Is deflation damaging?

Jan 20 2015 14:44
*Edward Ingram

SOME pretty way-out stuff comes from the Cobden Centre at times. They like the idea of a gold standard, for example. They seem not to understand that if gold was priced in terms of money and money was priced in terms of gold, the price of both would do some extraordinary things.

My forthcoming book explains it this way:

The value of money is negotiable. It is valued in terms of what goods and services, including wages, can be exchanged for it. Those things are negotiated daily by millions of people. The value of money is always changing. It cannot be valued in terms of a metal such as gold because as soon as that is done the demand for, and the value of, gold gets altered.

Attempting to fix either the value of gold or the value of money in that way will destabilise both the value of gold and the value of money.

As demand for the metal departs from the normal level, the value of money will become unpredictable as a result. Attempting to fix the value of money in any way is an attempt to remove the right of people to determine the value of money. In fact, it cannot be done – not for long.

Did that happen when we had the gold standard? It worked for a time. Then the whole arrangement broke. The price of gold rose spectacularly; the value of money, in terms of gold, dropped like a stone. But the value of money in the shops and in wage negotiations remained steady. The people decided the value of money.

Trees bend in the wind. It prevents destruction of the trees. Boats ride over the waves – they stay afloat.

In economics, prices and values (including the value of money) adjust to the ever-changing environment – for if they do not, chaos ensues.

But regarding this essay from the Cobden Centre on Japan’s ‘lost decades’, I have been pondering its message since it was first published in September 2014. The claim made is that Japan’s lost decades is a myth. The economy slowed from an amazing pace to that of the USA or similar.

The evidence presented in the graphs in the above link makes it look to me as if you might have to ask which of the two GDP-per-person growth rates is Japanese and which is American. Unless you were told, I doubt that you could tell.

What do Fin24 users think?

Here is my viewpoint:

Mainstream economists claim that we should fear deflation and that it slows spending because prices will fall and things will be cheaper later. How much later?

I do not find this to be a convincing argument.

If you wait for the rest of your life, things will be a lot cheaper. What will you be doing in the meantime? Saving and spending nothing? Life goes on.

Certainly, the Japanese have a very high level of savings but then along comes the government and borrows it and spends it all. So jobs are still created, even if they are different jobs.

And really – how long will people put off buying essentials or even their exciting iPad and their thrilling motor cars? If everyone delays six months on average and that saved money becomes money that is borrowed and spent by the government or others, why does this mean that the economy will slow down?

It is like saying that because there is a dam in a river that holds some of the water (delayed spending), the river will slow down. Unless the water in the dam goes elsewhere, once it is full the river will flow as usual. The most we can say is that for a short time spending/water flow will slow down because the dam is filling.

So I for one am not yet convinced by the arguments against deflation constantly being put forward by newscasters and mainstream economists.

Do you agree with this point of view? Let us know and you could get published.

Edward Ingram is a past investigative quality control engineer of complex systems, who turned to managing investments and learning all about economics and finance from the experts. Combining these disciplines has enabled him to understand what others see, but have not understood.

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edward ingram  |  economy  |  deflation



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