by Gerard Emershaw
Federal Reserve Chair Janet
Yellen has said
that the United States
economy is still in need of stimulus because unemployment and inflation are
well short of the Federal Reserve’s goals. Yellen claims that the inflation
rate is below the Federal Reserve’s target of 2%.
Inflation hurts the average
American consumer. The prices of goods and services became more expensive. The
Federal Reserve’s “printing” of money has destroyed the value of the dollar
over the decades, eroding up to 95% of its purchasing power. Why is this a good
thing? Even if it is a good thing, is it true that there is virtually no
inflation? The Federal Reserve uses the Bureau of Labor Statistics’ Core CPI
(Consumer Price Index) as its measurement of inflation. The Core CPI
does not include prices of food and fuel. Without taking these important
economic factors into account, how can anyone be sure what the inflation level
is? If the rate of inflation were to be measured in the same way that it was
calculated in 1990 before the federal government began hiding the true
inflation rate, it would be 5% and
not under 2%.
The Federal Reserve and the
federal government in general are fans of inflation. Deflation is what they
fear and dread. The worst thing that they can imagine is that the prices of
goods and services should fall. Imagine the horror if all of a sudden the
dollar could buy more. Imagine the evils that would arise if suddenly
struggling American families could put more food on the table for the same
amount of money. Nearly 15% of Americans are food
insecure—including approximately 25% of black and Hispanic households.
Imagine the apocalypse that would arise if the working poor could afford more
food and worry less about their families being food insecure. The horror! The
horror!
Deflation is bad. Or at least
that’s what the Federal Reserve, the federal government, and economists like
Paul Krugman tell us. Paul Krugman is a genius. At least that is what he and
the left-wing media constantly tell us. Paul Krugman is such an enlightened
Keynesian that he believes the magic bullet to save the economy is an alien
invasion: “If we discovered that space aliens were planning to attack, and
we needed a massive build-up to counter the space alien threat, and inflation
and budget deficits took secondary place to that, this slump would be over in
18 months.” Given that Mr. Krugman has apparently read the graphic novel Watchmen or perhaps has watched a few
too many “Twilight Zone” episodes, of course he knows what he is talking about.
Mr. Krugman believes that
deflation is bad:
So first of all:
when people expect falling prices, they become less willing to spend, and in
particular less willing to borrow. After all, when prices are falling, just
sitting on cash becomes an investment with a positive real yield– Japanese
bank deposits are a really good deal compared with those in America—and
anyone considering borrowing, even for a productive investment, has to take
account of the fact that the loan will have to repaid in dollars that are worth
more than the dollars you borrowed. If the economy is doing well, all this can
be offset by just keeping interest rates low; but if the economy isn’t doing
well, even a zero rate may not be low enough to achieve full employment.
And when that
happens, the economy may stay depressed because people expect deflation, and
deflation may continue because the economy remains depressed. That’s the
deflationary trap we keep worrying about.
He must be right. After all, The
New York Times believes that Paul Krugman is a genius, so he must be. Plus,
he came up with that brilliant idea to spend money to build up arms to defend
against imaginary little green men. That idea is even more brilliant than
Keynes’ idea to save the economy by paying workers to dig holes and then fill
them in again. Given that Krugman is correct, it is true that American
consumers have not bought laptops and tablets, flat screen TVs, or smartphones.
These high-tech items have been getting both better and less expensive.
Therefore, it is the case that most Americans are still using their Commodore
64s, still watching their black and white console televisions with rabbit ears,
and still communicating with soup cans connected by strings. Since they know
such high-tech goods will drop in price, they will defer such purchases.
Perhaps indefinitely. Wait. These items are popular? Actually, they are
becoming rather ubiquitous. Given that Krugman is such a genius and must be
correct, it would be folly for a retail chain like Walmart to advertise a
policy of falling prices. If widgets are advertised by Walmart as having
“falling prices,” then consumers will put off buying widgets. After all,
they’ll be cheaper tomorrow. So, of course, Walmart must be nearing bankruptcy
since consumers will not spend money if they even suspect prices may be lower
tomorrow. Somehow, Walmart earned $17 billion in profits
in 2013.
