Falling Prices are “Really Bad” for You
It is quite comical how the idea that falling prices are somehow bad for society is continually pushed by the establishment and its mouthpieces. We imagine it is not easy to create propaganda in support of such an obvious absurdity. No doubt every consumer in the world would love nothing more than genuine price deflation. After all, what can possibly be bad about one’s income and savings stretching further and buying more, rather than fewer goods and services?
Consumers and savers all over the world must surely be scratching their heads by now after hearing for the umpteenth time that it will be somehow “good” for them if their real incomes decline and the value of their savings is eroded by rising prices. What exactly is the justification for this nonsense?
Bloomberg has a strongly pro-interventionist, pro-central planning editorial line. This is possibly the case because its owner is a well-known champagne socialist and nannycrat. However, the statist quo is actually supported by a great many prominent financial publications, including the Financial Times, the Economist, and several others. As far as we are aware, there are no major mainstream financial media supporting genuine free market capitalism.
Image credit: Dreamstime
5 year US “inflation breakeven” rate – a measure of inflation expectations – click to enlarge.
Following the ECB’s decision to further devalue the ailing and misbegotten euro, Bloomberg apparently felt compelled to explain to the hoi-polloi why exactly their instinctive rejection of the modern monetary debasement orthodoxy is all wrong. An article entitled “Why Falling Prices Are Actually a Really Bad Thing”, presents the convoluted thinking on the topic in the form of soundbite bullet points. Think about the vast economic damage you are doing citizen, before you rush out to avail yourself of the latest discounts offered by evil price cutters like WalMart!
Here is our small contribution to blunting this propaganda effort. Below is a list of the assertions made in the Bloomberg article, followed by our rebuttals:
1. “When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? As a result, consumer spending flails. For most nations, that’s a big chunk of their economy, and any slowdown in consumption threatens growth.”
One wonders how even a single computer or smart phone could ever be sold if consumers were to “hold out on buying things” when their prices decline. After all, it is absolutely certain that one will get a better deal by waiting for next year’s model – so the price declines are certainly “persistent”. And yet, the technology sector in the widest sense is one of the strongest growing industries on the planet.
Meanwhile, since savings are the sine qua non precondition for capital formation, economic growth is not “threatened” at all by consumers postponing consumption in favor of saving. The opposite is true; without saving, there could be no economic growth whatsoever. All that changes when consumers save more and consume less is the pattern of spending in the economy. While less is spent on present consumption, the savings that are thereby attained are employed in investing in production, which turn makes more consumption possible in the future.
2. “Businesses behave pretty much the same way. They postpone buying raw materials, hoping to get a break on costs, and delay investing in that splashy new facility or hiring an extra hand.”
Again, we have to ask: if that is true, why are technology companies, or any other companies for that matter, investing even a single cent? Ever since capitalist production processes have been adopted, the real prices of raw materials have been declining. This has evidently not kept businesses from investing and hiring workers. The above assertion misconceives the essence of economic calculation. It is not relevant for businesses whether the nominal prices of final goods are rising or falling. What is important for them is the spread between the cost of inputs and and the expected prices of the output that will be produced.
3. “Additionally, their pricing power — the ability to charge more — vanishes. That makes it harder for them to grow profits.”
We’re not sure why this was made an “additional” point, since it is basically the same assertion already made in point 2. Once again, business profitability is certainly not dependent on “the ability to charge more” due to an inflationary environment. It is solely dependent on the difference between input costs and output prices. Money supply inflation makes some business propositions look more profitable than others by distorting relative prices – but that only leads to malinvestment of scarce capital and capital consumption. Nothing can be gained by this.
4. “Lower profits = less money to go around to workers. Employees don’t get the raises they were expecting, they cut back on spending even more, and the ugly cycle repeats. That’s why they call it a deflationary spiral.”
Profits don’t depend on inflation (see points 2 and 3) and neither do wages. To this it must be kept in mind that what counts are real, not nominal wages. When consumer prices decline and wages remain the same, employees will continually get “raises”, and will have no reason whatsoever to cut back on their spending. On the contrary, rising real wages will enable them to buy more goods and services over time. Hence, there is no “ugly cycle”. Note that it is capital accumulation that makes it possible for real wages to rise in a free market economy. The more capital is invested per worker, the higher real wages will tend to be. In a progressing free market economy (i.e., an economy without central bank intervention), the prices of consumer goods will decline over time, reflecting the increase in economic productivity. Increasing productivity at the same time ensures that companies will be able to afford paying ever higher real wages. “Deflationary spiral” sure sounds scary, but there is really nothing to fear.
5. “The sad thing is, even when prices are falling, the amount you owe doesn’t. Borrowers get crushed under the weight of that debt. In a mild scenario, companies and consumers hold back on other purchases to continue meeting their obligations. When things get really bad, they go bust altogether.”
