The Deflation Myth

Deflation Ahead

The concept of deflation will one day be known as one of the greatest myths of history. I know why it is a myth. In fact, it’s not a myth – it’s a lie, it’s a scam. I will tell you exactly why so that next time the conversation comes up you won’t look like the total moron that one looks who tries to argue that deflation is a problem or is bad for society and its standard of living.

The deflation topic has crushed my respect for humanity. As I have been getting older I have become increasingly aware as to how stupid most people are. At this stage I think that the creators of public opinion are playing a joke on the public and having the biggest laugh ever. It seems as if the developers of public opinion are creating increasingly stupid opinions and views and seeing where the limit is in whether the general public will believe or not. Some of the past classics have been the holocaust, September 11, the war for oil, global warming and now the latest and greatest is that deflation is bad. In the past I had to rely on expert opinion to get a balanced view and then did a balance of probabilities as to which view made most sense. Even though I tended to take the side of the minority “sceptics” of the various myths I always had a feeling that maybe these sceptics are wrong and the 99% are right. This was my view because I was not an expert in any of those fields but had to rely on expert knowledge and common sense. In contrast, economics is my field. This is an area that I know very, very, very well. I don’t need to rely on anyone’s knowledge. I know 100% and without any doubt that deflation is GOOD!

Firstly, for some definitions.

Inflation is generally considered to be a sustained increase in the general price level. As stockbroker and financial analyst/advisor Peter Schiff points out, it is the result of an increase in the volume of money. In basic terms, when prices of the things you buy go up then it is termed as inflation. The more the prices go up the higher is the inflation. Traditionally government have always wanted to combat inflation. This is because rising prices are bad. At school and university I have always been taught that inflation is bad. Common sense tells me that inflation is bad. This is because when prices rise consumer spending power falls. Consumers end up buying less goods and services with their money. In terms of export economies, when goods in one country are produced and that country has inflation then the rising prices of those goods means that it will be harder to export them because they will be less competitive against similar goods from other countries. This means that there will be less exports, less money coming into the country, a smaller need to produce those goods because of less demand, and therefore, the demand for workers and supplies will be lower. Whichever way you look at it, rising prices are bad, bad bad.

Deflation is the opposite. When prices of goods and services fall then it is said that there is deflation in the economy. In other words, the economy is characterised as having goods and services whose prices are falling. Apparently this is meant to be bad. In fact, you have probably heard this opinion on TV many times recently, and so you, the reader, also agree that falling prices are bad. It must be bad if they say it is on TV, yeah – “we need to combat deflation!!”. The only thing we need to combat are morons and deadheads, and the best way to do this is to send them off to work and not to give opinions. The reason why I have such strong feelings about this is that popular opinion is actually creating damage to society. With community support when governments “defeat” deflation by creating inflation the prices in the community rise. The prices rise for you and me. The difference between me and you (if you are one of those smart ones who feel deflation is a problem) is that you actually wanted to combat deflation and you got what you wanted. I didn’t, and that’s the difference. In life when someone does something really dumb and pays the price we say that they got what they deserved. The injustice is when some third party gets hurt in the process. Anyway, I am going off on a tangent.

When prices fall it is actually good. It means that we, as consumers, have greater spending power. It means that with the same amount of money we can buy more goods. In economics terms it implies that our standard of living increases because we have more. Economics is all about overcoming the problem of scarcity, which is a result of a conflict between unlimited wants and limited resourced. The best outcome is when our resources are utilised in such a way as to satisfy as many of our wants as possible. When we buy more goods and services then we satisfy more wants and needs. Deflation, or a fall in prices, enables this to happen. We don’t need to work overtime, we don’t need to work in hazardous jobs. Our incomes don’t rise, but the effect is the same – we get to buy and consume more, but we don’t need to work an hour or minute longer. Deflation is like a tax cut. When people’s spending power increases they end up spending in more places. This helps to distribute more money throughout the economy. Vendors make more money since they achieve greater sales. Everyone is a winner, really. So that is the whole and true story about deflation, period and full stop. So what is the “official” story on deflation?

