We should learn to love deflation – MoneyWeek

Deflationisafairlysimplephenomenon。

Itmeanspricesgoingdownabityearonyear,ratherthanup。

OurVictorianancestorswouldnthavefoundthatodd。

Inthe19thcentury,accordingtostatisticspublishedbytheHouseofCommonslibrary,priceswentupsomeyears,thendowninothers。

In1854,forexample,pricesroseby15%,thenfellby8。

4%in1858。

Thenetresultwasthatin1914,priceswereroughlythesameastheyhadbeenacenturyearlier。

Bycontrast,priceshaveriseneveryyearsince1945,makinganaggregateriseof22times。

Mostpeoplemightthinkstableorfallingpricessoundquitegood。

Awholearmyofeconomists,however,keepstellingushowterribleitis。

Butoncloseexamination,itturnsoutthatmostoftheargumentsagainstitareremarkablythreadbare。

Wearetoldthatitwillhurttheeconomybecausepeoplewillpostponespendingdecisions。

Whybuythatsofatodayifitwillbecheaperinsixmonthstime?

Demandwillcollapse,andpeoplewillbethrownoutofjobs。

Butthisisntreallytrue。

Ifitwas,wewouldnthaveacomputerorelectronicsindustry。

Botharesubjecttosavagepricedeflation,andyetareamongthemostinnovativeandfastest-growingbusinessesintheworld。

PeopleknowtheycanbuyabetterandcheaperPCinsixmonthstime。

Buttheyreallywantonerightnow。

Quitequicklyabalanceisstruck。

True,deflationisbadforpeoplewhoveborrowedlotsofmoney。

Thedebtstaysthesamewhiletheirincomemayfall。

Thathurts。

Buttheycouldalwaystryworkingabitharder,andpayingbacktheirdebtshonestly,ratherthanlettinginflationdothejobforthem。

Thentherestheupsideofdeflation,aboutwhichwehearremarkablylittle。

Itsgoodforsavers,whofindthemselvesgettingmagicallyricheryearonyearratherthanpoorer。

Itmaywellhaveapositiveimpactonconsumptionaswell,despitewhatwearetold。

Afterall,ifyoureckonthatfallingpriceswillmakeyouslightlyrichernextyear,whynotspendabitmorenow?

Intruth,deflation,likeanyothereconomicevent,isfairlyneutral。

Ithaswinnersandlosers。

Itgetsabadpresslargelybecausethelosersarealotmorepowerfulthanthewinners。

Deflationisbadnewsfortheheadsofbigfirms。

Aslongastheressomeinflationoutthere,theycanpushpricesupwards,andkeepprofitsgrowingwithoutdoingmuch。

Theycanevenslipthroughstealthpaycutsforstaffbyincreasingtheirwagesatslightlylessthantheinflationrate。

Withdeflation,noneofthatispossible。

ItsevenworsefortheCity。

Oneofthemainwaysthefinancialindustrymakesmoneyisthroughinflation。

Withoutit,private-equityfirmswouldbefinished。

Sowouldmosthedgefunds(whorelyjustasmuchondebt)。

Inflationusuallymeanssavers–thecustomers,thatis–getclobbered,whileborrowers–Cityinstitutions–getrich。

And,ofcourse,itsgreatforthegovernment。

Itgetsstealthtaxrises(byleavingthresholdswheretheyare)。

Anditseesitsvastdebtsquicklywipedout。

Deflationwouldhammerthechancelloroftheexchequerbeforeanyoneelse。

Linedupagainstthismobofvestedinterests,thepeoplewhobenefitfromdeflation–mostlysmallsaversandordinaryconsumers–arefarlesspowerful。

Butthatdoesntmeantheyshouldbeignored。

Indeed,asIvesaid,fightingdeflationisoneofthewayswegotintothismess。

Thepastdecadeshouldhavebeenaperiodofgraduallyfallingprices。

Globalisation,andparticularlytheintegrationofIndiaandChinaintothedevelopedeconomy,putalotofdownwardpressureoncosts。

Sodidtechnologicalchange:computershavemadelotsofthingscheapertoproduce。

InBritainscase,thestrongpoundwasanotherfactor–witheverythingweimportgettingcheaper,pricesonthehighstreetshouldhavebeenfalling。

Overall,pricesby2007shouldhavebeen5%orsolowerthanin1997。

Butcentralbanksfoughtthat。

Inthralltoaparanoidfearofdeflation,theykeptprintingmoreandmoremoneytostaveitoff。

Theysucceeded。

Theprice,however,wasahugeasset-pricebubble。

Nowthatithasburst,theworldhasbeenplungedintorecession。

Itwouldhavebeenfarbettertoacceptashortperiodofdeflation,ignoringtheindustrialistsandfinancierswhowarneditwouldleadtocatastrophe。

Andyouknowwhat?

Weshouldignorethemthistimetoo。

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