Daily Archives: March 7, 2009

Deflation: friend or foe?

Our powers-that-be have invoked deflation as a kind of ultimate economic bogeyman.  Prices fall, so people don’t spend, but wait to buy cheaper.  Economy grinds to a halt.

Can we find any evidence to test that theory?  Actually, it’s very easy.  Look anywhere in electronics.  WebThing’s first desktop computer cost about £2000.  About 10 years later, its current replacement was in the region of £200, not to mention more powerful by a yet bigger margin.  Computers have been falling in price for 30 years.  Other electronics, such as phones or home entertainment kit, show similar patterns.

So which electronic industries have been choked by this “deflation”?  Apple?  Nokia?  Sony?  But you don’t need me to list a whole bunch of global giants.

And in recent years, we’ve had lots of other price falls due to globalisation and cheap imports: the rapid rise of Asian countries, most recently China.  Clothes, for example, are cheaper than a few years ago not only because we have Primark, but also in staid and conservative M&S.

The problem they’re scared of isn’t falling prices, it’s falling consumption.  Or in an economy reliant on growth, even static consumption.  So we must consume ever more.  Consumption grows above income, so we have to borrow.  Over time, the borrowing grows into a bubble that can never be repaid, leaving the lenders to take heavy losses.  But we can’t stop borrowing ever more against illusory future income, because then we stop spending, and that’s the bogeyman deflation.

That’s where we are now.  And there’s no way out.

Printing money won’t help: you haven’t added anything to the real economy, you’ve just debased it.  More borrowing won’t help, when the only people who want to borrow are those who’ll never repay.  More lending won’t help in a saturated market.

We have deflation, because a bubble is deflating.  At the same time we have inflation, which the government is desperately trying to raise higher.  And we have the bottom line: even when we’ve push inflation up to 1970s crisis levels (above 20%), we’ll still have the deflation.  Because it’s not, nor ever was, about consumer prices!

Someone should explain biflation to our powers-that-be.