Why Has Deflation Become a Dirty Word?
"Power tends to corrupt and absolute power corrupts absolutely." Lord Acton
The powers that be and their proxies in the media have, for a millennium, fought at the idea of deflating currency. Because, they say, it would cause pandemonium and anarchy. With said parties producing such power against something—should tell you that ‘thing’ is in your best interest. A cursory view of history demonstrates inflation crippling countries.
When the Federal Reserve was created in 1913, the purchasing power of the dollar was $1.00. It now stands at $.04. Put differently, what used to have a price of $1.00 now is $25.00. An accountant who made $10,000 back then, to afford the same lifestyle, must now make $250,000. A hamster on a wheel comes to mind.
When it comes to the economy’s price level and what would make the most difference to Americans in their daily lives, policy makers, experts, and the mass media’s focus is all wrong. Whether intentionally or not, useful idiots parrot problematic policies.
Deflation and how to achieve it needs to enter the national conversation before we end up like Argentina. Let me explain.
What I am about to go over may seem asinine, but as a lawyer and an economist, I follow the facts and interpret the numbers presented. When I first began my journey researching this subject, right after Congress passed the CARES Act, it was difficult to believe what I saw with my own eyes. I have studied this issue for years and even attempted to launch a hedge fund to buy Treasury Inflation Protected Securities (TIPS). I remember predicting inflation would exceed 10%. And being laughed at by a Guggenheim Banker.
My aim is to present the facts, it is up to you to decide for yourself.
With the total U.S. Government debt standing at a staggering $31,458,438,000,000.00 ($31.458 trillion) and the Biden Administration’s every effort to cripple the economy and blow out the deficit; Americans are showered with, allegedly, good news the rate of increase in inflation is coming down month-after-month, and year-after-year. The Consumer Price Index for All Urban Consumers (CPI-U) increasing only 3% in June from a year earlier, we are told, is something to celebrate.
I tend to agree that the increase in the rate of inflation coming down is a “good thing.” I agree with this sentiment as much as I tend to agree with the reality of, the more taxes I pay is a “good thing” because it means I am making more money.
That is, it pays to be an optimist and see the best in situations. But there are better alternatives.
For instance, I would, as I am sure many agree, prefer to keep a lot more of the money that I make. It is painful to never realize almost half of what I make. Especially when I am unable to claim Ukraine as a dependent.
For inflation, it is a decent development the rate of decrease in my purchasing power has slowed down. However, I would prefer that my purchasing power increase.
With almost all things reported by the government and parroted by the mass media, the whole story is never relayed. For that you must do your own research. What is never explained is the actual year-over-year inflation. And it is no shock this information is the devil hidden in the details.
Before we get to why deflation would be a welcome development, let’s first have a brief overview of inflation, how it is calculated, and the devil in the details.
How Inflation Is Calculated
The numbers we hear reported every month only involve the rate of increase (or decrease) in the prices of the goods and services which make up the CPI-U, compared with earlier periods. These statistics are calculated and reported by the Bureau of Labor Statistics (BLS). Dive a little deeper, and it becomes interesting.
The CPI-U is a pegged index. Its peg is the average inflation rate of 1982-1984, where inflation was 3.76% on average. When using a pegged index, 100 is the baseline. To ascertain what inflation is, one takes the number reported, divides it by 100, then multiplies the number by the peg. Thus, a reported price level of 100 means 3.76% (3.76=(100/100)*3.76).
Inflation Data Reported by BLS for June 2023. Found here.
Clearly, with the peg being 3.76%, the Federal Reserve’s goal of 2% inflation already sounds suspect. This information lends credence to my conclusion the Federal Reserve’s goal of 2% inflation, is not an overall inflation rate of 2%. But a 2% increase in the overall inflation rate every year. That is, the goal is not gas prices going from $1.00 to $1.02 year over year.
Curious minds may wonder why we hear reports about inflation “cooling” to 3%, yet what they are paying at the pump is a much larger increase in prices from the year before. What gives?
Looking to the data table above, you can read the inflation index for June 2023 was 305.109. That translates to actual year-over-year inflation being 11.47% (11.47= (305.109/100)*3.76).
