Over many decades, people have been programmed to think that deflation is a catastrophic economic event spelling doom and destruction if we let it happen. Thankfully, we have all those central banks who fight deflation with inflation, which is also bad but not too bad. Bull shit! Deflation is a good thing.
During our life we have seen this argument play out time and time again. Politicians drone this so-called fact into children from Primary to Secondary school. Economists give their opinions, whether solicited or not, any time they can. Central bankers speak from their monetary pulpit lecturing us about the saving graces of “mild inflation”. This is all, of course, propaganda. Inflation is always and everywhere a bad phenomenon.
If inflation is simply too much money chasing too few goods, deflation is the opposite. Too many goods chasing too little money. In practice this means that if we leave the amount of money more or less constant, for example if we could force central banks not to create new money at all, then free markets would simply do what they do best; this is, to create more and more new goods and services. Our purchasing power would go up and up and up.
Inflation is different in all countries because all countries have different central banks. But we can perform a few calculations. For example:
In UK you need about 1000 ₤ today to purchase the same amount of goods and services you could with 10 ₤ in 1900.
In US you need about 280 $ today to purchase the same amount of goods and services you could with 10 $ in 1900.
In Canada you need about 210 $ today to purchase the same amount of goods and services you could with 10 $ in 1900.
In Argentina you need about 150.000 $ today to purchase the same amount of goods and services you could with 10 $ in 1900.
In Zimbabwe you need about 1.000.000.000.000.000.000.000.000.000.000.000.000 $ today to purchase the same amount of goods and services you could with 10 $ in 1900.
Does this look like something you would like? Of course not. This is the ugly, real face of inflation. The worst is, it is self-inflicted. Or more precisely, politician-inflicted.
If we look at history, there were a few times and places (not too many) where central banks did not exist or their impact in economic affairs was minimum. In those places, we can see the power of deflation at work. For example:
US and UK the deflation rate was about 2% per year from the beginning of the Industrial Revolution and up to WWII. This meant that you needed about 10 $ or ₤ in 1912 to purchase the same amount of goods and services you could with 92 $ or ₤ in 1800. Yes. The value of money actually grew over time.
Something similar happened in a few other countries, but not too many. In more recent times, we have Japan’s deflation of about 0.5% between early 1990 and 2010. Yes, prices actually dropped steadily in Japan for almost 20 years without anything catastrophic occurring because of this event.
An ongoing example of deflation in action is the price of computers. They have been falling steadily over time since the 1960s; from millions of dollars per computer to less than 500$ for a new laptop. No catastrophe here either.
The truth is that economists and central bankers love to link deflation with depression. They do so because they know that in order to keep their cushy jobs they need to satisfy their political masters by giving them what they want: spending money. They also know that they can only do so through inflation. So, in order not to have mobs of people on the street rightfully claiming for their heads on spikes, they engage in a gigantic disinformation campaign.
Let us be clear. Depression is not deflation, far from it. It is true that in a depression we can find deflation, but the opposite is not true. Deflation does not cause depression.
Depressions are caused by the stupidity of economic “managers” (mostly central bankers) that in a spur of arrogance pretend to know more than the combined common sense, self-interest and knowledge of entire markets. Depressions are caused by the accumulation of errors of such managers; no more no less. Depressions are caused by massive malinvestment caused by the wrong economic signals generated mostly from central banks. Depressions are extended by the wrong policies imposed by governments after a crash. Instead of allowing natural market forces to clean-up the mess, they postpone the recovery by forcing more “managed” economic processes onto the market. The same processes that caused the depression in the first place! Is there then any wonder that depressions drag on forever? Of course not!
If we look at the historic record of countries before central banking was invented, short of ware periods (also caused by governments), there were no depressions, only the occasional short-lived recession. How strange!?
Furthermore, if we look at depressions, it is noticeable that during those times deflation actually helped people. They could buy more goods and services over time with however little money they had left.
Don’t let yourself be confused, depression and deflation are completely separate things.
A depression is a bad thing, but depressions are not being brought in by deflation. Deflation, when natural and brought by a free market is always good (in which case we all benefit). However, deflation can also be brought in by the stupidity of economists. It’s been tried before, recently you know, with devastating consequences.
Collor de Mello tried it in Brazil in 1990 as he assumed the presidency. In order to “combat” inflation, he froze most bank accounts preventing people from using them. The money supply dropped by 80%.
Gorbachev, the USSR president tried it in 1991. He “cancelled” all 50 and 100 ruble notes and froze most bank accounts permitting the withdrawal of only 500 rubles per month. The money supply dropped by about 30%.
De La Rua, the Argentine president tried in 2001. He froze most bank accounts, particularly the ones in US Dollars. The money supply dropped by about 50%.
Results? All three countries dived right into a near-depression. Just because something is stupid and has been tried many times before with devastating consequences, it does not mean it is a bad idea in the eyes of economic advisors.
Artificial deflation is so devastating because it typically follows a gigantic inflationary period. Businesses have adapted to the increasing amount of money printed by the government and are surviving by expecting inflation. All their plans factor in the expansion of money supply. However, suddenly and drastically, the money supply shrinks! Not only are they not receiving enough money in sales but people are not buying because they don’t have access to their own money! No wonder businesses were dying like flies sprayed with DDT.
The solution to inflation is not more inflation. This is merely a survival tactic, and a fairly poor at that; eventually leading to total economic destruction. The solution to inflation is natural deflation. It is quite simple, really. Just stop printing. At all. No printing, no inflating, no borrowing, no nothing. Keep the money supply exactly where it is today. Then wait. Wait for the economy to recover itself and produce goods and services that will first match and then overtake the amount of money. Then, the good deflation begins. Voila! Problem solved.
Of course, this is never going to happen. As we have previously stated in many lessons, politicians need to keep spending to remain in power. Therefore, the only real solution to stop all printing is to stop all politicians. In other words, get rid of all governments.
Those are our choices, your choices. You can educate yourself and demand the end of central banking and governments or you can continue to suffer their consequences. Your choice altogether.
Note: please see the Glossary if you are unfamiliar with certain words.
