Why Deflation is not a Catastrophe

One of the greatest economic issues that many governments, economists, and the average layman fear is deflation. What is deflation?  According to dictionary.com, deflation is “a fall in the general price level or a contraction of credit and available money.” According to mainstream economists and government officials, this is a bad thing. 

According to the St. Louis Federal Reserve Bank,

         While the idea of lower prices may sound attractive, deflation is a real concern for several reasons. Deflation discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower prices. Decreased spending, in turn, lowers company sales and profits, which eventually increases unemployment.

Wikipedia also explains objections to deflation in this way:

         Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity. Since this idles the productive capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral.

So according to mainstream economists, deflation reduces consumption, reduced consumption reduces production and lower production will shut down almost all economic activity. To many people, deflation, if not checked or eliminated, will lead to a great downward spiral in economic activity. That is why Federal Reserve Chairman Ben Bernanke believes in fighting deflation more than inflation through monetary policy. Paul Krugman, the most popular cheerleader for Keynesian economics, has compared deflation to a black hole. To some, the deflationary downward spiral doomsday has already happened since, according to the New York Times, deflation caused the Great Depression. 

Some Points About Deflation

One question that must be asked about criticism of deflation is this: should prices that have fallen be expected to continue falling. As Robert Blumen has pointed out, there are at least three response people can have to falling prices: One person may interpret the fallen price of a good as an indicator that the price of that good will fall in the future; another person may predict that the price of the same good will stay where it is at; and yet another person may predict that the lowered price of a good is an indicator that the price of that good will be higher in the future. 

As Austrian economist Jeffery Herbener has observed in his testimony about monetary policy before Congress, 

“the downward spiral of prices is merely the logical implication of assumptions about expectations within formal economic models. If you assume that the agents operating in an economic model suffer from expectations that are self-reinforcing, then the model will produce a downward spiral.”

Expectations are just as self-reinforcing as they are self-reversing. The economic models that are touted by most mainstream economists and economics professors are not a good way to examine the economic decisions people make, i.e. human action. I for one have always jumped on lower price like most people because there is an expectation that such a price will not last forever. 

The reality is that the idea that deflation produces a death spiral does not accurately describe the economic behaviors of people. Robert Bluemen provides the following reasons: 

1. There is in reality always a diversity of expectations among the public. While some people will expect prices to continue in the same direction, others will form the opposite view. Everyone’s expectations will change not only in response to changes in the data, but taking into account their entire life experience, their own ideas, and their situation.

2. Expectations are not entirely driven by prices. A broad range of things influences our expectations about price.

3. Lower prices are not always sufficient motivation to delay purchases because everyone prefers to have what they want now, rather than later.

4. Expectations of buyers tend to be met by sellers, if not at first, then fairly soon. In some cases, buyers can hold onto their cash for a bit longer, but most businesses have no choice but to sell their inventories at what the buyer will pay. In other cases, buyers may not be able to delay purchases, or may not wish to, and will pay what they must in order to buy.

5. Everyone—buyers and sellers (and every one of us acts in both of these roles at different times)—has expectations not only about consumer prices, but about wages, employment prospects, even asset prices, the economy in general, the progress of our own life, and the future of our family. A coherent plan of saving and spending takes all of these things into account.

6. Expectations can be met. Buyers have a buying price. Even if not known in advance, they know it when they see it posted. Even if they do not know what they plan to buy in the future, a bargain price will be met by buyers.

7. People only need so much cash. Beyond that, they start to look around for either consumption goods, or investments.

Robert Wenzel: An Examination of Key Factors in the Collapse of the Soviet Union

Without the State, Who Would Invent Tang?

By Peter Klein

During the 2012 presidential campaign, President Obama made his now famous claim that “you didn’t build that” in reference to the infrastructure that businesses use to provide goods and services to customers. These comments were controversial, but Obama’s defenders quickly noted that Obama was not criticizing business owners, merely highlighting the supposedly indispensable role governments play in providing amenities on which businesses rely for success: “Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government 

research created the Internet so that all the companies could make money off the Internet.”


This view is shared by almost all mainstream social scientists, even those who are generally favorable toward
free markets and limited government. Sure, they will say, the market is good at producing shoes or trucks or laptop computers, but the market cannot provide basic research—it is a “public good” that only government can provide.


