The 'Deflation Danger' Should Abate …
What is it with this perennial fear the chief money printers have of falling prices? Not that we are likely to see it happen, but if it does, what of it? Bloomberg reports on the recent ECB decision with the following headline: “Draghi Says Deflation Danger Should Abate as Economy Revives”
The headline alone is a hodge-podge of arrant nonsense. First of all, 'deflation' (this is to say, falling prices), is not a 'danger'. Speaking for ourselves and billions of earth's consumers: we love it when prices fall! It means our incomes go further and our savings will buy more as well. What's not to love?
The problem is of course that when prices decline, the 'wrong' sectors of society actually benefit, while those whose bread is buttered by the inflation tax would no longer benefit at the expense of everybody else. But they never say that, do they? Has Draghi ever explained why he believes deflation to be a danger? No, we are just supposed to know/accept that it is.
Secondly, the 'as economy revives' part makes no sense whatsoever. Why and how should a genuinely reviving economy produce inflation? Economic growth occurs when more goods and services are produced. Their prices should, ceteris paribus, fall (of course, we are not supposed to inquire too deeply into which ceteris likely won't remain paribus if Draghi gets his wish).
“ European Central Bank President Mario Draghi signaled that deflation risks in the euro region are easing for now after new forecasts showed that inflation will approach their target by the end of 2016.
The news that has come out since the last monetary policy meeting are by and large on the positive side,” he told reporters in Frankfurt today after the central bank kept itsmain interest rate at 0.25 percent. He also indicated that money markets are under control at the moment, lessening the need for emergency liquidity measures.
Draghi is facing down the threat of deflation in an economy still recovering from a debt crisis that threatened to rip it apart less than two years ago. New ECB forecasts today underscore his view that the 18-nation bloc will escape a Japan-style period of falling prices as momentum in the economy improves.”
We have highlighted the sentence above because we keep reading about the 'Japan-style deflation trap' for many, many years now. You would think that Japan was a third world country by now the way this keeps being portrayed as a kind of monetary evil incarnate that destroys the economy. Of course, nothing could be further from the truth.
Inflation is Not Equivalent to Economic Growth
'Inflation' is not the same as 'economic growth' – on the contrary, it both causes and frequently masks economic retrogression. How much inflation has there been in the euro area over time? Let's have a look.
The euro area's true money supply since 1980. One can only shudder at this depiction of 'deflation danger' in action – click to enlarge.
What about prices though? Let's have a look-see:
As Austrian economists have long explained, it is simply untrue that prices must rise for the economy to grow. Consumers obviously benefit from falling prices (only Keynesian like Paul Krugman don't realize that, as their thought processes are evidently unsullied by logic and/or common sense). All of us can easily ascertain how beneficial the decline in computer prices, cell- and smart phone prices, prices for TV screens, etc. is. Naturally, it would be even better if all prices fell, not only those on a select group of consumer goods.
What about producers? Won't they suffer? By simply looking at the share prices and earnings of the companies that make all the technological gadgets the prices of which have been continually declining for decades, everybody should realize immediately that the answer must be a resounding NO. This is by the way not only true of the firms that are in the final stages of the production process, i.e. the stages closest to the consumer. It is obviously also true for the firms in the higher stages of the capital structure. But why? It is quite simple actually: prices are imputed all along the chain of production. What is important for these companies to thrive are not the nominal prices of the products they sell, but the price spreads between their input and output.
In fact, the computer/electronics sector is the one that comes closest to showing us how things would likely look in a free, unhampered market economy.
Of course, in said free, unhampered market economy, Mr. Draghi and a host of other central planners would have to look for a new job.
Charts by: ECB
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
6 Responses to “No, Deflation is Not a ‘Danger’”
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- US Economy - Curious Pattern in ISM Readings
Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output. Pepsi factory in Baltimore, 1956 Photo via pinterest.com Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- How is Real Wealth Created?
An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least. Groping in the dark, Yellen-style Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- Donald’s Electoral Struggle
Wicked and Terrible After touting her pro-labor union record, the Wicked Witch of Chappaqua rhetorically asked, “why am I not 50 points ahead?” Her chief rival bluntly responded: “because you’re terrible.”* No truer words have been uttered by any of the candidates about one of their opponents since the start of this extraordinary presidential campaign! Electoral map (note that the coloration may no longer be applicable...) That Hillary Clinton is...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- Great Causes, a Sea of Debt and the 2017 Recession
Great Cause NORMANDY, FRANCE – We continue our work with the bomb squad. Myth disposal is dangerous work: People love their myths more than they love life itself. They may kill for money. But they die for their religions, their governments, their clans... and their ideas. Famous French hippie and author Voltaire. He wears the same sardonic grin in every painting, whether he's depicted at a young or an old age, doesn't matter. His real name was François-Marie Arouet; he...
- The Donald Versus Killary: War or Peace?
War: A Warning from the Past Although history does not exactly repeat itself, it does provide parallels and sometimes quite ominous ones. Such is the case with the current U.S. Presidential election and the one which occurred one hundred years earlier. The Donald probably has the better slogan... The dominating question which hung over the 1916 campaign was whether the country would remain neutral in regard to the horrific slaughter which was taking place on the...