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We’ve Already GOT Deflation – The Only Question is Whether It Is the Good Kind or the Bad Kind

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George Washington’s Blog
Friday, Nov 21, 2008

In an article entitled “Deflation: Disaster or Just A Nice Discount?“, the Wall Street Journal says we’ve already got deflation:

When economists think deflation, they see looming disaster in the form of Japan’s deep recession of the 1990s or even the Great Depression.

But when U.S. households see deflation, they might just notice a little extra money in their pockets.

Right now, deflation appears to be that latter, better, variety: Every day is a sale.

How can the Journal say we’ve got deflation “right now”, when many economists are debating about whether we’ll get deflation some time in the future?

Because people use the word “deflation” in different ways.

Everyone agrees that deflation is negative inflation. One economist writes:

Economists define deflation as a decline in the average price of the products and services in a market.

Well, we certainly have a decline in the average price of goods and services right now. The U.S. has actually experienced many brief periods of deflation, so this is not uncommon.

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Many people define deflation as a “persistent decrease in the general price level of goods and services.” But no one agrees on how long deflation must be to be “persistent”.

In fact, while they won’t admit it, I believe that whether or not economists think we’ve got deflation comes down to whether they think we’ve got the “good” or the “bad” kind of deflation. Not on whether or not average prices or falling or the number of months they’ve been falling.

For example, the above-quoted Wall Street Journal notes:

What the Federal Reserve has to avoid is the kind of chain reaction that ensues when consumers and businesses expect prices to keep falling, leading to a downward spiral of lower spending and job cuts.***

As long as expectations for future inflation remain anchored in the 2% range, then falling prices are likely to remain the kind of price shock that benefits consumers, who are less likely to put off spending in hopes of getting a better deal later.

Just as the government and media kept asking “will we get recession” long after we were already in recession, they’ve avoided mentioning deflation so they wouldn’t scare people.

We’ve already got deflation. The only question is whether it is the good kind – where consumers get a price break – or the bad kind, where the economy crawls to a standstill because no one is buying and employers slash wages and jobs.
The Austrian school of economics defines deflation as a shrinking money supply, and considers falling prices as simply a symptom of the smaller money supply. Personally, I agree with that definition. See this for more information.

This article was posted: Friday, November 21, 2008 at 5:07 am





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