
Careful, KC. You are buying into the phony government mantra that attempts to convince us that a growing economy and deflation are mutually exclusive; they are not. Our economy has exhibited growth before in a deflationary environment. It all depends whether that growth is the “good” kind induced by aggregate supply (via productivity gains), or the “bad” kind via aggregate demand (via a strangled money supply a la the Great Depression). For more on this, check out this story on Seeking Alpha:
Paula @ Afford Anything says
Haha — I’m borrowing to invest in cash-flow positive rental properties, so I’m rooting for inflation!! 🙂