The Truth About Deflationary Collapses
The war is on-that is the war against the ravaging force of deflation. “Economists” declare that an all out effort must be made to eradicate that demon known as deflation. They tell us that falling prices are the equivalent of a depression-that will make the 30′s look innocuous in comparison. On the advice of these so-called experts of economic analysis, the government along with Federal Reserve System embarks on humongous bailout maneuvers to save us from this deadly enemy of prosperity and well-being.
It’s amazing that this economic “wisdom” of our political and financial leaders hasn’t been questioned and critiqued. For it is certainly flawed. In order to understand what deflation is about it is necessary that we define the term.
Classical Definition of Deflation
Deflation is a decrease in the quantity of money (money supply) which results in a rise in the purchasing power of the monetary unit. In other words, each dollar, euro or yen has more purchasing power. An unfortunate consequence of deflation is that it falsifies economic calculation and impairs the ability of capitalists and entrepreneurs to appraise profits and loses. The larger the decrease in the quantity of money the more it disarranges consumption, investment and production. It benefits some at the expense of others.
Deflation is seldom a policy that governments purposely embark upon. Inflation is their favorite method of manipulating the currency for the benefit of special interests.
Classical Definition of Inflation
Inflation is an increase in the quantity of money (money supply) which results in a drop in the purchasing power of the monetary unit. You receive less for your money. As with deflation, economic calculation is impaired and the ability of entrepreneurs and capitalists to appraise profits and losses are diminished. The larger the increase in the quantity of money the more it disturbs consumption, investment and production patterns. Entrepreneurs and capitalists embark on ventures that the marketplace eventually exposes as mal-investments.
What makes inflation so insidious is that it benefits the people who receive the inflationary money first. They have the advantage of purchasing what they need at current prices. As the money moves through the economic system it causes overall prices to rise. The unfortunate individuals at the end of the line end up paying higher prices. The thrifty individual who attempts to accumulate capital by saving his money-soon discovers his purchasing power has significantly decreased. The hapless citizen living on a fixed income suffers a lower standard of living.
Current Definitions of Deflation and Inflation
The ascendancy of faulty economics has resulted in establishment economists reversing cause and effect. They now define deflation as falling prices and inflation as prices rising. These are effects-the results of deflation and inflation. Remember deflation is a decrease in the quantity of money. Inflation is an increase in the quantity of money. Of course, these days most people accept the faulty definitions.
There are obvious reasons why the establishment prefers that you believe in falsehoods. Ask yourself these questions: Who is in control of our money? It is the Federal Reserve System. Who directs where the newly created money goes? It is the government and the Federal Reserve System working together to make sure the “right people” receive the inflationary money.
By the way, a social system of unhampered capitalism with its monetary system of 100% gold backing guarantees continually declining prices. This would benefit both consumers and producers. The standard of living of consumers soar and producers earn greater profits by offering more goods and services.
The Cause of Our Current Crisis
The reason the establishment wants you to believe the faulty definitions of deflation and inflation is so they can divert blame from the creators our economic crisis to some imagined “culprits.” This way they can blame greedy capitalists, speculators, short-sellers, consumers spending too little, consumers spending too much, people saving too much money, people not saving enough money, ad infinitum, ad infinitum.
Since the Federal Reserve System controls our currency and along with the government determines where the newly created *(fiat) money goes-who is responsible for our current economic crisis? Do I really have to answer this question?
*The terms fiat currency and fiat money relate to types of currency or money whose usefulness results not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government’s order (fiat) that it must be accepted as a means of payment. Definition from the Wikipedia encyclopedia.
The Boom Cycle
As explained in the section on the classical definition of inflation-increases in the quantity of money cause economic distortions. During the past 25 years we’ve had considerable increases that have resulted in the stock market boom, the tech boom and the housing boom. When Alan Greenspan lowered the Federal Funds rate to practically nothing (to counterbalance the effects of the tech collapse), he guaranteed that there would be an unsustainable boom somewhere in the economy. Conditions dictated that the fiat money went into the housing market. Illusions are just that-illusions. All artificial booms end in busts.
The Bust Cycle
The party is over. The partygoers wantonly consumed all the booze and drugs of false prosperity. Now is a time of hangovers and drug withdrawals. The addicts of inflationary money must go into rehab. The recovery will be long and painful. Unfortunately, our government and the Federal Reserve System are attempting to keep the party going with massive injections of fiat money. It is all in vain. Lenders won’t lend money to people who can’t and won’t pay them back. The debtors are borrowed out. Of course it is possible that all this fiat money could cause a hyperinflationary boom-with the tragic result of goods and services disappearing from the marketplace. It definitely won’t stimulate the production of goods and services.
Trillions of dollars have “vanished” from the world economy. Trillions upon trillions more will “vanish”. This is a tragic joke. The money didn’t exist in the first place. It was phony Federal Reserve money. Individuals were relying on paper profits that didn’t actually exist. Bill Bonner calls the marketplace Mr. Market. Mr. Market has exposed it all as a fraud. Now he is attempting to restore wealth to its rightful owners-those productive individuals who actually produce value and those thrifty people who save money. That is what is a deflationary collapse is-restoring value to its rightful owners.
Conclusion
When the great economist Ludwig von Mises was asked what the government should do about the depression (the depression of the 30′s) he said “nothing-a lot sooner.” Of course governments never follow sound economic principles. Instead, they tamper with the marketplace-hampering its efficiency and destroying its smooth functioning. All these massive bailouts are at best useless. At worse, they could be deadly to our economy and the future of the dollar. It is possible that this inflationary money could transform the deflationary collapse into a hyperinflationary collapse-turning the dollar into “toilet paper” currency and destroying our economy-not to mention the world economy.
Ludwig von Mises also observed “Government is the only entity that can take a perfectly useful commodity like paper-and turn it into something that is completely worthless.”
Leave a Reply