It appears that Americans will spend money even if prices are falling.
In general, the American consumer will nearly always spend money—whether he or
she has it or not. If anything, lower prices will likely cause them to spend
even more money than they normally do. After all, many Americans have the bad
habit of buying things not because they need them, but simply because they are
on sale. If anything, deflation would increase demand and increase spending.
Krugman also believes that deflation is bad because it increases the
burden of debtors:
A second effect:
even aside from expectations of future deflation, falling prices worsen the
position of debtors, by increasing the real burden of their debts. Now, you
might think this is a zero-sum affair, since creditors experience a
corresponding gain. But as Irving Fisher pointed out long ago, debtors are
likely to be forced to cut their spending when their debt burden rises, while
creditors aren’t likely to increase their spending by the same amount. So
deflation exerts a depressing effect on spending by raising debt burdens –
which, as Fisher also points out, can lead to another kind of vicious circle,
in which depressed spending because of rising real debt leads to further
deflation.
Out of control spiraling deflation would certainly not be a good
thing. That would cause debtors to be unable to service their debts, and this
would lead to massive bankruptcies. However, nobody is talking about that. If
one assumes that all deflation is dangerous deflation of this kind, then in
fairness, one must also assume that all inflation is Weimer
Republic wheelbarrow
hyperinflation. With mild deflation, the increase in real debt of debtors will
be offset in good part by the fact that the debtors will be able to purchase
more with their money. This will allow them to have more money to apply to their
debts since they need to spend less on goods and services. Mild deflation will
also encourage investments of all sorts. Those who do defer spending are likely
to invest their money—even if that investment is as simple as placing money in
an interest bearing bank account. Some will win and some will lose in the end.
But that is always the case. Some debtors will be burdened. However, creditors
will earn more money and will have more money to spend and invest. Some of
those lucky creditors may even be Kurgan’s
alien friends.
Finally, Krugman worries about falling wages. This was a constant
worry during the Great Depression. And in fact, it was President Herbert Hoover
and President Franklin D. Roosevelt’s unwillingness to allow wages to drop
along with prices that exacerbated the Great Depression. According to Krugman:
Finally, in a
deflationary economy, wages as well as prices often have to fall—and it’s a
fact of life that it’s very hard to cut nominal wages—there’s downward nominal
wage rigidity. What this means is that in general economies don’t manage to
have falling wages unless they also have mass unemployment, so that workers are
desperate enough to accept those wage declines.
This assumes that the economy will be more or less stagnant. However,
regular mild deflation will likely spur the economy as consumers have more
money to spend and invest. Wage levels are always in great part affected by
unemployment levels. When the economy has high levels of unemployment, wages
will drop as there are more workers willing to do the job for less. However, at
times of near “full employment,” wages inevitably rise because workers who can
fill job openings become more scarce. Therefore, deflation is unlikely to harm
workers. Any drop in wages will be offset by a drop in prices. As employers’
dollars have more buying power, it is also likely than many of them will hire
additional workers. This falling wage fear is a delusional relic of the Progressive
Era.
Why do the Federal Reserve, the federal government, and statist
economists like Paul Krugman actually favor inflation? The answer is simple.
Inflation allows the government to play its economic shell games. It allows the
federal government to “tax” the people through the mechanism of the Federal
Reserve. It allows the federal government to spend money on its welfare/warfare
empire without actually having to openly raise taxes. Inflation makes banksters
like those behind the Federal Reserve even wealthier by redistributing money
from American citizens to the banks and their cronies. In the long run, as
Keynes said, we are all dead. But in the slightly shorter run, inflation makes
more citizens dependent on the state by draining the value of their dollars.
This means that more Americans will rely on government largesse, and as a
result, more Americans will be loyal. As this happens, fewer will protest
against unconstitutional wars of aggression, mass illegal domestic
surveillance, or any other type of tyranny. Inflation enslaves the people. All
statists ultimately love that idea.