We have heard a lot lately in the media and among the chattering class about the suppossed “risk” of deflation. I suspect that these comments have originated because the government and the financial institutions want to print more money and have low interest rates. Since that tends to produce inflation, the best way to win the war of public opinion is to spread the fear of the “threat” of deflation, and then to tell everyone how much we need a loose monetary policy to fight this dreaded beast of deflation. There is no deflation and I don´t believe that there ever was a threat to deflation. The reality is that the inflation rate (as they more honestly used to measure it) is a about 7.5%, which does not sound like serious deflation territory to me. It sounds like inflation territory. And why is deflation really to bad anyway? Are falling prices the end of the world?
Where is the Deflation?
Friday, November 4, 2011 08:24 AM
By: David Skarica
I am a pretty simple person. Even in my views toward markets and the like, I want things to be pretty simple and straightforward. I see inflation as prices go up and deflation as prices go down. I hate all of the contrived arguments people use to make their arguments work.
For example, in the past five years we have seen gasoline, insurance, education and food prices all go up. Sounds like inflation to me.
About the only thing down is housing prices and that is more of an asset than an input cost. In addition, most people bought at the top or had to default or can’t get access to credit now that the market turned down so they are not even benefitting from lower prices in housing.
Deflationists tell us there is deflation because there is a contraction in credit. Yes and one day, hell will freeze over or pigs will fly.
Sorry, but that contraction in credit argument does not hold water. Right now we are seeing inflation and huge amounts.
In the early 1990s, the federal government decided to change the way they reported inflation. Basically, to make a long story short they decided that food and energy would have less of an impact. This caused the inflation rate to drop. Which helped the government’s budget, as most outlays are linked to inflation.
John Williams of shadowstats.com tracks what the inflation would be if the old method was used. It shows us that inflation would be running near the double digit levels of the 1970s.
We must remember every time there is a financial crisis or downturn the government fights it by printing more money! This is inflationary by nature.
Whenever you hear the word deflation being used, please remember that most of the costs in your life are going up. We are going through highly inflationary times, even if there is a contraction in consumer credit.
About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.