A general critique of the public-goods rationale for government science funding will have to wait for another
day. But here I want to address a companion argument that is often used to justify not only expansive government per se, but a large military sector specifically. It’s the argument that war is an important, and even necessary, source of scientific progress, because technologies developed by the state to fight wars often have important civilian uses. Innovation is a side benefit of war, say war’s defenders. By mobilizing all the resources of society, through coercion, repression, and exploitation, we get not only civic pride and the martial spirit, but also great new technologies.

You can view the rest of the article here in the Mises Institute's March issue of The Free Market

Robert Wenzel interviews Daniel McAdams

The Sequester ‘Crisis’ and What Should Be Done

By Ron Paul

Despite what the media and politicians would have us believe, the United States did not collapse last Friday when the package of spending reductions known as “sequestration” went into effect. The financial markets hardly blinked, as they have come to be more skeptical about these periodic government-hyped “crises.”

What had been portrayed as a drastic reduction in government spending was merely a decrease in the projected rate of increase in government spending over the next decade. Under sequestration, government spending increases by $2.4 trillion over the next 10 years rather than $2.5 trillion without it.

So we are speeding toward collapse at only 100 miles per hour instead of 110 miles per hour.

Some in Congress are using the panic over sequestration to justify another surrender of legislative authority to the executive branch. These members want to “pass the buck” on prioritizing federal programs by giving the president, cabinet officials, and high-level bureaucrats authority to set spending priorities. However, it is Congress’s job to set priorities in federal spending.

he drafters of the Constitution give the legislature the authority over spending because they recognized it was a threat to liberty to allow this power to be concentrated in the executive branch. Congress’s willingness to cede more authority to the executive should be opposed by everyone who values liberty and limited government.

Some of the loudest objections to sequestration have come from the champions of the military-industrial complex. Yet under sequestration defense spending will still increase by 18 percent over 10 years as opposed to 20 percent without sequestration.


There are claims that the military will face a one-time real reduction back to 2007 levels of spending, before beginning to climb again next year. That remains to be seen. However, few claimed at the time that 2007 levels of military spending, occurring as they did during the huge post 9/11 build-up, were inadequate.

But despite the fact that the US spends more on military than the rest of the world combined, we are told that even this modest, short-term reduction would be, in the words of outgoing Defense Secretary Leon Panetta, “shameful” and “irresponsible.” A return to 1980’s levels of military spending in real dollars – a time of significant military build-up – is considered outrageous even though the US faces no Soviet Union or equivalent threat.

In fact, the entire $1.2 trillion dollars that the sequester is supposed to save could be realized by cutting one unneeded, wasteful boondoggle: the $1.5 trillion F-35 fighter program. The F-35, billed as the next generation all-purpose military fighter and bomber, has been an unmitigated disaster. Its performances in recent tests have been so bad that the Pentagon has been forced to dumb-down the criteria. It is overweight, overpriced, and unwieldy. It is also an anachronism: we no longer face the real prospect of air-to-air combat in this era of 4th generation warfare. The World War II mid-air dogfight era is long over.


As defense analyst Winslow Wheeler wrote last year:

“It's time for Defense Secretary Leon Panetta, the U.S. military services, and Congress to face the facts: The F-35 is an unaffordable mediocrity, and the program will not be fixed by any combination of hardware tweaks or cost-control projects. There is only one thing to do with the F-35: Junk it.”


We should not look for cancellation of the F-35 program any time soon, however. The military industrial complex understands the political necessity of spreading its military Keynesianism as widely across Congressional districts as possible.

That is why F-35 manufacturer Lockheed-Martin can boast on its website that “the F-35 provides 127,000 direct and indirect jobs in 47 states and Puerto Rico.” What is unfortunately not understood is that these 127,000 workers would be far better utilized producing needed goods and services rather than treated as a jobs program disguised as national defense.

Despite the alarm over cuts that are not real cuts, it is clear that the US government is not serious at all about changing its ways. In a recent tour of the Middle East, newly-confirmed Secretary of State John Kerry announced that the US would be sending another $60 million to the rebels seeking to overthrow the Syrian government – in the midst of the sequester “crisis”!

Despite the rhetoric, there appears no intention on the part of the government to take our fiscal crisis seriously or abandon the idea that we should run the rest of the world.