Here we are finally getting to the heart of the issue. The inflationary fiat money system has impoverished the middle class and the poorer strata of society and many have been forced to go into more and more debt as a result. In a free market economy this impoverishment would not have occurred. Consequently debt would not pose such a big problem.
However, if the sustainability of debt is dependent on inflation (which in a fiat money system inevitably implies that more and more debt will have to be created), then this reveals ipso facto that this debt is unsound. In other words, it will eventually be subject to default anyway, in one way or another. The question is only whether it will happen sooner or later, and what precise shape the default will take. There can be outright default, or indirect default via hyperinflation and the repudiation of the currency. Creditors will lose big either way.
What is not mentioned in the Bloomberg article is the fact that the biggest debtors by far are governments, and that inflation works like a “hidden tax” that allows them to surreptitiously appropriate wealth from those forced to use the currencies they issue. Savers, retirees as well as widows and orphans are especially vulnerable to this theft , i.e., all those who act prudently or are depending on some form of fixed income.
Price Stabilization and Bubbles
The sixth and last point is a bit different from the rest:
“6. Policy makers usually have an antidote to economic slowdowns, but it’s trickier when interest rates are already near zero. That’s exactly the situation with the ECB and much of the industrial world. That forces officials to turn to unconventional tools.”
Here the author is transitioning from trying to explain why declining prices are really, really bad for us, to making excuses for central bankers and their current mad-cap policies (it was of course clear that the article would eventually progress to this point).
The notion that the economy needs “policy makers” dispensing “antidotes” is just as misguided as the rest of the article. The economy would work best if left alone. No central planner can possibly improve on the outcomes that an unhampered free market economy would deliver. Moreover, officials are certainly not “forced” to turn to so-called unconventional tools. Given that money printing cannot possibly enhance economic prosperity, these policies are only likely to eventually produce an intractable economic catastrophe. One should not forget that we have already had several previews of this upcoming event.
Japan’s central bank has implemented unconventional policies on several occasions, with the same result every time: as soon as the policies were discontinued, an economic downturn reasserted itself. The crisis of 2008 was also the result of heavy monetary pumping, which was implemented as an “antidote” to the slowdown following the bursting of the technology bubble of the 1990s. While the “zero bound problem” was not yet an issue at the time outside of Japan, central banks lowered interest rates to extremely low levels and kept them there for an extended time period. Money supply and credit expansion took off as a result (at one point in 2001, the US true money supply grew at an annual rate of more than 21%), which caused another bubble in asset prices and an unhealthy boom concentrated in the real estate sector. The result: a few boom years which were widely mistaken for a sound economic recovery, followed by a crash that nearly wiped out the financial system. In the end, the economy was in even worse shape than before the “antidote” had been administered.
People may have forgotten that the same arguments that are forwarded in favor of monetary pumping today were forwarded after the bursting of the technology bubble as well. The “price stabilization policy” was used as the justification for generating massive money supply and credit growth. Incidentally, the same excuse also accompanied the monetary pumping of the “roaring 20s”.
It is not true that declining prices of consumer goods are economically harmful. In fact, the period in US history during which the by far greatest spurt in real economic growth occurred, was an era of mild price deflation (approx. 1866 to 1913). It is certainly true that those carrying large debts would find repayment more difficult if the real value of these debts were to increase. However, to the extent that this is the case, the soundness of such debt is questionable anyway. Lastly, if the age of centrally planned inflation masquerading as “price stability” were to end and be replaced by an unhampered market economy characterized by mild price deflation, it is a good bet that economic power in society would shift. Currently, a small group is benefiting from inflation to the detriment of society at large, which is a major reason for the constant barrage of pro-inflation propaganda in the media. Don’t be taken in by it.
US: Real GNP per capita growth from 1869 to 1918. With the exception of the war period this was a time of gentle price deflation, with consumer prices falling from the end of the civil war until 1913, as economic productivity took off. It was the strongest economic growth ever recorded in US history. Not surprisingly, this period of strong economic growth came to a close roughly around the time of the founding of the Federal Reserve – which is not a coincidence – click to enlarge.
Charts by: St. Louis Fed, BigCharts,
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 “Mainstream Financial Press Promotes Economic Illiteracy”
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...
- A Convocation of Interventionists, Part 2
Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there. Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images We should preface the following with a Mises quote, as the...
- 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...
- A Convocation of Interventionists – Part 1
Modern Economics - It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context. Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes). When...
- 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...
- John Maynard Keynes’ General Theory Eighty Years Later
The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money. The mere fact that the book is lauded by TIME magazine on the cover should give everyone...
- 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...