Why is deflation depicted as an absolute horror? Journalists, economists, politicians and central bank chairmen are all warning us against a general and durable price deflation, equating it to the Apocalypse, as they explain it. This unanimity is very troubling, so let’s stay on the alert. Why... when prices fall, it’s great, we can buy more! The price of flat-screen TVs and electronic components in general, the price of gas falls a little, and the slowdown in emerging countries should put a damper on the price of commodities... should we complain? Why should the consumer fear a fall in prices?
There is someone panicking about a general price fall : the very indebted one. In fact, the relative weight of his/her debt increases as prices fall; its nominal value stays the same, but it becomes proportionally heavier when prices all around are getting lower. If you’re over-indebted, a prolonged fall in prices is like a death warrant. So who is concerned? Well... the industrialized countries : the United States, Europe and Japan. This is the real reason : over-indebted countries. So they’re « selling » this fear to everyone to mask the fact that they’re the only ones paying the price...
And then, on TV shows, a bunch of economists explain that falling prices automatically trigger a recession and a fall of GDP. Why? They say it’s because consumers wait for lower prices to buy... what a joke! So these economists would have the power to refrain from eating, lighting and heating, and travelling for several months in order to benefit from falling prices? Give us a break... this would be a great performance, but I don’t think anyone could do it.
And how about discretionary buying of goods, like those flat-screen TVs, for instance? At first, they were very expensive, but did consumers wait until prices would come down? Not at all : those who had high income bought some, then prices came down, targeting a larger consumer base, and so forth, until today, where almost everyone has one. This is nothing but the normal process with any new technology : it’s alway expensive at the launch, and it becomes cheaper later on. So this explanation of consumers waiting for lower prices is a myth.
We are getting used to inflation, with fiat paper money, but, as Ron Paul states, under the gold standard in the United States, retail prices fell by 47% from 1879 to 1900, while average economic growth was close to 4% a year, which proves that one does not exclude the other. But what’s true is that, then, productivity gains were not cancelled by an inflation caused by printing money out of thin air.
Deflation does not cause a recession, it’s the opposite. Our countries, in Europe, Japan and, to a lesser degree, the United States, have lost the keys to growth and the thrombosis of our economies manifests itself, among others, by dis-inflation, and then a possible deflation. There are multiple causes, but the main one is the oversize of a public sector that is choking businesses. So... what will the countries do to fight deflation? You guessed it, more money printing and zero interest rates or, in other words, more ways to finance their deficits and their debt and, thus, kick the can of restructuring down the road... Let’s not fall for this crude and blatant trap.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.