Deflation Demystified
I have learned that it’s seemingly impossible to have a discussion on the economics of deflation without mixing learned insights with political opinion. Unfortunately, this post provides no exception, I’m presenting a paper via the Mises institute on the myths of deflation. I find the paper to present a fascinating counterpoint to the “deflation argument” made by contemporary politicians and bankers. However, be sure to read the article excepts(below) and then decide of you want to read the entire paper. Click Here To Skip The Introduction & Excerpts & Read The Full Article On Deflation
Article Excerpts (Via Mises.Org)
“…In practice, there are at any point in time two, and only two, fundamental options for monetary policy. The first option is to increase the quantity of paper money. The second option is not to increase the paper money supply. Now the question is how well each of these options harmonizes with the basic principles on which a free society is built.”
“The point is that any monetary policy has redistributive effects. In particular, once a deflation of the supply of money substitutes sets in, the only way to combat this is through inflation of the supply of base money, and this policy too involves redistribution and thus creates winners and losers.”
“deflation is not inherently bad, and that it is therefore far from being obvious that a wise monetary
policy should seek to prevent it, or dampen its effects, at any price. Deflation creates a great number
of losers, and many of these losers are perfectly innocent people who have just not been wise enough to
anticipate the event. But deflation also creates many winners, and it also punishes many “political entrepreneurs” who had thrived on their intimate connections to those who control the production of fiat money.”
Article Conclusion (Via Mises.Org)
“In short, the true crux of deflation is that it does not hide the redistribution going hand in hand with
changes in the quantity of money. It entails visible misery for many people, to the benefit of equally visible winners.”
“Inflation is an unjustifiable redistribution of income in favor of those who receive the new money and money titles first, and to the detriment of those who receive them last. In practice the redistribution
always works out in favor of the fiat-money producers themselves (whom we misleadingly call “central
banks”) and of their partners in the banking sector and at the stock exchange. And of course inflation
works out to the advantage of governments and their closest allies in the business world. Inflation is the
vehicle through which these individuals and groups enrich themselves, unjustifiably, at the expense of the citizenry at large.”
“It would not be uncharitable to characterize inflation as a large-scale rip-off, in favor of the politically
well-connected few, and to the detriment of the politically destitute masses. It always goes in hand with the
concentration of political power in the hands of those who are privileged to own a banking license and of those who control the production of the monopoly paper money.”
