Nonsense On Deflation

We are now hearing ominous warnings about imminent deflation. Checking the welcome page at AOL this morning, I see that the lead item in the financial news section heralds “The Looming Threat of Deflation.” This headline encapsulates two highly problematic ideas. The first is that deflation would necessarily be a bad thing. The second is that deflation is likely to occur in the near-term.

That deflation is always and everywhere a bad thing—not simply a bearer of bad news but bad news in itself—is now an almost universal article of faith among mainstream economists and financial commentators. Clicking on the scary headline, I opened an article by Ted Allrich, who is described as “the founder of The Online Investor and author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night.”

Image source: iStock

Allrich’s article, which does nothing to alter my belief that most investment “experts” are simply charlatans, encapsulates virtually every untutored and fallacious idea you’ve ever encountered in regard to deflation.

As he tells the story, deflation brings on all the horrors in the catalog of economic devastation.

As prices decline, businesses sell less, then go out of business. Fewer goods and services are offered. Less doesn’t become more. It becomes less.

As businesses fold, capital dries up because investors don’t believe any business will make it, no matter what the product or service. Investors hang on to their cash. Hoarding becomes synonymous with survival. Wall Street (what’s left of it) can’t find capital for new companies to grow. Investors won’t invest.…

So with deflation, there is less of everything. Businesses don’t grow. Jobs are fewer. Capital is not available. Everything comes to a slow and grinding halt.

Allrich concludes his litany of deflation horrors, naturally, by singing the praises of inflation: “Regular inflation, in fact, can be a good thing since it suggests an ever growing economy where jobs are plentiful and goods and services abound.”