Officially deflation is bad. Hahahahaaaa…… !!!! Sorry about that. The funny part is actually the reason why deflation is bad. So hang on. The reason why deflation is bad is because if we know that prices are going to fall then we will postpone our purchases and this will cause the economy to grind to a halt as everyone stops spending and businesses will be forced to let go of workers causing unemployment to rise, which will cause an increase in crime, resulting in a social breakdown, violence, alcoholism, drug abuse, extortion, family violence, incest, people going mad, leading to cannibalism and the end of the world as we know it. Ok, maybe most of those things have not been mentioned in the media but it would be interesting if they were since people would believe all of it too, and that would make for very entertaining discussions. Let’s break down the argument.

Argument: If we know that prices will fall we will postpone our consumption.

In theory yes, but in reality no. Firstly, in most countries of the world, and when I say most I mean about 95% of ALL countries around the world, inflation and possibly deflation is small. We are talking about rising or falling prices about about 1 – 5% per annum. See, if prices fall about 1% during the year then this is termed deflation, and this is really, really bad, it seems. Apparently, you knew that prices would be falling so you did not buy that $2 loaf of bread because you knew it would cost $1.98 at the end of the year. You never bought the $10 packet of cigarettes because you knew it would be “about” $9.90 later in the year. You got great admiration from your girlfriend or lover after you explained to her that you can’t take her out on Valentine’s Day because doing so would cost you $200 but if she waited for as long as you had to wait to land her in bed then that would save you about $10, which you could re-invest in her, naturally. This is because she would only need to wait 6 months. Women love logical and thinking men. So why spend $200 now when you can spend $190 in 6 months on exactly the same thing. Makes sense, doesn’t it? Speaking of dates and lovers, you can forget going to the cinema when the new movie is launched. No way!!! If you wait a month you can get in for 25c less.

What I don’t get is that if all these things would happen when prices are expected to fall by 1 or 2, or let’s take a really extreme 5%(!!!!) per annum, then why doesn’t the economy grind to a screeching halt already. Every idiot knows about the Christmas and after Christmas sales. In those cases prices are slashed by 50% or more!!! In the US there are the Black Friday sales and Cyber Monday. The Black Friday sales are so good that riots are known to occur as shoppers wrestle each other for the goodies. You can pick up TVs for about 80% less. What about new technology? We all know that the prices of new phones and other gadgets are bound to fall, yet that does not stop people lining up for a whole block to pick up the latest iphone from an Apple store. In fact, sometimes for product launches such as the iPhone or Playstation supply cannot keep up, and poor impatient tech geeks who miss out have to wait a week or so to get their product. Remember video players, DVD players and plasma TVs? What about mobile phones? They used to cost a fortune when they were new technologies and prices have been coming down ever since. In theory none of these items should have been bought by consumers as past experience with technology made it obvious that prices would go down, and not just by 1, 5, 10 or 20%, but by heaps more. So why is it that we all need to be wary of deflation and work together to fight it like we would fight an invading army, when past experience and current real life experience under serious deflationary conditions does not show that consumption patterns will change as we are told they will? I have the answer for this.

We are being scammed. The decision makers know that the general public are a bunch of morons. They know that the general public, in general, does not question or even think. The decision makers also know that their decisions to print currency will result in higher prices, which normally would cause the public and consumers to revolt and want blood. Knowing that the future will bring higher prices because of bad government decisions they are already conditioning the population to accept, and even to desire, inflation. When inflation begins to occur, which it will because that’s what happens when you increase the money supply as many governments and central banks are doing, the decision makers can stand proud and beat their chests about how successful they are in overcoming inflation. The stupid idiots will be watching and cheering and myself and other smart people like me will be fuming.

So there you have it. Let only fools get fooled.

Peter Solanikow
Peter Solanikow
Peter Solanikow is a tertiary educated and qualified business consultant and options trader based in Melbourne, Australia.
Peter founded A1 Tuition, an education resource provider, in 1997 at the age of 23. Peter has written a number of educational books as well as presented seminars in accounting and economics.
Over time Peter developed an interest in business management and has assisted hundreds of clients from various countries around the world in management, marketing, strategy and finance matters.
Peter travels to Europe annually and has knowledge and experience in business matters relevant mainly to Poland.

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