CB -
I agree, the money supply doesn't have to increase - but when the population increases and/or productivity increases, but the money supply doesn't increase, what happens to prices?...
They go down, including factor prices.
...If the thing you make costs you more to produce than you can sell it for, of course, you can sell it, at a loss, but then you don't have any profit, so either you consume your working capital or you quit producing. Well, after you consume your working capital you have to quit producing.
But you might keep selling for enough to pay the fixed and the variable costs without a profit, or maybe you can sell for enough to pay the fixed costs, just to keep going until things pick up.
And the downward spiral begins. You start consuming the seed corn, as it were, and then you're done.
What you're not allowing for is that that the producers' costs also fall as the purchasing power of money increases ( except for the government policies which maintain the nominal wage level and increase real wages, which you have told me is not all that important).
In deflation, creditors benefit at the expense of debtors whose payments have higher purchasing power, but this is only because the loan terms did not include a hedge against deflation, which it could have if it were thought to have been significant. Presumably, instead of the hedge, the original rates were appropriately lower than they otherwise would have been in the absence of the danger of deflation.
Regards, Don |
