If you pay attention to financial media even the slightest bit, you have no doubt heard the talking heads freak out over the prospect of deflation. Bloomberg, CNBC, Fox Business, Wall Street Journal, you name it… they all mindlessly repeat the bloviations of Bernanke, Yellen, Krugman, etc. that what we need is for people to spend (not save), to borrow, and for prices to rise. All of this is wrong.

To give you a real basic econ lesson, this attitude is largely inspired by the economist John Maynard Keynes. Bernanke and company are devout Keynesians. They believe an economy is built on consumption and is stimulated by spending. Paul Krugman is outspoken in his conviction that the US does not carry enough debt. That $18 trillion is not nearly enough. He believes we need to spend much, much more and that increasing the debt does not matter in the least. I sh%t you not. These are the people running our economy. Bernanke, Yellen, Jack Lew, the financial media, republicans and democrats alike all believe we must spend our way out of this funk we’re in. And as Shaq once said, “Don’t fake the funk on a nasty dunk.” That literally means nothing, sorry.

So what does this have to do with deflation? Keynsians (and other schools of thought as well) believe falling prices cause recession and depression. For example, they believe the Great Depression was caused by price deflation. That the Federal Reserve should have printed money, lowered interest rates, and encouraged spending… and that their failure to do so made the depression great. I’ll explain in a moment why this is all wrong.

Today this Keynsian fear of falling prices has morphed into a paranoid devotion to inflation. The thinking is that rising prices a) are how you grow an economy and b) stave off depression. The monetary gods of all major central banks in the world have determined in their all-knowing wisdom that the magic number is 2% We must have 2% annual inflation. As Peter Schiff likes to say, “Not 1.9%, not 1.8%” but 2!!! Two percent inflation is the elixir that will create wealth and prosperity for us all! And so they tweak and manipulate as best they can to get us right at 2%.

So back to why deflation as a cause of economic downturn is all wrong. Falling prices are an effect, not a cause. There are two reasons prices can fall. First, they can fall as a result of a healthy, robust, competitive economy. Innovation and competition through a true laissez faire economy means firms compete to offer consumers the best quality products at the lowest possible price. We all benefit from affordability. We all benefit if we can buy more at the grocery store. Prices basically fell for 100 years in America during the 19th and early 20th centuries as we became the wealthiest country the world has ever seen. The second reason prices fall is a result of overconsumption and speculation. It is corrective in this case. Think of the housing boom and bust. The government induced over borrowing and over speculation (a topic for another piece) causing prices to rise to an artificial and unsustainable level. The deflation was simply prices returning to a more natural level. In regards to the Great Depression, the over consumption and speculation (Fed induced) of the 1920’s led to the corrective bust of 1929. Massive government spending and misguided policies made the depression great (see Murray Rothbard’s America’s Great Depression).

So how does the Fed cause prices to rise? They basically print money. They have fancy terms for it like “Quantitative Easing”, but it’s money printing. Econ 101: more currency chasing the same amount of goods will result in higher prices. Its as simple as that. Until the recent “taper”, the Fed was printing $85 billion per month! Fed Balance Sheet You don’t have to be an economist to know that printing money is not the honest path to prosperity. History has shown many times over that debasing one’s currency leads to it’s downfall. What’s really scary is that a lot of this printed money is tied up in bank reserves and overseas. Many think once the money is unleashed we could experience what is known as hyper inflation (see Weimar Germany or Zimbabwe).

Lastly, lets briefly look at how these policies affect me and you. First of all, inflation eats away your savings. Remember when you used to earn a nice yield on a savings account? Now the fed keeps interest rates so low that the rate of inflation outpaces the interest rate we earn. So we actually lose money by doing the responsible thing and saving! This policy in turn causes speculation. Savers are punished so they seek out yield. This is partially how we get speculative bubbles. And we have all seen first hand the effects of bubbles bursting. Sh%t ain’t cool man. We are also punished because the things we buy are more expensive. Groceries, clothes, gas, education, healthcare, shelter… Nobody likes that. We have been fooled into thinking certain things should appreciate in price like houses. I don’t know about you but I’d rather pay $100K for a ridiculous 5,000 square foot house than say $600K but thats just me. Sure it’s great if you happen to sell your house at the height of a government induced housing boom but some of us weren’t so lucky. I’d rather let the market decide what prices should be. We’d all be able to afford more and live easier and happier lives. Instead the Keynesians in DC think they know better than the market. They don’t care that granny’s savings are eroded or that our poor can’t afford groceries.

These policies benefit the wealthy and punish the poor and middle class. These policies pump up asset prices and make the rich bankers richer. The rich don’t care if the price of milk goes up, but they care if stocks go up. The poor don’t care if stocks go up but sure as hell care what milk costs. The Keynesians are not only stupid, they policies are evil. Don’t let anyone tell you that being able to buy more with your money is bad.

***Note: if you have an interest in real free market economics Google Austrian Economics, Mises Institute, Peter Schiff, Tom Woods, Murray Rothbard, Bob Murphy, Tom DiLorenzo, Henry Hazlitt, David Stockman.


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