We Are Not Experiencing Consumer-driven Deflation

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We Are Not Experiencing Consumer-driven Deflation“Inflation is the senility of democracies” – Sylvia Townsend Warner

If you ask the average person to define inflation, you invariably get this response: “Rising prices.” Similarly, the same person would likely define deflation as “falling prices.” But both answers are incorrect; in fact they are gross misrepresentations of the words. And this simple but popular misconception is the root of every single economic problem we face today: we are not experiencing consumer-driven deflation.

Rising prices do not cause inflation, nor are they inflation. On the contrary, rising prices are the result of inflation. Specifically – speaking in terms of the entire economy (as differentiated from individual goods and services) — rising prices always result from an increase in (or inflation of) the money supply. This happens through the printing of currency, and/or the manipulation of interest rates by central banks.

Simply put, inflation is always monetary. Likewise, pulling currency out of circulation constitutes the deflation of the money supply. Falling prices are not — in and of themselves — deflationary. Indeed, if prices are falling, but the government is printing more money, then the economic environment is properly described as inflationary.

And so here we are.

You may be unaware of the fact that the authorities controlling the status quo actually prefer you to use the words inflation and deflation incorrectly. This might all seem like mere semantic hair-splitting, but in the grand scheme of things, the significance of these definitions cannot be overstated.

Unfortunately, most people believe we are in a deflationary period– despite the fact that central banks are printing money at the fastest rate in the history of human existence. We are certainly not in a deflationary period – nor have we been for many decades. Ultimately, this will lead to an incalculably rapid rise in prices across the globe. It may not happen tomorrow, or next year, but it is coming.

Think about it: an increase in the supply of currency in the economy makes each unit worth less. Money is just like everything else — it has value, and the laws of supply and demand are every bit as applicable to currencies as they are to everything else. The larger the supply of money, the lower its value.

In the midst of all this misapplied talk of deflation, I keep hearing the argument that prices are dropping because consumers are waiting for bargains; as such, they won’t spend now. In the last twelve months, I have experienced my fair share of specious arguments, fantastical predictions, vapid conclusions, and positively farcical objectives — from all measures of politicians and economists. But this idea that consumers aren’t spending because they are waiting for lower prices is absurd. And the ensuing leap of logic — that consumers are responsible for a so-called “deflationary” environment — is positively imbecilic, for at least two reasons:

First, it is a misapplication of the word deflation — as I pointed out above. Second, while it is true that the average consumer isn’t (and won’t soon be) spending as much as he used to, it isn’t because he is waiting for bargains; it’s because he is out of credit, and he’s unemployed. His house, car, motorcycle, boat, and plasma television have either been repossessed or foreclosed upon.

Consumers are not exactly in the mood for shopping. They are not waiting for bargains. They are waiting for a miracles. And I don’t think they sell those at the mall.

Consumers for the most part do not postpone purchases, even for technology — in which prices routinely and rapidly collapse. This is borne out by the fact that technology embodies some of the fastest growing and profitable sectors in the global economy… and has for decades. Consumers will pay today – even in the face inevitable obsolescence.

We should cling eagerly to the truth: the money supply is not shrinking. And even if the prices of some asset classes are still falling – which is arguable, at best, in real dollar terms — consumers do not postpone purchases in anticipation of lower prices. And consumers are not causing “deflation.”

We are in an inflationary environment; governments are printing exuberantly. This is how they intend to pay for the trillions of dollars they have promised to spend in coming years. But while the rate of printing and easing has accelerated to an unprecedented rate, this is by no means a new story;  The money supply has been increasing for decades.

So again, I point to the laws of supply and demand, and I remind you that the value of dollars is going down, not up. It may not feel like we’re in an inflationary environment, but we are, and even if you don’t perceive it now, you will. You can rest assured, the very nanosecond the Fed suspects the effects of this expanding money supply are causing upward pressure on prices in our economy, it will begin ratcheting interest rates with every means at its disposal.

To lend yet more credence to this theory, we should look at precious metals, agriculture, and oil — which have been rising for the last year. This is not happening because consumers are expecting prices to fall. Commodities are the best predictors of future prices, so it is safe to assume that a large number of market participants are anticipating higher valuations.

The Fed – by way of John Maynard Keynes — is the main instigator of this preposterous idea that we must fight falling prices with everything at our disposal. Lately, they’ve even attacked the long end of the yield curve by buying long-term Treasuries in the open market. Some of you may not understand the implications of this behavior: the Fed can only maintain lower long-term rates by buying Treasuries. And to make those purchases, it must use dollars. Thus, the transition to massive printing and easing…

I have four final questions:

1. If the Fed (attempts to) hold down long-term rates by using printed money to buy Treasuries, will that not cause downward pressure on the value of the currency?

2. Assuming the answer is yes: as the dollar loses value, won’t U.S. creditors be reluctant to loan us more money – or even to hold existing American debt?

3. Assuming again the answer is yes: won’t that necessarily mean rising interest rates?

4. And if the answer is yes again: how, will that keep long-term Treasury rates lower?

Central banks are comprised of a decidedly small number of people, who make decisions that will affect you, your job, your family, and your life for years to come. They are not gods; they are human beings, and their perception of reality is just as subject to error as yours and mine.

If you consider nothing else, please at least think about this: your currencies are more vulnerable than at any other time in history.


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