When It Comes to Deflation, You Are Walking Into a Trap
February 22, 2010
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There is a buzz going through the Interwebs. Deflation is back, they say. The core CPI numbers declined for the first time since 1982, down 0.1%
I'm going to discuss 5 topics today so let's dive right in.
1 Why Deflationists are always wrong.
2. Why deflation, in normal circumstances, is a great thing.
3. Why the CPI is a useless statistic
4. A realistic assessment of current price levels
5. Why the Federal Reserve wants you to worry your poor little head about a 0.1% drop in price.
Why Deflationists are always wrong
Accoriding to deflationists, falling prices are right around the corner. The inflationists, on the other hand, predict rising prices but often say that the rise may not come for some time. You won't hear a deflationist (outside of alstry perhaps) predicting prices falling by massive amounts. They can't tell you how long it will last or how severe it will be. You never hear the term "mass deflation."
Inflation is persistent rising prices. Deflation is persistent falling prices. The key word is "persistent." A temporary 0.1% drop in the core CPI (if that even mattered) doesn't qualify as deflation.
Don't think this is a new debate. It is a very old one. The deflationists have been wrong every year since 1955. The rise of central banking around the globe effectively destroyed deflation (persistent falling prices.) This is bad for consumers and workers but great for big governments and big businesses. The Left often bemoans the rise of big business but never sees the connection between inflation and their growth. They are fools. The Right often bemoans the rise of big government but can't see the connection between inflation and their growth. They are also fools.
Courtesy of Austrian School economist/investor Gary North, here are 10 questions to ask any Deflationist. Check the answers you get and decide for yourself. A good idea would be to bookmark this article for future reference the next time a government official, hack economist, or blogger tries to warn you about deflation.
Why deflation, in normal circumstances, is a great thing.
America suffered from persistent falling prices from the late 1700's until 1914 when the Federal Reserve opened for business. These falling prices were only temporarily interrupted when the government or the Bank of the United States created new money, usually to pay for war. The result was always inflation. Once fiscal sanity resumed, a recession followed. They were all brief. Speculation during these inflationary periods resulted in a boom that led to a bust. The markets were allowed to correct themsleves and they always did, quickly. Anyone who tells you otherwise hasn't read a history book. Case in point, most Leftists and mercantilist Republicans believe the 1870s was a "Long Depression." They believe this because economically ignorant history teachers point to persistent price deflation during the decade. However, price deflation caused by an increase in prodution is a good thing and it turns out the 1870s are among the longest and largest periods of persistent economic growth in American history.
Capitalism works best when left alone. An increase in capital investment leads to a higher productivity of labor. More machines means more production. More production means more goods made. More goods chasing a stable amount of dollars means persistent falling prices. This is good. Your dollar now buys more stuff. Your standard of living has gone up. This is how America became the most powerful nation on Earth. Mild deflation is a wonderful thing.
Even panic stricken mass deflation caused by the popping of an inflationary bubble is bad only for those who have leveraged themselves too much during the boom. The quick fall in prices clears out the fools that stretched themselves too thin. In their place, people like me, those who saved and avoided taking on debt like Twilight fans avoid sunlight, prosper. We can buy assets cheap and put those economic fools in their rightful places, i.e. working for a living.
But since those fools have friends in high places, the same places where the money machine is being worked over like Martin Brodeur in last night's USA vs. Canada hockey game, they get bailed out. If the fools who prospered during the boom fail, the big boys on Capitol Hill fail as well. They are mutually invested. This is why no one goes to jail despite the obvious fraud and theft.
Deflation, indeed, is liberty.
Why the CPI is a useless statistic
The original intent of the CPI was just fine. They wanted to measure price changes on a year to year basis. A steak in 2010 should be measured against a steak in 2009. But then, as always, a good idea in the hands of government bureaucrats and economists becomes a political tool.
Why measure a steak versus a steak, says the crank, when we can measure a hamburger this year against a steak last year?
Huh?
Well, let me explain, simple minded fool, as you are not familiar with my algorithms and fancy graphs. If prices rise, a subsitution effect will take place. The man who could buy the steak in 2009 can't afford it anymore. What use is it to study those costs today? Let's assume he buys a hamburger instead and measure the difference.
Why not do this? To begin with, it ruins the whole point of the CPI. The point was to measure price changes of useful goods demanded by society not to speculate about what they might purchase instead. Second, sure he might buy a hamburger, but he might also restrict himself to peanut butter and jelly. This tells us nothing except that you are a crackpot.
As bad as this idea was, excluding items where prices are going up was even worse. The crackpot economist says, "housing, energy, and food costs are always seem to be rising. It's not fair. It makes us look bad. Let's just take them out." They are always rising for a reason, mainly because those are the areas where people spend the most of your inflated money.
The CPI is worthless. Arguing over the significance of CPI numbers is like watching disabled kids try to hump a doorknob: somewhat amusing, mostly tragic.
A realistic assessment of current price levels
What if you knew the truth? What if you found out that inflation is currently running at about 9.8%? Would you believe it? I guess that depends on whether or not you go to the grocery store very much. If you do, then you know the government economists are full of baloney. If you are single and surviving on take out food, you probably believe the CPI.
John Williams started Shadow Stats about 30 years. He was asked by businessmen to look beyond the faulty government statistics and give a realistic assessment of the macroeconomic picture. The government economists do not like John Williams. He uses a few different measurements, including the original CPI before the crackpots started tinkering with it plus a couple of experimental measurements. He estimates that inflation is running at about 9.8%, not negative 0.1%.
"Adjusted to pre-Clinton (1990) methodology, annual CPI eased to roughly 6.0% growth in January from to 6.1% in December, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.8% (9.76% for those using the extra digit) in January, versus 9.7% in December."
Why the Federal Reserve wants you to worry your poor little head about a 0.1% drop in price.
It's not enough for the Fed and its buddies to convince you that we are in a deflationary period. They know that falling prices are good for consumers. No one is going to revolt if the price of milk goes down. They need to do more than that. They need to scare the crap out of you. They need to worry you about deflation. That way, they can justify another round of Quantitative Easing (read: theft), more inflation, a bigger government and bigger big business. That want you to welcome this. That is their goal.
"The increasing use of scientific jargon has permitted the State's intellectuals to weave obscurantist apologia for State rule that would have only met with derision by the populace of a simpler age. A robber who justified his theft by saying that he really helped his victims, by his spending giving a boost to retail trade, would find few converts; but when this theory is clothed in Keynesian equations and impressive references to the "multiplier effect," it unfortunately carries more conviction. And so the assault on common sense proceeds, each age performing the task in its own ways." - Murray Rothbard, Egalitarianism As a Revolt Against Nature, Essay: Anatomy of the State
You are being duped.
David in Qatar
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