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Is Deflation Better?

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Is Deflation Better?
by Alex Merced

I constantly speak about the dangers of inflation (increase in the money supply), and inflationary pressures of a growing government. Inflation destroys our purchasing power, causes malinvestment, and encourages risker investing. Inflation is primarily on my mind cause it's more imminent, government is naturally incentivised to inflate, so inflation and it's danger are practical concern although some take this to mean deflation (a decrease in the money supply) is the desired alternative.

 They paint this utopian image that in a world of deflation that purchasing power increases, savings will increase meaning more capital for investment and it'll breed a more prudent and moral society. In reality, deflation or any manipulation of the money supply will cause distortions in the economic calculation of market participants, just in different ways.

 With deflation artificially increasing the value of money, and what is the story whenever we artificially the price of any good? When prices are fixed above the market price less people will be willing to consume that good so you end up with a surplus. This would be the result of a deflationary environment that even though savings will be available for lending for projects, lenders will not want to pay the higher price of money and will choose not to lend it. So now you have underutilization of resources, and while I would prefer under spending than over spending this is still not ideal.

So does this mean a constant money supply is wanted, not neccessarily because of the downward price level adjustments that will constantly occur to a fixed supply. The only solution to the money supply issue is have a supply free from human influence, meaning no FIAT or paper money. In a world with a commodity backed money, the supply will fluctuate based the demand for the money for industrial use and new money mined through labor.

It's in this world, absent from taxation, regulation, and FIAT money can individuals begin to more accuratly begin economic calculation.

Posted Apr 07 2010, 09:05 PM by Alex Merced


Manestor wrote re: Is Deflation Better?
on Thu, Apr 8 2010 2:57 AM

In an ideal world, I agree, there would be no inflation and no deflation either. But for now, in this inflationary / fiat currency world, deflation is absolutely necessary until we stabilze the money market. Going back to a commodity based currency is not an artificial regulation, it is precisely the opposite. That would mean a decrease in the quantity of money but this kind of deflation is necessary and should be welcomed.  

Manestor wrote re: Is Deflation Better?
on Thu, Apr 8 2010 3:29 AM

Deflation is necessary. We should not prevent it, we should not be afraid of it's consequences, we should welcome it.

Deflation as an artificial regulation, of couse, just works out like any other regulation, i.e very badly. But we live in an artificial fiat currency / inflationary world. In order to go back to a commodity based currency standard (it doesn't have to be gold), readjustment of the money supply is necessary. That would mean deflation, yes, and that is good. That is the desired alternative we should put foward.

When we reach a natural equilibrium with a commodity based currency, you can talk about about a no-inflation-nor-deflation policy but until then, when someone asks you if stopping inflation means deflation you should say yes. People are not concerned about what should be done in an ideal world, they want to know what you plan to do now.

You might already be aware of this. This may be a simple confusion in terms but I think it is worth pointing it out. You talk about deflation as a "manipulation of the money supply ". A more objective definition of deflation is decrease of money supply. Not necessarely a manipulation, which implies tons of regulations. You seem to be considering arificial deflation only. Any sensible economist should be against artificial regulations.  But you can't consider putting an end to a regulated system like any other regulation.

Alex Merced wrote re: Is Deflation Better?
on Fri, Apr 16 2010 6:00 PM

I agree, when I'm referring to deflation I'm mainly to referring to artificial reductions of fiat mneys supply, I am totally ok with adopting a commodity money no matter the supply of it.