The case against deflation

Downward line on world map

Alasdair Macleod – 06 April 2013

Regular readers will know I am in the inflation, possibly hyperinflation camp; but there are those that think the future is more likely to be deflationary. In the main this is the view of neoclassical economists, Keynesians and monetarists, who generally foresee a 1930s-style slump unless the economy is stimulated out of it.

Rather than repeatedly go into the errors of their ways, we must accept that they are in charge. They have decided that prices must not fall, and they see moderate price inflation as a necessary stimulant to business: this is the reasoning behind Helicopter Ben Bernanke’s defining statement, when he made it clear that central banks could spray the economy with endless fiat money if need be.

Given this determination to stop prices falling, worries that the outlook is deflationary are unlikely to be realised. But there is a second group of commentators which believes that in a slump there will be an unstoppable credit contraction as banks are forced to foreclose on failing businesses. This, they say, will lead to a mad dash for cash to pay off debt, leading to fire-sales of assets as credit contraction spreads to otherwise sound businesses. The imperative to pay down debt will overwhelm central banks’ attempts to replace it with cash.

The error here is to misunderstand where we are in this sorry tale. The belief common to all deflationists, that the developed world has so far avoided a severe economic contraction, is wrong. The fact that this is not often recognised must be blamed on the irrelevance of nearly all government statistics. Not only are they self-serving, but they do not allow for the increasing meaninglessness of government money. The only hard statistics are unemployment, which despite official attempts to water them down, cannot conceal the fact that there has been a slump since the banking crisis.

The banking crisis marked a sudden increase in consumer preferences in favour of money, assuredly egged on by banks who switched almost overnight from risk-tolerant to risk-averse. This is why GDP numbers in most major countries took such a heavy knock, reflecting money being withdrawn from economic activity. That was the event deflationists are worrying about today.

So deflationists are forecasting an event that happened five years ago and their fears have already been disproved by massive monetary intervention. That is not to say the slump is over: far from it. Current indications are that things are about to get worse everywhere. But the nightmare cycle of falling asset prices becoming self-feeding and a dash for cash has already been prevented.

So successful was the Fed leading other central banks to save the world in 2009 that the precedent is established: if things take a turn for the worse or a systemically important financial institution looks like failing, Superman Ben and his cohort of central bankers will save us all again.

Call it kryptonite, or failing animal spirits if you like. It is closer to the truth to understand we are witnessing the early stages of erosion of confidence in government and ultimately its paper money. Ordinary people are finally beginning to suspect this, signalled by the world-wide rush into precious metals last month.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

One thought on “The case against deflation”

  1. Nobody and I mean Nobody understands deflation because it has little historical precident. Most confuse deflation with monitarism. Not even the Japanese understand properly. The outcome of the deflationairy spiral is ALWAYS revolution. ANd that outcome is because most people cannot understand the following. The Deflation spiral has ONLY 2 possible solutions 1) beheading the wealthy and taking their assets. OR 2) large and i mean large, fast and i mean fast direct cash payments of printed money directly to the cash/asset poor combined with large tax increases for cash/asset wealthy. Since number 2 will ALWAYS be blocked by the wealthy and those that don’t understand deflation that only leaves number 1. So brace yourselves folks, DEATH is usually the result of ignorance and 99.99999% of the population is ignorant about deflation. Only a couple of economist have talked about direct cash to the cash poor …. So only a couple out of hundreds of thousands of economist understand deflation.

    If i were a betting man, i would bet on hundreds of NEW wars and revolutions across the planet. Death is always the result of the deflationairy spiral always. Ironically, the more wealth you have the more likely Death will visit you. It is a new world we have just entered and building bridges will not do it folks. The deflation spiral is the death spiral, if they wealthy only understood that giving directly to the poor is like buying their and their childrens future life. But most are older and don’t suspect it could come quick, it will come very quick. The velo of money chart in 2014 says to me lots of death In 2015 and 2016.

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