Recently one of my favorite bloggers, Israeli Water Engineer, wrote about fears of deflation in the United States: “This is bad. The only solution to world indebtness is controlled inflation….”
I commented that deflation is a pretty good thing; he replied and I replied back (go read it).
Though this discussion is about deflation, I actually have much stronger views about inflation. I think inflation is absolutely the worst economic policy that can possibly be effected, a million times worse than recession. Recession, see, harms everyone. But inflation is a dagger in the back of the people who hold society upright, the people who work hard for a long time and save their money with prudence and wisdom. I think there is a case to be made that inflation is at the very root of all the ills of modern society.
Why don’t other people see it this way?
Let’s be clear about some terms: deflation is a decrease in the money supply, and it typically leads to decreasing prices (it does not equal decreasing prices). Inflation is an increase in the money supply, and it typically leads to increasing prices (it does not equal increasing prices). Actually, “prices” are just the number of dollars (or whatever currency) it takes to buy any old good or service. So we can express the cost of stuff in terms of dollars or the cost of dollars in terms of stuff: when the supply of one side increases, its value decreases relative to the other side, and when the supply of one decreases, its value increases relative to the other side.
Progressives love inflation because it’s inherently destabilizing. How so? Suppose you’re 25 years old, just starting out in the world after graduating from university and with a lot of debt. If inflation starts eating away at the money supply, your debt can be wiped away soon! So don’t bother paying it off. Instead, spend your money extravagantly on vacations and fancy clothes, and maybe buy a house that you don’t really need (with a huge mortgage, of course). Why not? It’s not like money means anything or has any value. Now suppose you’re 75 years old, worked your entire life, saved money, raised a family, paid off your debts and finally retired to enjoy your old age. If inflation starts eating away at the money supply, your retirement savings can be wiped away soon! But don’t bother complaining, because progressives love the idea that no one will ever be able to retire (except from government careers, with pensions tied to the inflation rate): after all, it was progressives who came up with the idea that one who doesn’t work should not be able to eat. Inflation is how the young generation steals from their elders.
Suppose you’re 25 years old, just starting out in the world after graduating from university and with a lot of debt. And suppose you can’t count on inflation to take care of your debt for you. What do you do? You move in with your parents. You get a job. You become a productive person. You live frugally, saving money and making careful, wise decisions. Progressives hate the thought that this could happen. People who get jobs, become productive, live frugally, save money and make careful, wise decisions are the enemies of progressivism everywhere, because they are independent and they don’t need progressives or government to organize their lives. Now suppose you’re 75 years old, worked your entire life, saved money, raised a family, paid off your debts and finally retired to enjoy your old age. Due to mild deflation, you’re able to stretch your savings out for a long time, which means you won’t need to depend on charity or welfare. Progressives hate the thought that this could happen. People who stretch their savings and don’t depend on charity or welfare are independent and they don’t need progressives or government to organize their lives.
You don’t have to read between the lines to see how deflation is fear in this article about Japanese beef bowl restaurants. Take this sentence:
Japan’s big three beef bowl restaurant chains, the country’s answer to hamburger giants like McDonald’s, are in a price war.
If I were Japanese and I liked beef bowls, I’d be thrilled. But progressives, who are joyless and whose ultimate goal is to suck the joy out of life like marrow from a bone, write things like:
It is a sign, many people say, of the dire state of Japan’s economy that even dirt-cheap beef bowl restaurants must slash their already low prices to keep customers.
The article goes on to criticize restaurants that provide food to people inexpensively. Sure, those businesses are competing to make their supply match consumers’ demand – but it’s, you know, destructive to be too efficient. Instead, they should make agreements with other companies so they can all keep their prices artificially high – because that would really benefit everyone.
Anyway, some prices do fall and no one complains about them: prices for technology. Why is it a problem to progressives when the price of a beef bowl declines but not when the price of a computer declines? Is it because one is due to deflation and one is not? No one ever seems to present any evidence to show that deflation leads to less expensive beef bowls but that less expensive computers are caused by something else. Perhaps that’s because progressives habitually conflate declining prices with deflation.
