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The following brand new paper by Joseph T. Salerno breaks up price deflation into four separate categories, distinguished by their causes, and evaluates their impacts.
mises.org
An Austrian Taxonomy of Deflation
Joseph T. Salerno
Lubin School of Business
Pace University
February 2002
Presented at “Boom, Bust, and the Future,” January 19, 2002,
The Mises Institute, Auburn, Alabama
This is a 160K pdf file, quick to download and save to disk using a right-click save operation.
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A somewhat condensed audio MP3 version of the lecture itself is also available for download, BBF03.mp3 under the title -
What the Fed Has Done and Is Doing to Us by Joseph Salerno (Pace University). [Download (28:31)]
at mises.org
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"...An increase in the value of a dollar, and a corresponding
decline in overall dollar prices, may thus proceed either from an expansion of the demand
for or contraction of the supply of money or a combination of both. There are four basic
causes of deflation—two operating on the demand side and two on the supply side of the “money relation.” The economic processes associated with these factors may be
categorized as “growth deflation,” “cash-building deflation,” bank credit deflation,” and
“confiscatory deflation.” I will analyze each in turn below and appraise its effect on
economic efficiency and consumer welfare...."
"...5. CONCLUSION: THE PROSPECT FOR DEFLATION
So what is the prospect for an imminent deflation in the U.S.—for an actual
sustained fall in consumer prices—that so terrifies so many contemporary
macroeconomic analysts and forecasters. The answer derived from our theoretical
analysis of deflation above is practically none...."
"...This brings us to the supply side of the money relation. During 2000, the AMS
aggregate actually contracted by 1.29% after having risen by an annual average rate of
6.47% in the previous three years. After growing by an average of 12% per year in 1998
and 1999, the MZM grew by 8.00% in 2000. There is no doubt that this sudden decline
in monetary growth precipitated the current recession. However, the Fed’s aggressive
rate cutting in 2001 resulted in explosive growth in the money supply in 2001, with AMS
growing by 12.33% and MZM by more than 20%. So any deflationary tendency
proceeding from monetary policy in 2000 has since been swamped by the Fed’s reversion
to a massively expansionary money policy...."
"...Whether our current inflationary recession will continue for another six months to
a year, which appears to be the prevailing consensus, or whether unforeseen events in the
financial arena prolong and deepen it, we will see a hefty rise in consumer prices before it
ends. In other words, an existing or imminent deflation in the U.S. is a chimera conjured
up by those unfamiliar with sound, Austrian monetary theory."
Regards, Don |
