Friday, December 19, 2008

Why Deflation Can Be So Bad

Yes, deflation gives Ben Bernanke nightmares. Wondering why? Here's a nice video from ABC News which clears things up a bit:

ABC News: Dissecting Deflation (2008-12-17)

Also, central banks tend to feel much more comfortable fighting inflation as opposed to fighting deflation. Inflation can be choked off, the theory goes, because the money supply can always be reigned in. (The timing of such measures, of course, is the tricky part.)

Deflation, on the other hand, is nastier. Once the mindset of "Don't buy today; prices will be lower next week" sets in, the velocity of money grinds to a halt, and it's uber-difficult to reverse. Sure, a central bank can force piles of money and credit into the system. But making certain that the liquidity gets loaned out (by nervous banks) or spent (by debt-burdened consumers) is a task not yet perfected by any central-banking entity in any era. Recent news gives numerous examples of just this quandary.

This vicious circle of "delayed buying" is just one reason why the Fed has vowed to throw all its force behind battling deflation. The fact that debt (our economy's lifeblood, sadly enough) becomes more and more burdensome in a deflationary environment is another.

For more info on economic topics like this, I highly recommend Naked Economics, by Charles Wheelan. It's a really fantastic read for up-and-coming Money Dorks!


— Posted by Michael @ 9:48 AM


While I have enjoyed and agreed with most blogs you have written, your Pro-Keynesian video just doesn't do it for me.

The problem with the Keynes deflation meddling is that the government must do something to "prop" up prices, which in turns prolongs the agony that WE all must go through.

The reason prices are deflating is because they have been inflated so much for so long, let them come down, let some people "temporarily" lose jobs. And let the free market work.

Sure lets keep it up so we can prolong this depression for 10 or 20 years. Since we didn't learn the first time, we are doomed to repeat our mistakes.

If we had free markets at work, we would have maybe 1 year of deflation, unemployment, etc. Prices would stabilize rapidly as they are trying to do now, we then will start getting back to work, what's going to happen now is all this "liquidity" that banks don't want to dole out will build up until we hit the bottom, then they will flow like water, we will get inflation---->hyperinflation, the dollar will be even more worthless than before.

Hold on to your horse, we are in for a wild ride.

Me--I'm looking for a new truck. They are a bargin which I don't think will last long. So I'm buying in this market.

Happy New Year.

Michael Sparks


Uhh ... where in my writing do you get anything "pro-Keynesian?"

Mises had it right. There is no escaping the final collapse of an unbridled credit bubble.


It's not you, I agree with your stuff, it's the video.

Maybe the video would should have shown that price had come down to a "normal" level so that people would start buying again, and the fact that all the prices before were created in a bubble that was cause by easy credit caused by the FED.

Anything from the major networks will be pro-keynesian that's all.

I think you have the idea.

BTW, just bought a new truck for work. $10,000 off MSRP, don't think we are in for inflation? Well I do, I don't think we will see these prices again. Also re-financed the house at 5.25.

I'm now waiting for inflation to kick in so I can see my silver at 5 times what I paid for it.


Okay. Fair enough. You can call me a lot of things, but "pro-Keynesian" ain't one of 'em. :)

The way I see it, one way or another, "cheap 'n' easy credit" and/or the lack of it will be the death of our system.


I like your post and would have to agree with you. Deflation is a nasty cycle. I like your insight.

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