In fact, prices can fall for any number of reasons. One is improvements in technology: my parents bought my brother and me a Nintendo (NES) for $100 back in 1987. Now they have a Nintendo (Wii) and NES consoles cost about $15 (not adjusted for inflation). Another reason for prices to fall is increases in worker productivity or efficiency. These are much harder to observe in real life, but even a slightly attentive reader will realize that these are the factors driving the falling prices in Japanese beef bowls (in fact, the article even says that the original beef bowl chain became dominant by being extremely efficient). Actually, increasing worker productivity is both a cause and an effect of decreasing prices, which I find pretty cool!
Finally, the increase in value of dollars compared to other goods and services is what makes us value dollars as currency. If the decline in value of dollars continues and gets out of control, no one will want dollars any more. I don’t mean this to scare anyone – I don’t have any particular affinity for dollars over any other currency, except that my main debts and savings/investments are in dollars – but we should keep in mind that our civilization is built from the ground up on value stored in money. If that money loses its value, civilization as we know it will be over.
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after all, it was progressives who came up with the idea that one who doesn’t work should not be able to eat.
Actually, that is from the New Testament. The intent of that statement was that freeloaders should not be tolerated in the congregation, not that those who had saved should be forced to work.
Here is the verse:
http://bible.cc/2_thessalonians/3-10.htm
Personally, I think this would be a great plan for welfare reform. Although personally I would like to see welfare abolished.
Despite what you have been taught by the folks at mises.org, deflation is not exclusively caused by expansions and contractions in the money supply. Right now the Phoenix metro area is seeing a major drop in both the cost of rent and the cost of buying a house. With the collapse of the housing industry at least 200k Mexicans have gone home, causing many apartments to go vacant, and thus causing landlords to lower rents. The flood of people into the valley has also dried up, causing all of the newly built houses to become excess inventory, which must be liquidated. This means that the deflation in the cost of shelter is caused by a drop in demand, not a contraction in the money supply.
J has been hoping for inflation on his blog for at least a year now, despite being an investor.
Off topic, but on the right hand side of your blog you have a small widget that displays links to the four most recent comments. This comment widget needs to be expanded to ten comments.
Actually, that is from the New Testament.
Thanks. Like Moldbug, I hold that progressivism is a form of religious fanaticism driven by, or descended from, Calvinism.
Despite what you have been taught by the folks at mises.org, deflation is not exclusively caused by expansions and contractions in the money supply.
The situation you describe is a decline in prices due to a shift in demand. It actually proves the point I was trying to make, which is that declines in prices are not the same thing as deflation – defined as a contraction in the money supply.
This comment widget needs to be expanded to ten comments.
Done.
1. The NT is believed by ALL Christian groups, even non-Calvinists. Second. The RCC is probably one of the largest leftist organizations on earth, and its not Calvinist by any means. A specific form of leftism may be descended from Calvinism, but the Left in the US today is not exclusively composed of such Calvinist descended leftists.
2. By deflation I meant a drop in prices. There have been later attempts to approptiate the term for the use of the libertarian crowd, but the definition I was using didn’t refer to the size of the money supply.
3. The Puritans originated as a sect in England seeking to “purify” the newly created Church of England of its remaining Romanist elements. The Puritan movement was very much inspired by Calvinism, and if Mencius thinks that Calvinism is the root of leftism in America, then he is implying that the American experiment was doomed from the moment the Puritans left for America.
In fact, Calvinism was a necessary experiment during the Reformation, and since America is a product of the Reformation to damn Calvinism is to state that America itself should not exist. Mencius should just convert to Catholicism and bloviate endlessly on how Romanism protects us all from the hidden hobgoblins of the world.
Well ‘Genius’ I’d bet you love to try and save under a deflation environment – the boss keeps informing you pay is being lowered to keep in line with deflation. Deflation was 5% this year so you get a 5% pay cut – oops! Pro-deflationists forget that as money becomes more valuable it also become harder to get. You might feel it great to be in a world where to have a million dollars really means something again just the way it did in 1900 but the chances of becoming a millionaire become harder every year.
After there was a site that the nominal values of the 1850s (which look really good compared today’s prices – however when the prices were adjusted for inflation so we could get a look the real prices people in that times really had to pay (i.e. purchasing power) they were paying way more for the basics hence they went hungry and had very little (unfortunately I can’t find it anymore). So it really comes down to productivity gains and purchasing power of your time and if the business are quite happy to continue with doing the former we all get more of the latter.
The NT is believed by ALL Christian groups, even non-Calvinists.
