The debate over whether deflation is better than inflation is in full speed ahead mode now. There are compelling arguments from both sides of the issue. Most would agree that avoiding hyperinflation is paramount.
That is a tricky game to play however. Kind of like timing the financial markets. How long do you stay with something in the hope of wringing out some more value. Better to leave a little early than a little late.
I put this page together to give you some content to form your own opinion. The page about the reichsmark era provided a historical reminder about hyperinflation as well.
This tumultuous time was caused by several factors, including currency manipulation. War reparations also added fuel to the fire. This is a history lesson that we must learn. We can never allow a repeat of what came out of the despair of that period in time.
Business Weekly posted a story discussing the inflation vs. deflation question. In that article they mentioned a phrase coined by Lucius Cassius. At one time he was a trusted consul in the Roman Empire.
That phrase was "cui bono." Translated it means "As a benefit to whom."
Some economists and business analysts believe that massive national debt will cause prices to collapse along with the money supply. They believe what will follow is loss of jobs as people hold on to any cash they may have and just refuse to spend on anything but essentials.
Peter Schiff is the author of "Crash Proof." We mentioned that book in an earlier page. He has a different view on deflation.
"There is no greater propaganda victory in economics today than the complete vilification of deflation (and the relative acceptance of inflation). As far as economists and politicians are concerned, deflation, which is defined as the overall decline of prices over time, is the economic equivalent of the bubonic plague. At the slightest whiff of deflation, governments will typically enact policies to push prices back up.
But what's wrong with falling prices? Habituated as we have become to steadily rising prices, it would shock just about everyone to know that prices in the United States fell steadily for almost 150 years...from the late 1700s all the way to 1913! But during that time we experienced some of the fastest economic growth in the history of the planet. This was made possible for the precise reasons described in this chapter: increased efficiency. When combined with a stable supply of money (as existed in the United States until the establishment of the Federal Reserve), efficiency will push prices down.
The vastly increased productivity of the industrial revolution made it possible for working-class people to afford all kinds of goods, like upholstered furniture, tailored clothing, plumbing, and wheeled transportation, that were previously available only to the rich. Deflation meant that $100 saved in 1850 could buy many more goods and services in 1880. Why is this not a good thing? While modern grandparents habitually point out how much cheaper stuff was when they were kids, their own grandparents likely told stories to them about how much more expensive things were in their youth."
— Peter Schiff; "How an Economy Grows and Why It Crashes"
This book is featured in our list of new classics, found in the left margin of every page. I have written several times that "How An Economy Grows And Why It Crashes" should be part of every high school curriculum.
Mr Schiff's opinion is in direct contrast to the strategy of Ben Bernanke. He stated often that his goal was to avoid deflation at all costs. He followed the general belief popularized by John Maynard Keynes back around the time of the Great Depression. (Many would argue however, that the depression would have been over much quicker without so much government stimulus. Another debate for another time.)
Mr. Bernanke's successor in the lead chair at the FED is following in those same footsteps. But her actions illuminate the truth more accurately than her words, as is the case most of the time in life.
Despite glowing government statistics about job growth, she has teeter-tottered back and forth between suggesting that she will raise interest rates or perhaps will push for negative rates. Such is the dilemma when trying to manipulate markets. This inaction tells us those federal numbers have been "massaged."
Paul Krugman, a well read economist and author also usually agrees with this Keynesian macroeconomic theory. In part it suggests that the private sector decisions can lead to "inefficient macroeconomic solutions." This requires the central banks to respond with monetary policies to stimulate an economy.
This theory lost most of its steam in the mid 1970s with two new terms that fit the awful economic situation in those years. Stagflation became the term for that time of high interest and slow economic growth along with persistently high unemployment.
That time also brought back the term "Misery Index." If you were around for that period in history, you remember 18% interest rates and just about no growth. The Misery Index was one big reason Jimmy Carter was a one term president. The Misery Index is the average sum of unemployment and inflation.
The Misery Index was actually created around 1965 during the Johnson administration, but the Carter years are most remembered for that index. The link might have been a bit unfair, but history isn't always fair.
In the last ten years or so, the Keynesian theory has come back into the forefront at least as far as central bank policies in most countries.
The other side of the debate argues that constant currency printing and easy money leads to higher inflation. Much higher. If we pose the question, which option favors governments that are deeply in debt; deeper than it may be possible for them to re-pay, then the answer is clear. "Cui bono" suggests inflation is a clear benefit from a government position.
Assuming they control the velocity of money. Usually in history, the money supply outpaces inflation for a while. The problem begins when the money supply line, the inflation line, and the dollar confidence strength line all begin to meet. That is what happened in the Weimar Republic. When the pendulum swung the other way, it went fast and hard.
This may all seem a little confusing to you. Both deflation and inflation seem to have big downfalls. And as history shows us, failure of a central bank to react to the fine, moving line between the two can bring about hyperinflation. So I've included a five minute video that will explain in lay person terms, what is going on and what to be watching for to protect yourself.
As always, personal vigilance and the willingness to seek knowledge are the best safeguards for all of us. Just below is another video presentation from an excellent author. This is a longer segment. Robert Kiyosaki gave you a really good fundamental lesson. This next report by Mike Maloney will give you some very technical insight.
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