Deflation Might Just Be a Good Thing

Why deflation might help to curb the economic recession

By SHARE

By Bonnie Erbe, Thomas Jefferson Street blog

Why is the whole economic world dreading deflation? Just today, Reuters reported:

Federal Reserve Bank of Dallas President Richard Fisher said on Thursday that the U.S. central bank's duty now was to do everything it could to prevent deflation and it could worry about inflation later.

"Price pressures now are in the other direction," he said in response to a question at a World Affairs Council of Dallas/Fort Worth luncheon about potential future inflation. "We have to do everything we can to lift the economy up and prevent deflation from taking (hold)."

The conventional media take explains deflation fear as follows:

What makes deflation such a dreaded condition is that, once it takes hold, it motivates consumers to hold back on spending in the expectation that they will be able to buy things at a cheaper price later. This causes further drop in demand today, leading to more cutbacks in production and even slower economic activity, which feeds into more price declines—a highly destabilizing dynamic.

But all these explanations and fears fail to take into account that the economy has just endured spiraling inflation, most of which the government's rigged economic figures (see prior blog entry) have failed to recognize. Real estate, in some areas, doubled and tripled in price, while gas prices doubled within a year. Food is up, rents are up, although gas is back down again, of course. But salaries never did rise quickly enough to catch up with other inflated costs. So, from where I stand, a bit of deflation is a good thing for the economy. It is not to be feared; it is to be welcomed.

  • Read more by Bonnie Erbe.
  • Read more from the Thomas Jefferson Street blog.
  • Read more about the recession.
  • Read more about the economy.
  • Read more about deflation.
  • Read more about inflation.