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 breakeven rate

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.

 

SPXBooms and busts as reflected in asset prices – click to enlarge.

 

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”.

 

Conclusion

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-GNP-per-capita-1869-1918US: 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, Equilibrium007

 

 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

6 Responses to “Mainstream Financial Press Promotes Economic Illiteracy”

  • antgermano:

    Pater,

    Numbers 1 and 2 were thoroughly demolished by Tom Woods in one of his recent books (I don’t remember which), but I’m sure others have demolished them, too, as you have.

    The key point to remember in debunking those arguments is that, no matter what the anticipated price might be tomorrow, whether higher or lower, people generally want things in the present, not the future. It might seem counter-intuitive that people might want to buy today if they think prices will be much higher tomorrow but not wait until tomorrow, or some date in the near future, to buy even if they thing the price might be marginally lower. The reason for both of these seemingly contradictory behaviors is time preference – the propensity for people not to want to wait for satisfaction of their wants.

    Until I read Tom Woods’ response to those arguments, this never occurred to me, even though I knew of the concept of time-preference. This piece just cements my understanding.

  • JohnnyZ:

    A minor quibble. Pater, you say:

    “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)…”

    I think here “fiat” needs to be replaced with “debt-based”. Actually the fiat system seems to be primarily there to:
    1. Support, enrich and bail out the FRL system (which I consider legalized fraud)
    2. Allow for almost unlimited government spending and growth of bureaucracy (the spoils for the government for providing 1) above)

    Best,

  • WhirledPeas:

    I took Econ 101 at the U of Minn. in 1966. My instructor taught that a little inflation was a good thing, for exactly the same reasons given today and dispelled here. As Yogi Berra said, “It is deja-vu all over again.”

    But I got the impression that my instructor did not really believe it, yet he had to teach it or he would damage his career prospects.

    Inflation is the natural result of gov’t budget deficits which are a natural result of a large statist government.

    • m111ark:

      Actually, debt-money is the cause of inflation. Budget deficits are the inevitable result of a debt-money monetary system(a government that elects to borrow is no longer sovereign) The last person to learn economics from is an economist. A debt-money monetary system always has an expiration date; in our case, 2008.

      Just waitin’ for the inevitable.

  • No6:

    Charlatans run the financial world. Their coven is in Davos.

  • Kreditanstalt:

    Point number five is the key one. Protecting borrowers…but the borrowers who count are not you and your mortgagee neighbor.

    They’re big banks, funds, insurers and companies. And, most importantly, GOVERNMENTS.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
  • chart-4-silver-basis and cobasisGold is not Going to $10,000
      One Cannot Trade Based on the Endgame The prices of the  metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322!   All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...
  • Purchasing Power of the BuckThe Real Reason the “Rich Get Richer”
      Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs.   Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com