I’m sure I never implied otherwise. But of course different parts appeal to different people. Seventh Day Adventists focus on certain verses, the snake-handlers in backwoods Appalachia focus on certain verses, Calvinists focus on theirs, other types of Protestants on theirs, and Catholics on theirs.
Second. The RCC is probably one of the largest leftist organizations on earth, and its not Calvinist by any means. A specific form of leftism may be descended from Calvinism, but the Left in the US today is not exclusively composed of such Calvinist descended leftists.
Marxism is not Calvinist by any means either. Neither is environmentalism or multiculturalism. Except in the ways that they are. I can’t summarize Moldbug well at all, but it’s more than worth going to where he talks about this stuff and reading through it. When I did, I was blown away.
if Mencius thinks that Calvinism is the root of leftism in America, then he is implying that the American experiment was doomed from the moment the Puritans left for America.
I don’t know that he means that, but I do know that he opposes the American War of Independence as an illegal rebellion against the Crown.
since America is a product of the Reformation to damn Calvinism is to state that America itself should not exist.
I guess he’d say, as I would, that the United States of America should not exist in its current form, but would best be broken up into (at least) 50 states.
Mencius should just convert to Catholicism and bloviate endlessly on how Romanism protects us all from the hidden hobgoblins of the world.
But he doesn’t believe that, being an atheist. His problem with Calvinism is not that it picked at the problems in Catholicism, but that it generated progressivism. I think he’s right, even though I find the dour, almost stoic Calvinist approach to life rather refreshing.
Well ‘Genius’ I’d bet you love to try and save under a deflation environment – the boss keeps informing you pay is being lowered to keep in line with deflation. Deflation was 5% this year so you get a 5% pay cut – oops!
Ok, suppose my nominal salary (the specific number of shekels my boss puts in my bank account every month) decreases along with the nominal cost of living. I’m no more hurt than I am helped when my nominal salary increases along with the nominal cost of living. So as much as I’d hate a 5% pay cut in real terms, if everything really cost 5% less, I don’t think I’d mind it much. Actually, deflation in this case really is better for employees. Employers will naturally be much slower to give cost of living raises than cost of living decreases, which means inflation eats away at our salaries faster than than deflation bolsters them.
Pro-deflationists forget that as money becomes more valuable it also become harder to get.
Hardly, because money becoming harder to get is just another way of saying that money is becoming more valuable (ie, more scarce relative to the things for which it’s traded).
You might feel it great to be in a world where to have a million dollars really means something again just the way it did in 1900 but the chances of becoming a millionaire become harder every year.
Being “a millionaire” is irrelevant to my life or to almost anyone else’s. What matters is how many of the goods and services I need and want I’m able to obtain with the money I have. If the money I have becomes more valuable relative to the goods and services available, I’m getting richer.
After there was a site that the nominal values of the 1850s (which look really good compared today’s prices – however when the prices were adjusted for inflation so we could get a look the real prices people in that times really had to pay (i.e. purchasing power) they were paying way more for the basics hence they went hungry and had very little (unfortunately I can’t find it anymore). So it really comes down to productivity gains and purchasing power of your time and if the business are quite happy to continue with doing the former we all get more of the latter.
You said it yourself: “it really comes down to productivity gains.” The relatively very high prices of the mid nineteenth century were not caused by deflation or inflation, but by relatively very low productivity.
John Calvin claimed that he wanted to get back to the original Christianity that existed before the 4th century.
Incidentally, two modern followers of Calvin have written extensively on Old Testament law. RJ Ruchdooney wrote a book calling for America to be put under biblical law, including the reintroduction of slavery as criminal punishment. RJ’s son-in-law (Gary North) is in the process of finishing a 20 volume economic commentary on the Bible whose thesis is that the Bible is a free-market document.
I don’t want to see the US broken up into 50 different independent states, first I just want to see the end of welfare. Then after a year we can talk about carving up the carcass.
So why should I care about deflation or fear inflation then Genius? Saying “can you image a future where you’ll pay $500 for a cup of coffee” doesn’t mean much if it is from long-term inflation as people in the future will have adjusted and won’t think anything of it. After all, saying “$5 for a cup of coffee isn’t too bad” would blow the mind of the deflationist in 1900 because a lot of people weren’t even getting paid $5 per week. The deflationist would be shocked that people are spending around a week’s pay for a cup of coffee.
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