The natural path for all economies is a mild deflation in the amount of productivity improvement, averaging 2-3% annually.

via Here Comes the Spin (Central Banks) in [Market Ticker]

Coninuing my investigation into inflation (the desirability of) and deflation (the evils of), the above is one businessman’s opinion. He writes (emphasis in the original):

I’m going to keep hammering on this until people wake up and start demanding it: The natural path for all economies is a mild deflation in the amount of productivity improvement, averaging 2-3% annually.  That deflation — that is, increased purchasing power for the people of a nation, is yours.  It belongs to you.  It comes into existence because you perform your job, whatever it may be, with more efficiency due to the improvements of technology over time.

You do more with less and since you are the one doing the “more” the fruits of that effort are your property, not someone else’s.

What prompted his outburst is a Bloomberg news article, which states in part:

Central banks are finding it’s easier to push up stock and home prices than it is to prevent inflation from falling short of their targets.

While declining costs for everything from gasoline to coffee can be good news for consumers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when disinflation turns into deflation, which leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up.

The above argument against deflation, namely that it “leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up” is an old one, and has been challenged before now. Just how solid is it?

Common sense tells us that, in an environment of falling prices, households may delay purchases of some items, but not all. You might, for instance, delay buying a new fridge or car if you think prices might be coming down in a month or so, but you are unlikely to delay purchases of daily necessities like petrol, food stuffs, utilities (gas and electricity).

In addition, some people, especially businesses, may not be in a position to wait; they may need something right now, even if they fully expect prices to come down soon. If you run a restaurant or cafe, for instance, and one of your ovens or fridges or fans breaks down beyond repair, you are not going to delay purchase of a new one because that will directly impact your business and your relationship with your customers. You are going to buy one today (or sooner)!

So this argument is rather weak, when examined closely. And it begs a question: should people be forced to buy things now rather than be “allowed” to buy things when they want to, or need to, based on their forecast of future prices? In what way is it “better” for people not to delay purchasing things? For whom is it better? Just whose interest are we talking about, here?

As Market-Ticker asks,

So it’s bad to not purchase “things” right now — even if you can’t afford them with your personal economic surplus in the present time?

And further, it’s bad if companies don’t invest and hire if they do not feel the pressure of increased demand for their products?


Market-Ticker goes on to explain how inflation benefits some people at the expense of others, and how those benefits can only be realized by cheating. Read the whole thing, it’s not very long.

The Bloomberg article offers the salutary example of Japan:

Japan has grappled with deflation for the last dozen years, with its central bank hamstrung by a liquidity trap that’s caused consumers and companies to save the money it has injected into the economy.

Yes, how dare they! People saving their own money! (Notice the suggestion that this money is belongs to the central bank, not “consumers and companies”.) In other words, the suggestion is clear: when people are allowed to make their own decisions based on their own, subjective assessments of the present and future financial situations, they act in ways which are unproductive or contrary to the economy as a whole.

This argument makes the faulty assumption that wealth is consumption. Consumption is not wealth. Where does the means to consume come from? From work: either producing goods or providing services that people want and are willing and able to pay for; some of the profits from these productive activities become capital (savings which are used for investing in capital goods). Savings are wealth. Productive work is wealth. Consumption is not wealth. And yet this is now the wisdom of the age: wealth is consumption, and when people don’t consume or consume less than they used to (according to some standard of “optimum” consumption, and who decides that?), then this is bad for the economy, we are told.

Investor “Mish” has written a number of pieces about inflation, explaining how inflation benefits the wealthy few at the expense of the many. Here’s a selection which you might find instructive: