Deflation Explained

In many people’s minds deflation is associated with falling prices for a representative basket of goods. Although this definition is incorrect, for brevity most people continue to call this deflation, which in reality is CPI or Consumer Price Index as reported by US Government. The true definition of deflation is contraction in money supply as represented by M0 through Mn aggregates published by the Federal Reserve, plus credit outstanding (or simply debt). Credit accounts for anywhere between 90 and 95% of total “money” in today’s economy out there. It is also a fact that most of the mass media in today’s world is owned by multinational corporations that also control the politicians in the Government, and so no impartial opinion on the issue of inflation/deflation should be expected to come from the talking heads’ mouths. And then there is the Federal Reserve bank, the FED, that ostentatiously proclaims as its main goal as price stability and inflation targeting.  A critically thinking person will observe, however, the the FED is the only source of inflation in US economy, so it seems it is fighting to maintain price stability with one hand, while issuing massive amounts of money with another. In fact, since the FED was created in 1913, the US dollar lost 96% of its value due to FED’s policy of “price stability”. There is nothing stable in continuously rising prices that erode wages and savings.

The media and the Government officials go on almost daily rounds of spooking us, the docile populace, about the dangers of deflation. Their main argument being that if deflation were allowed to take hold then it would lead to wage/price downward spiral and economic contraction. A typical “warning” about dangers of deflation would run something like this as described in Paul Krugman’s writings on MIT’s website. Krugman coincidentally won Nobel Prize in economics for his gargantuan works in this field. Here is a sample of his brilliant work in his now famous piece CAN DEFLATION BE PREVENTED?:

Deflation, not inflation, is now the greatest concern for the world economy.
Yet here we are, with deflation turning out to be a serious problem after all – and with policymakers finding that it is not as easy either to prevent or to reverse as we all thought.

And so on. If you read the news, you will find unending examples of news with similar verbiage.

Now we need to stop and think, who benefits from inflation and who benefits from deflation and who is concerned almost to point of self-induced panic attack that inflation is not getting any traction. While we don’t know the precise names of individuals in a position of high power of business and finance, we know this one principle of life for sure: If something is good for them they will stop at nothing to making sure it happens and they be the first to reap the benefits of it, which in this case is inflation. That is so because they run ahead of the curve by printing money, then buying up assets on the cheap and then selling it to the public when the prices have risen du to increased supply of funds. That is why it has been the policy of the Federal Reserve since inception to making sure inflation is perpetuated. As it has just been stated the ones that print the money are ahead of the curve, meaning that the rest of us who don’t print money (or extend credit) are behind. And while wages are rising during inflation they are rising behind and slower than the prices, thus making the wage earners and borrowers always find themselves in a position of needing either to work harder and more or borrow more to pay off previous debts. Now that is an exciting economic model, is not it? Not unless you own the printing press.
In short, according to these guys, rising prices that erode your purchasing power is somehow a good thing. You better believe it.
Of course, a sensible individual that has to work for his or her money, rather than printing it, which is an illegal practice called counterfeiting, would shrug from the idea of getting excited from sinking deeper and deeper into poverty.
And here comes deflation to the rescue. Deflation that is properly defined as a contraction in money supply that occurs, for example, when debts and credits that were used to bid up asset prices begin to be defaulted or liquidated. That in turn leads to decrease in CPI through lower prices for production input components, which is what most consumers care about in their daily needs.

If a gallon of gas goes down from $4 to $2 in a matter of months, as it happened in the second half of 2008 in USA, this is a very good thing and every consumer understands it and feels it. This is rational and desired. But not so fast. If you were to listen to the news media propaganda, you are almost committing a heinous crime by buying gas at 50% discount, because according to them that will lead to wage/price downward spiral and the monsters of deflation will eat everybody. Of course, now that we know who produces and benefits from inflation and increasing CPI, we can discern dishonesty when it is heard from commentators and “experts” screaming at the top of their lungs DANGER, DEFLATION, RED ALERT, RUN, HIDE. And to stop deflation they are throwing trillions of both tax payer and printed dollars at the problem not understanding that in an economy that has reached its insane speculative bubble top in almost every asset class the only way is down. Way down, until asset prices get back in line with individuals’ incomes and ability to pay for them.
Ben Bernanke and his buddies don’t understand or don’t care to understand and admit that monetary manipulations will not bring back demand. We are now experiencing a DEMAND DEFLATION in everything. The sub-prime real estate buyers are not coming back to market, and the credit worthy borrowers are not going to get into debt any time soon to support the speculative bubble blowing any longer. We don’t need to “unfreeze lending” if nobody wants to borrow (while assets are depreciating). Mr. Bernanke somehow believes that he can magically circumvent creating economic product, which is always based on labor and goods it produces, by just hitting a button on his computer to add a few zeros to FED’s account in a coup of counterfeiting. This illegal act does not provide employment to anyone except Mr. Bernanke and does not result in any economic product on the other end of this labor intensive operation. His academic theories, being tested on live human beings, will be proven wrong and disastrous soon enough. The prices will go where they naturally want to go. All FED can do is slow the process of decline, not arrest it – and that will only prolong this recession that has all the underpinnings of becoming another Great Depression.

National Deflation Association wholeheartedly and vigorously endorses deflation and the benefits of lower prices that it brings to the common person.

– NDA executive committee.


  1. wones
    Posted September 7, 2009 at 3:37 pm | Permalink

  2. littleblackduck
    Posted February 20, 2010 at 1:54 pm | Permalink

    My dad’s an economist – he’s sent me some articles about how deflation really isn’t a bad thing.
    There was an economist/blogger I was reading a month ago who also posted something along those lines but I can’t remember who know. The gist of it was that unlike what ‘austrian schoolers’ advocate – the worst thing to do would be to bring down the minimum wage in response to deflation and that people’s earning power needs to increase.
    Supply-side ‘economics’ has been exposed as the ideology that it is so TPTB are are whatever it takes to keep up the pretense that it still works and that the solution is more tax cuts to the rich and to corporations (but deficits are bad!).

  3. Posted September 14, 2010 at 12:11 am | Permalink

    Right. Deflation is comming and we will have a Greater Depression which will really take prices down. My mission and I’m sure your is to help as many prepare for it a possible.
    What is you website/blog URL?
    See my article about Obama, “They Talk About Me Like
    A Dog.”

  4. Posted July 25, 2011 at 4:07 am | Permalink

    I have even thought of this subject in the past, yet haven’t reached a answer, Sigh ~

  5. Posted August 8, 2011 at 2:44 pm | Permalink

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