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Don’t believe the ‘experts’ – deflation is actually good for us!

For months, the business and economics sections of the serious newspapers, have been running ‘doom and gloom’ articles about deflation. “Deflation stalks Eurozone” and “UK risks falling into deflation” and “Oil price fall tips world into deflation” are typical of the headlines. In almost all cases, deflation is presented as something terrible which will harm both the economy and ordinary people.

The problem is that all these economists and other supposed experts have studied on similar economics courses at university and have all read the same economics textbooks. Their knowledge about deflation is taken from the 1930s Depression and few of the ‘experts’ have the intelligence or imagination to think new thoughts and see why what is happening today is far removed from the 1930s deflation.

To generalise slightly, we could say there are two main types of deflation – benign deflation and recessionary deflation:

Benign deflation – this is what we are experiencing now. With the fall in the prices of many major commodities, especially oil and gas, we are seeing slight falls in the main inflation index (CPI). Moreover, technical advances also help fuel deflation as we either pay less for products with a technical content (computers, smartphones, washing machines, cars, TVs etc) or else get more functionality for the same price.

This benign deflation – maybe 1% to 2% a year – is great for most of us. We can afford to buy more or save more. It’s particularly beneficial for those on fixed incomes like pensioners. With 25,000 to 30,000 old people dying each year from conditions related to being unable to heat their homes properly, any fall in power bills will reduce this appalling death rate. Moreover, for those with savings, deflation is wonderful. If we have deflation of say 1% a year, then even a bank account paying a miserable 1% interest is actually giving us a real return of 2%

Recessionary deflation – this is the big bogeyman. The theory here is that if people see prices falling or if they fear for their financial future, then they will delay buying things. This will cause a fall in demand. Companies will be forced to fire workers leading to a further fall in demand and so on in a downwards spiral of economic collapse. Here’s the textbook version (click to see more clearly)

deflation 1

And here’s a more straightforward view:

deflation 2

But to get recessionary deflation, prices would need to be falling by at least 5% a year or more. And we’re nowhere near that nor are we likely to be. Greece is probably the only European country with recessionary deflation.

So don’t be taken in by the “doom and gloom” supposed ‘experts’. A little bit of deflation is good for most of us.

Governments – the only people really harmed by deflation are incompetent, financially-incontinent, overspending governments. When you have inflation of say 2% to 3% a year, governments (like the useless Coalition) will happily borrow borrow borrow and spend spend spend, knowing that in 10 years the massive debts they’re accumulated will have lost 20% to 30% of their value. But with deflation, these debts increase.

That’s one reason why the Bank of England has been set a target of keeping inflation at around 2% – the Government is trying to reduce our spending power each year in order to reduce the value of its own borrowings.

But for the rest of us, deflation is great. Enjoy it while it lasts!

(By the way. I have a feeling that the ‘Comment’ function might not have been working for the last few days. I think what is happening is that a spammer has blocked access to the ‘Comments’ function and is trying to fill it up with ads [which I delete] selling anything from fake Nike shoes to fake religious artifacts. This spammer is preventing anyone genuinely making comments. I’ll try and get this fixed on Monday)

2 comments to Don’t believe the ‘experts’ – deflation is actually good for us!

  • MGJ

    It is good (and rare) to see someone distinguish correctly between the two. Many of the ‘experts’ in the MSM, politicians and even economists seem to confuse deflation (what you call recessionary deflation and meaning a fall in aggregate demand in the whole economy) and disinflation (falling prices).

    The reason consistently cited for why disinflation is so terrifying is that consumers will defer purchases in the expectation of lower prices to come. Even if true this hardly sounds a disaster. Given that the prices of far eastern electronics goods (amongst others) have been falling through the floor for a couple of decades, you’d think this particular theory was effectively falsified.

  • Scott Wardrope

    Deflation transfers wealth from debtors to creditors, thus preventing the build up of excessive debt and misallocating resources.
    Tim Price puts it more eloquently, when he slays the deflation bogeyman below.

    http://www.cobdencentre.org/2014/04/everything-we-are-told-about-deflation-is-a-lie/

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