The Lies of Deflation

Deflation is a scary word: falling wages, falling asset values, failing economies. Deflation is usually blamed as being the force causing the Great Depression. Yet deflation is a term that is often abused, misinterpreted, and misdefined. Deflation has two real definitions: Fed-inspired deflation and saver-inspired deflation.

The cause of the Great Depression WAS deflation, but it was Fed-inspired deflation occurring quickly after rampant Fed-inspired inflation. In Fed-inspired deflation, the money supply is literally reduced (akin to taking dollars and burning them). When the Fed destroys dollars, it destroys liquidity, destroys demand for assets, and destroys value. When the Fed deflates by reducing the supply of actual dollars, there is no recourse to add cash to the economy based on demand for goods and services. The Fed respond way too slow to what the market needs to harmonize prices and costs.

Saver-inspired deflation, on the other hand, has a different mechanism for bringing harmony to the markets. Savers who actively hoard money outside of the banking instruments do put a pressure on prices (downward), but only until prices fall to a point where each saver sees value in spending their hoarded money back into the market. The savers don’t destroy money, but hold it outside of the economy until such time that prices are reasonable for each individual saver/hoarder. This style of deflation is actually positive, as it tends to prevent run-away prices and run-away inflation. In a full reserve banking economy (which does not exist), saving in a bank instrument would be as good as hoarding under the mattress. Unfortunately, we live in a fraudulent fractional reserve banking economy, where savers are a prime force to future inflation and price increases through cash devaluation. This means that the only positive form of savings is hoarding.

Deflation scares many people because they correlate deflation with reduced wages, but an overview of the 90+ year history of the Federal Reserve’s loose inflation policy shows that wages rarely rise with price increases. In fact, for many decades wages have risen far slower than consumer prices and needs have grown in price, which shows that Fed-inspired inflation is a net loss for laborers, retirees and consumers. Fed-inspired inflation comes directly out of the money multiplier effect, a market process that aids banks in reaping huge profits during bountiful consumer economic periods, but puts huge pressures on future taxpayers when the banks eventually fail due to over-extension. Fed-inspired inflation creates bubbles, which end up creating banking failures, which are usually paid out from government bailouts on the backs of the taxpayers.

Deflation is not a bad thing if it is done in a free market by savers who are waiting to become spenders. By withholding dollars to prevent price increases, savers become the most powerful figures in the economy. Taking banks out of the picture makes those savers/hoarders even more powerful, as banks need cash reserves to profit.

Will you join us in the saver strike?