The exaggerated threat of deflation

Some commentators are warning of a possible deflation in the American economy in the coming year.

Before I continue, please take slightly less than nine minutes to watch this video:

It is hard to be precise about the effects of deflation because it very rarely occurs.  In fact, I am not sure that Britain has ever experienced deflation - or at least not across the whole economy.

Let me repeat what I said in an earlier post:

Inflation is a trend rise in prices over a period of time, and also the decline in the value of money over the same period of time ... It is impossible to calculate the rate of inflation exactly, as we have to make assumptions which are not necessarily correct.

Likewise, deflation is a trend fall in prices over a period of time, and also the increase in the value of money over the same period of time.  It is impossible to calculate the rate of deflation exactly, as we have to make assumptions which are not necessarily correct.

Deflation in the USA has been linked to high levels of unemployment, but periods of inflation in many countries have been linked to economic misery.

The belief that deflation discourages people from buying is at best an exaggeration.  As it happens we can see deflation at work in some sectors of the economy, and it certainly does not discourage people from spending their money.  The latest computer game might cost thirty pounds on the day of its release, fifteen pounds six months later, and six pounds two years down the line - and yet sales are almost certainly going to be highest when it costs the most.

Many economists seem to think that inflation does not matter much if it is at a very low level, and yet we are expected to believe that deflation would be a disaster even at a very modest level.

The argument that deflation harms people with mortgages seems also to be at best an exaggeration.  The amount you repay on a mortgage fluctuates with the level of interest rates, and salaries do not always rise over time.  In addition, it is easy to envisage a scenario in which inflation can harm people with mortgages.

I currently believe that the doomsayers who warn about the dangers of deflation are for the most part people who know that it is no more of a danger than inflation, but who are obsessed with inflation.  When inflation is low - and it ought to be zero - they invent a danger of deflation so as to make us believe that we should overlook the dangers of inflation.

Money should neither rise nor fall in value.  It should remain stable at all times.  The doomsayers are therefore half right.  We do not want deflation, but neither do we want inflation.

This link lists some of my previous posts about the economy.