Charles Skeen, Re " Is deflation bad "? from this week's Barron's editorial.
Here is the other side of the story from a recent WSJ editorial.
In fact in deflation means getting away from inlated \, valueless dollars into a stonger dollar that preserves a consumers buiyng power and ability to buy, save and invest, it can be very good for the economy and that is the way to go. The Fed should just be carefull not to be too stingy in printing dollars and thus cause a true contraction/recession: they should just print enough dollars to keep gold and a basket of consumer goods prices steady:
Deflation Is Bullish
By David Ranson
10/20/97
The Wall Street Journal
Page A22
(Copyright (c) 1997, Dow Jones & Company, Inc.)
For most of this year producer (or wholesale) prices have been
slowly declining in the U.S. Economists wedded to the Keynesian
belief that low unemployment generates rising prices have reacted
with disbelief, puzzlement and concern. But history suggests that
their expectations -- not the booming economy -- are out of step
with reality. A modest dose of deflation should be no surprise.
Indeed, it should be welcomed.
Sadly, modern economic thinking has been colored by the high
inflation rates of the 1970s, and many observers have come to
doubt that falling prices are consistent with rapid economic
growth. While some prices may fall, they may argue, surely a
broad-based price index will not. But not only is deflation
possible; it was commonplace when currencies were more
directly linked to gold. These misconceptions arise from the myth
that falling prices are always due to a lack of "demand." This
assumption in turn leads investors to see deflation as a harbinger
of economic contraction.
While fear of inflation is the heritage of the 1970s, fear of
deflation was the heritage of the 1930s. Although deflation
certainly preceded and accompanied the Great Depression,
subsequent experience has been quite different. Indeed, during the
past half-century, far from being a sign of contraction, deflation
(measured in terms of producer prices) has been followed by
significantly better economic performance than has inflation.
If, as Milton Friedman contends, inflation is a monetary
phenomenon, deflation is a monetary phenomenon too. Inflation
represents a cheapening currency; deflation , an appreciating
currency. As the population becomes more confident that the
dollar is a safe asset to hold, its purchasing power increases.
This process is most readily evident in the prices of precious
metals. Modern scholars have shown that gold and silver are the
only stores of value whose long-run purchasing power remains
stable across the ages. This stability will far outlive the so-called
demonetization of these metals during the present century.
The precious-metals indicator explains why Federal Reserve
Chairman Alan Greenspan and others who have been expecting
an upsurge of inflation have been wrong. The dollar prices of gold
and silver are down sharply from a year ago. If the prices of gold
and silver go down over time, the dollar's purchasing power must
be on the increase.
Deflation often goes unrecognized because of the reliance placed
on official measures of the general price level that distort the facts.
And outright decline in the consumer price level is unlikely to be
registered because (for well-publicized reasons) government
indexes greatly overstate inflation. But inflation by any measure
has been ebbing even while economists committed to the mistaken
belief that inflation results from "excessive" growth continue to
predict the contrary.
Movements in the price of gold are excellent leading indicators of
changes in the general price level. They also forecast movements
in interest rates. With gold down 15% or more from a year ago,
mild deflation and slowly declining interest rates are in the cards.
Since deflation allows interest rates to fall, it is bullish for bond
markets. Most investors recognize this, but very few of them
understand that deflation is also bullish for stock markets and
economic growth. It is a common assumption, but an illogical one,
that if deflation is good for bonds, it must be bad for stocks and
the economy.
On four other occasions since 1954 the U.S. producer price
index fell from one year to the next: 1961, 1963, 1985 and 1986.
There have been other periods during which it hardly moved at all.
Although the years of actual deflation have been few, they
provide enough information to explore the financial consequences.
Each was followed a year later by excellent stock market
performance (an average rise of 18%) and an acceleration in
economic growth (an average of 2.8 percentage points in terms of
industrial production).
Other statistical tests further confirm these results: The greatest
improvement in economic performance and the best stock market
performance follow periods of deflation in the PPI. As would be
expected, the reverse is true following periods of high inflation.
Evidence from abroad corroborates the U.S. experience. There
have also been occasional episodes of deflation in Germany and
Japan in the past 50 years. During and immediately after these
brief periods, economic performance improved in these countries
as well.
My purpose is not to advocate deflation as an economic policy.
Any unanticipated change in the price level is an economic friction,
because it capriciously redistributes wealth among borrowers and
lenders. But if completely stable prices are an unattainable ideal, a
modest dose of deflation is better than any amount of inflation.
---
Mr. Ranson is president of H.C. Wainwright & Co. Economics,
an investment research firm in Boston. |