Still, one may wonder, how even that number makes sense, when gas prices have increased 65.9% since 2020. That is a conversation for another day. For now, our government has a vested interest in suppressing the actual inflation rate reported by the CPI-U.
Keynesian’s, ‘Modern Monetary Theory’, And The Monetization of Debt
The Federal Reserve, the Halls of Congress, and the West Wing are dominated by economists who adhere to Keynesian Economic Theory and Modern Monetary Theory (MMT). I am still waiting for someone to convince me Keynesians and MMT adherents are two different people. Until then, to me, they are the same. For now, I’ll use both terms for clarity.
Put simply, Keynesians and MMT adherents put the government front and center of economic growth and progress. They believe stimulating aggregate demand, the sum total of spending in the economy on goods and services, is how to stimulate economic growth. Governments stimulate economic growth via issuing new debt, omnibus spending packages, and helicopter money to consumers. They believe that governments can print money without concern.
Nothing could be further from economic reality, or the truth. One only needs to compare the years of Obama to Reagan’s to realize which economic philosophy yields better results. Reagan adhered to a mix of Chicago and Austrian Economic Theory—Milton and Mises.
In short, stimulating the supply side of the economy brings down the general price level of goods and services, thus causing individuals to spend more money. Consumers tend to purchase more goods at lower prices. The more that money is cascaded through the economy, and depending upon its speed, can lead to increases in gross domestic product.
Lower prices, i.e. deflation, are the result of deregulation, lower taxes, innovations leading to increased productivity, among other things, that strengthen the purchasing power of the dollar. This stimulates economic growth.
Furthermore, it increases overall tax revenues for governments. In both real and nominal terms. You would think everyone in the government would implement what leads to more tax money.
Today, however, with our historic debt levels, the government wants inflation. It needs inflation. Inflation monetizes debt. That is, inflation makes the debt cheaper over time, in real dollars. Continual year-over-year inflation of 10% (for round numbers) devalues the debt the government owes by $3 trillion dollars a year.
Monetizing the debt is nothing more than governments printing themselves out of ever-increasing debt, by expanding the money supply and devaluing the debt they owe, paying it back with new, lesser valued, money. There is that hamster on the wheel again.
Ask the Weimar Republic how that went for them.
Deflation Can Be a Good Thing
To this day, I have yet to come across any legitimate arguments that inflation is good for anyone but the government. Though instances and types of inflation differ, any outcome where your dollar purchases less things, cannot reasonably be argued as a net benefit. Doing less with more is both inefficient and ineffective.
For example, a negative supply shock can lead to an increase in the price of goods or services. The resulting price increase is inflationary, as it leads to more dollars being able to purchase less goods. Another type of inflation is caused by the absolute increase in the money supply, i.e., printing money. The Law of Supply and Demand affects currencies no differently than oil.
One instance of inflation is temporary and fixed by free market forces. The other tends to lead to permanent increases in the general price level. Such as we are experiencing today.
Just as there are different instances and causes of inflation, the same is true of deflation. Deflation can be a decrease in the general price level. It can, as well, be an absolute decrease in the money supply. These instances of deflation are not mutually exclusive. The latter of these lead to the Great Depression and has spooked policy makers since.
Both examples of deflation, moreover, increase the real purchasing power of the dollar. It makes the dollar stronger relative to the goods and services it can be used to purchase. If the deflation a nation experiences is caused by a decrease in the general price level, money supply remaining constant, that is not only good for American consumers, but also for the government.
This is because it is not the result of a decrease in the total money supply but is due to an increase in productivity in the underlying economy and living standards within a nation. Being able to do more, with less.
Americans would be able to purchase more things with their dollar; same with government. Freeing up more money for it to pay its debts. This type of deflation is caused by deregulation, lower taxes, increases in employment, free market interest rates, and innovations leading to higher levels of productivity. Somethings our current government seems hostile to.
What policy makers should focus on above all else is deflation defined as a negative average inflation rate. With this, the money supply can increase and the general price level falls. For that, however, Keynesians and socialists embedded within our government would have to cede more power to the people. Something inherently at odds with their world view.
With over thirty trillion in debt, and counting, a sound and strong dollar would force the federal government to be responsible. Don’t hold your breath.