In Defense of Deflation by Philipp Bagus

By Philipp Bagus

This ebook analyses the motives and results of deflation. unlike the common trust that deflation will be damaging to the economic climate as an entire, the writer argues that unfastened marketplace deflation is freeing and invaluable. a number of myths of deflation are uncovered and the explanations for the frequent deflation phobia that serves to justify expansionary financial coverage, i.e., inflation are investigated. historic case reviews, the expansion deflation within the US after the Civil warfare and the financial institution credits deflation in Germany through the nice melancholy are mentioned to demonstrate the issues made within the theoretical research of deflation.

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Because this group views deflation as being good at times, and not at others, they might be called the Good-versus-Bad deflation school. The Good-versus-Bad deflation school, to a certain extent, rehabilitates deflation. Thus, it is argued that a mild deflation would not always be more harmful than a mild inflation (Borio and Filardo 2004, p. 1), an assessment contrary to that of the liquidity trap theorists. 103 One cause is economic growth or positive aggregate supply shocks. There are high profits, asset prices, and rising real wages accompanied by a strong financial sector.

There are additional arguments for price level stability. The industrialist and banker Josiah Stamp (1932, p. 5) argues that price level stability could solve the most pressing social problems (of his time). Warren and Pearson write: “One of the most important problems in all human relationships is the establishment of reliable measures”(1933, p. 150). Regarding the problem of redistribution by price changes, these authors go so far as to state: “The solution of the problem of a stable measure of value will go far in establishing peaceful relations among men” (1933, pp.

Another author in this line of thought is Steven Horwitz. He explains in further detail why decreases in the velocity of money or increases in the demand for money should be counteracted by an increase in the money supply: During the time it takes the price level to fall, firms will find themselves with unintended inventory accumulations, implying that desired saving (holding of gold) is not equal to desired investment. This further implies that increases in the money supply would be warranted in order to bring desired saving and investment back together.

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