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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Mike Johnston who wrote (25873)	12/12/2004 5:30:26 PM
From: GraceZ	Read Replies (3) \| Respond to of 306849

Falling prices due to productivity increases are not the same as deflation but falling prices would accompany monetary deflation. As you point out, a stable money supply, while the population increased and productivity rose, would have to be accompanied by a falling general price level... as well as falling wages and non wage employment benefits. In a perfect world, we'd all benefit from falling prices due to productivity increases and we do, to certain extent even with monetary inflation. One reason governments tend to choose mild inflation over mild deflation is to favor those who are trying to accumulate wealth as opposed to those who already hold it. Inflation occurs in countries with governments who attempt wealth redistribution from those who have money to lend to those who borrow it to get ahead. At a high rate, both deflation and inflation have one common property and that is they are both difficult environments to make progress in regards to accumulating wealth. Inflation tends to favor borrowers and deflation tends to favor savers but in both environments the poor have a difficult time getting enough money to pay basic expenses and moving from poor to middle class. The very rich who hold the bulk of wealth have little reason to venture out of the safety of their low yield savings accounts in a deflation (or high yield money market accounts in an inflation) to make a return in either environment, therefore what occurs is a lower level of investment activity in productive assets, those which generate new industry and new jobs. Gains attributed to deflation would occur simply by holding cash assets and would not be taxable. This is one prime reason that governments prefer inflation to deflation. The government in Japan is now trying to figure out a way to tax these deflationary gains after suffering for ten years from their mild deflation (your word to describe 2-3% deflation). A large amount of the capital gains taxes in this country (as well as taxes on interest received) are taxes on gains which are inflationary. Without these taxes on inflationary (imaginary) gains the government wouldn't be able to take as much money from those who have to give to those who don't have. The rich would not be driven to put their money to work in productive assets (with higher risk and higher returns). Plus, they would be forced to contract the government each and every year instead of expand it as they do now. Expanding Socialism requires inflation. If I had to pick my poison, I'd choose an environment with neither deflation nor inflation, one where people on message boards continually argue whether we are in a period of deflation or inflation.