The Dishonest Meme of Deflation Advances
By Staff News & Analysis - January 06, 2015

World faces low inflation threat not seen since before WWII … Analysts are predicting that inflation will fall below 2pc in all of the countries that make up the G7 group of advanced nations this year. Central banks need to work fast to stop the world falling into a deflationary spiral … If inflation falls as low across the G7 as economists expect it to, this year will bring one of the worst disinflationary episodes since 1932. – UK Telegraph

Dominant Social Theme: The scourge of deflation advances. We must print!

Free-Market Analysis: We've pointed this out before, but this is another meme that is fast advancing. The idea of disinflation – especially – throughout the West and especially in Europe is being propagated regularly now.

We've pointed out regularly that it is difficult to have disinflation let alone deflation in a fiat-money central banking economy. This is partially because central banks are always printing money and partially because if there is a "threat" of disinflation, central bankers will rev up the printing presses as they are now.

And thus, we would offer the perspective that if disinflation is indeed troublesome – we believe it's not – it won't be for long. Central bankers print. That's what they do …


Increases in the prices of goods and services in the world's largest economies are slowing dramatically. Analysts are predicting that inflation will fall below 2pc in all of the countries that make up the G7 group of advanced nations this year – the first time that has happened since before the Second World War.

Indeed, Japan was the only G7 country whose inflation rate was above 2pc last year. And economists believe that was because its government increased sales tax which had the effect of artificially boosting prices.

But falling prices mean things are getting cheaper (or, at least, are not getting too expensive too quickly). Surely that is a good thing?

Not necessarily. The key ambition of any government is to achieve price stability. That is why the central banks of all G7 countries – Canada, France, Germany, Italy, Japan, the UK and the US – target an inflation rate of close to 2pc. This gives businesses and consumers the certainty they need to plan for the future. But with price growth slowing, many economists are worried that some of the world's biggest economies could slip into outright deflation.

According to this last paragraph, central banks via their government service are charged with keeping prices "stable." But where did the idea come from that the marketplace itself could not keep prices fairly stable in the absence of central-bank money?

In fact, money has varied in value throughout history; yet private money – especially gold and silver – tends to respond to fluctuations with greater or lesser volume. Central banks were not needed to provide a money monitor and looking back over this past century they have not done a very good job.

Two horrible recession-depressions and a regularly reoccurring smaller dips have crushed middle classes all over the world and reduced the employment possibilities while creating vast, inhuman corporations.

What central banks ARE good at producing is inflation – which in turn produces asset bubbles that lead to great expansions and then equally great contractions.

It is hard to avoid the notion that those who benefit from these contractions – those closest to the central bank money spigot – are eager to recreate the "normal" business cycle of the recent past. That is, they are trying hard to reignite the inflation that creates additional asset appreciation in commodities, goods and services and, of course, the stock market.

This is a much different interpretation than the one ordinarily offered regarding the ills of deflation – that have to do with a vicious spiral of downward prices. Of course, this doesn't really make sense anyway, as if prices are falling, those who purchase goods and services are benefitting from the lower prices.

In any event, we return to our larger point, which is that real deflation over a long period of time is hard for a central-bank, monopoly fiat economy to sustain.

The article itself admits: "Attempts to tell which kind of pressures are influencing prices have been complicated by the precipitous fall in the price of crude oil, which dropped from around $110 a barrel in June to less than $60 in recent weeks."

Nonetheless, we are exposed to this concern:

The worry is that this will lead to a dangerous downward spiral in which consumers hold off spending as they wait for prices to fall further. The reduction in demand for goods and services would then become self-fulfilling. Companies may start reducing their capital expenditure as they try and ride out the slump in demand. This would further depress economic growth.

Supposedly, Japan is "trapped" in such a cycle, but we would suggest that Japan's sluggish growth has more to do with the quasi-fascist-corporatist straightjacket of its corrupted mercantilist system. Bureaucratic back-scratching and a rigid economic pecking order have calcified the Japanese economy far more than "deflation" expectations.

Most likely there won't be significant disinflation or deflation in the West, either. Perhaps the books will be cooked to make the numbers seem to represent such a phenomenon; or perhaps a downward spiral commences because the distortions previous to the 2008 crisis still have not been rung out of the system.

But more likely, Abenomics and Draghi's long-contemplated European QE will boost asset inflation. It is hard to see the Fed doing anything serious, either. QE may be a thing of the past but the Fed has a fairly steady history of inflating – and that's probably not going to end.

You can plan your portfolio around disinflation or even deflation, but it's not necessarily a good idea no matter what you're reading. Western economies inflate. They have since World War II. That's what they are built to do.

After Thoughts

And stocks inflate along with those economies …