Deflation is good!

I posted this response to a post by Gordon Ludlow about fraction reserve banking.  His original post is worth reading.

[I've made small edits to this version to fix typos.]   I wrote:

You certainly understand the reasoning behind a central bank. The idea is that by printing extra money the central bank will promote "price stability" and this is in fact the charter of the Federal Reserve.

Unfortunately, there is no need for price stability. What would really happen if you planted a potato and then dug up 20 and sold them is that the price of potatoes would go down. The first year, if potatoes were in demand, you might only get $.95 per potato. You'll still make a lot of money but the increased supply of potatoes will probably lower the price - although it's just as possible that potatoes become some kind of fad and you're in the right place at the right time and the price of potatoes goes up!

More likely in the long run is that lots of people will see an opportunity in potato farming and the long term price of potatoes will go down, just as the long term trend of the price of computers is down.

What's wrong with that? Do you want the price of potatoes to go up? Do you want the price of computers to go up? Or even stay the same? No, you want the efficiency of making computers or potatoes to go up which brings the price down and makes the product more affordable for everyone, especially the poor.

Suppose you save the money you make. With enforced monetary inflation, you have to invest or your money will lose value - according to the Federal Reserve, 2-3% a year, which is their inflation target. If you have to invest, you have to take some risk, no matter how small. Why should you have to take a risk just to maintain the value you already earned? Why can't you just keep your money and let it grow in purchasing power as production becomes more efficient? Inflation is a tax on savings and it is particularly brutal to those near retirement age.

Price deflation is portrayed as evil when in fact it is the most honest pricing system there is. Price deflation after a bubble can be brutal - but that's only because of the price inflation that preceded it. The inflation was the problem not the deflation. Deflation is generally good and represents increased efficiency in the economy.

Thanks for the link to my blog, BTW. And thanks for taking the time to think about our economy. It's very important!

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