Deflation, a thing of beauty

I have never been able to comprehend why deflation is a dark personification of economic evil to be avoided like the Black Death. Why? Is deflation not defined as a general fall in price levels? I certainly like the idea of falling price levels. Perhaps it’s also because I like to save a little for a rainy day. Not that it has done me any good in a world where inflation and indirect taxes suck the life out of my savings until the bank simply close the account for lack of a reasonable balance.

Do you believe in the innovative spirit of man? Do you believe in the rational of economic advancement through cooperation, mutually beneficial exchange, saving for an uncertain tomorrow, uncoerced willing participants to any economic exchange and investment in components for productivity enhancement?

Is it not an economic absolute that man would successfully strive to improve the product of his labour and gain from it? Is it not so that billions of humans contribute to this process every minute of every day to improve economic production? Are all these improvements not measured at a price level? It simply follows that it is in the general nature of economic man to promote deflation in the majority of his economic activities. How did this become an economic evil?

Somehow the deflation so diligently pursued and as we well know very effectively achieved seems to mostly vanish. The deflation is converted into inflation somewhere in the economic chain. Much has been written about the monetary processes of increasing money supply, artificial interest rate settings and encouragement of debt formation. I will not dwell on it here. Money supply growth has one supreme and ultimate beneficiary and that is the state and its vesting supporters. All other economic participants may seem temporary beneficiaries but will ultimately lose. Something is terribly wrong when the general tendency for prices to fall is converted to a general tendency for prices to increase.

It is the intent of State, one of many, to use a monetary stimulation to encourage a faster pace of deflation by making artificial savings available for investment at low interest rates. The logic is that the investment will generate a greater productivity effect than the negative implications of inflation which will surely follow such stimulatory monetary policy. It is at best a road to hell paved with good intentions, at worst, a self serving exploitation of the natural deflation engineered by billions and diverted away from economic man to gluttonous State. It is therefore very logical to expect State to actively propagate the virtues of “low inflation” and the horrors of deflation.

Deflation per se has no horrors. The propaganda of equating deflation with depression is the clever slight of hand used to smear deflation. The use of labels such as “recession” when an economic downswing happens in a low inflationary environment or “stagflation” to explain an economic downswing in the midst of high inflation all contributes to the perception that deflation is the ultimate economic horror. This is just not true. There is absolutely no reason or logic to equate deflation with depression. A general fall in prices may also imply that the price of labour would fall. It would be good for labour should labour’s price fall less than the general drop in prices, has no effect should labour’s price fall in the same relationship to general prices and would only be bad should labour’s price fall more then the general fall in prices. Same with all other items in the economy, it is the relative relationships that matters and the unhindered pricing mechanism of the market will take care of that as it always has.

What about employment you would ask? A general fall in price levels, more so when it is the result of human ingenuity, would not have any direct effect on employment. The increased productivity may mean less employment but that has absolutely nothing to do with deflation and it is not a foregone conclusion. Would we stop all human advancement because it inevitably has the potential to reduce employment? We know that such displacement is a natural consequence of advancement and that the economy will evolve and absorb the displaced in alternative employment. Temporary displacement as a result of human economic advancement is not a curse of deflation.

One group of economic participants who would do well to fear deflation would be the indebted. It would therefore be in the absolute interest of the inflating State to encourage broad based indebtedness in its voting constituents. That would guarantee acceptance and desirability of inflationary policies which as we have seen is immensely beneficial to the economic entity State and ultimately harmful to all other economic entities.

A most consistent example of this deflationary principle is captured by the development of the personal computer. Prices have been falling for twenty eight years, productivity increases have been fantastic, employment has increased tremendously in this industry, fortunes have been made, every economic activity in the world has been touched by the development in this industry and humanity has gained much from this economic advancement. It all happened in an industry perpetually in the grip of deflation.

Let’s page through some Personal Computer history. In 1981 you could have bought an IBM 5150 operating at 4.77MHz. It had no hard drive, working off a single 5.25 inch floppy drive. It would have cost you around $2000 with a limited number of software increasing to around $6000 for a full house system with colour graphics. That was 1981 dollars. A Datsun Stanza would have set you back $6680 and a Dodge Colt at $6194 cost close to the same as having a personal computer. Would you swap your PC for a new car today? Could you?

I remember those early PC’s well. My later version XT was so slow we had to run a spreadsheet overnight to calculate a relatively simple financial model. A branded desktop operating at 2.5 GHz with lots of memory and disk space, a huge 22 inch screen monitor included will cost you $1300 in today’s dollars (all software pre-installed). How much car can you buy for $1300 today? Look at it in another way. One paid $6000 for a 4.77MHz system at $1258 per MHz in 1981. The branded middle of the road PC system will today cost you only 52c per MHz. This is the deflation of human ingenuity. How is it possible to generalise deflation as an economic threat?

Let’s dare to have some deflation. It may just turn out to be a thing of beauty.

Sarel Oberholster


Car prices were obtained at this link http://www.gti.net/mocolib1/prices/1981.html How much did it cost in Morris County, New Jersey? a survey of retail prices advertised in the Daily Record, December 1-15, 1981