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The Myth of Deflation

Inflation/DeflationWendy Macy put together a good video of Rand Paul and Peter Schiff discussing the myth of our current “deflationary crisis.” As the myth goes, prices for consumer goods and commodities have been falling during this last year of the recession, therefore we have a deflationary crisis.

However, nothing could be further from the truth. While prices have indeed decreased, the expansion of the money supply has increased exponentially. The more money the Federal Reserve prints, the more the value of the dollar decreases, thus goods and commodities increase in price. However, in our current situation, we have a couple of factors playing into why prices have decreased.

First, the increase in money supply has been soaked up by banks. The idea was for banks to use the money to  rid themselves of toxic assets and open up credit to businesses and individuals again. However, the banks have not used the money yet, as the toxic assets are still on their books and credit is still tight. Therefore, the increased amount of money has not fully made into into the market yet.

Another reason for decreased prices is liquidation. Businesses are liquidizing their assets in order to stay in business. As evident by the increasing unemployment numbers, businesses are still finding it hard to stay in business. One way to decrease their costs is to let their employees go. Another way is to reduce the prices of their products to drive up demand.

Eventually, however, the banks will let go of the newly printed money, unleashing a fury of inflation on Americans; 1970’s style. How long the banks continue to hoard the money and keep credit tight is unknown, however, what we do know is that with our government spending and deficit increases in the next couple of years, inflation will strike regardless. The Federal Reserve/Treasury will have to print the differences, thus increasing the money supply to the market immediately.

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1 Comment

  1. […] Posted by Ron Wheeler on November 24, 2009 This video ties into my earlier post, The Myth of Deflation. […]

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