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Deflation Bad?You may have heard (probably not) that… horror of horrors… EU is now in…deflation!!! Yes, sir! Eurostat confirmed that consumer prices dropped 0.2% in 2014. From this point on citizens and inhabitants of EU will have their ears full of standard Machiavellian…errr… Monetarist idiocy. Let's take a look at few statements (some of them contradictory) to be expected (yet again):

  • Inflation good, deflation bad.
  • Inflation and deflation are bad.
  • Inflation is caused by economic growth therefore we can spur lasting economic growth by spurring inflation.
  • Inflation and deflation are caused by fractional reserve banking and monetary manipulation.
  • During inflationary periods things go up in price, therefore people buys more.
  • During deflationary periods things go down in price, therefore people buys less.
  • Deflation will cause economic chaos.
  • During deflation sellers respond to low demand by lowering prices which reduces their profit margins which slows down the economy.
  • Lenders will prosper because they receive payments in an appreciating currency.
  • Borrowers will fall behind in payments and will be foreclosed.
  • Not to worry, the EU Central Bank is here and it will save Europeans using QE.

Now let's clarify a few points. Inflation is always bad and deflation is always good. This is so because if we keep the amount of money constant, productivity increases naturally which means that we can buy more stuff with less money (which is the very definition of deflation). Inflation is caused by money printing by Central Banks and it has nothing to do with economic growth, except that it creates cycles of boom and bust.

During inflationary periods people does buy more because money is constantly devaluating but they can buy less than if there would be deflation. They do so because they want to lock-in the wealth represented by money before it decreases. 

Inflation also causes economic chaos; the bigger the inflation the bigger the chaos.

Deflation does not cause economic chaos. How could it if it is a natural process of increased productivity?

Economists conveniently tie economic debacles and depressions with deflation, the only problem is that deflation does not cause depressions, inflation and money manipulation does. Deflation does not slow down the economy; deflation allows people to save more which later on becomes capital available for productivity gains. Deflation is actually the engine of productivity and through productivity the engine of civilization.

Lenders do not prosper more than usual during deflation because through increased savings money becomes more readily available and hence the interest rate on payments drops. In other words during deflation more people save more money which is then available for borrowing, thus the interest rate on this money drops.

Borrowers do not fall behind in payments because deflation causes and increased economic activity. During deflation the economy grows steadily. This can be verified quite easily. Since the 80's Japan has been in deflation until the new-and-improved Abe-nomics came rolling in and re-discovery of inflation. Japan is now in troubles. Japan spent 20+ years in deflation and… nothing happened!!! Sure, the economy has been stagnating ever since, but the stagnation is to be blamed entirely on the effects of previous massive printing followed by bubble-bursting. What Japan suffered in the 80's, US (and the world) suffered in 2008. The only thing that made Japanese life tolerable was…deflation!!!

All of the above we have explained ad-nauseum in previous articles, some of which are Fake Money For A Fake Economy, Real Money For A Real Economy, Senseless Inflation And Interest Rates, Deficits Debts And Inflation, Inflation Inflation Inflation and many others.

Unfortunately, the EU Central Bank will now resort to QE… formally… since informally it was implemented quite some time ago (QE Is Dead Long Live QE). The end result will be no other than more money printing and may even stabilize the EU economic situation for a while… until its implosion.

Now you know. We won't repeat ourselves, we will simply turn our eyes away from nonsensical economic barrages from government apparatchiks and Central Banks drones. Yeah…deflation is bad… whatever…

Note: please see the Glossary if you are unfamiliar with certain words.

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