Newspapers around the world are all decrying a “terrible and grave risk”. The world is supposedly descending into the abyss known as DEFLATION. Governments in all major economies are using the fear of deflation as the primary reason to create a whole lot of money for themselves and wealthy banks.
But really, is deflation a risk for the world right now?
When economists talk about the risk of deflation, they are referring to the opposite of price inflation. If inflation refers to average prices increasing, then deflation refers to average prices falling. The argument goes that as prices fall, people withhold spending so that they can pay cheaper prices later. This results in demand collapsing. Stores need to reduce prices even further to attract customers, causing a downward spiral for the economy.
This argument is in fact quite misleading. In reality, if average prices in the stores were to fall, the purchasing power of the money you have would increase. You would be able to buy more goods and services, not less. In reality, true price deflation is great news. For instance, when fuel prices fall – you have more money in your pocket to buy things you wouldn’t normally be able to afford. Everyone celebrates cheaper prices. Even businesses celebrate cheaper input prices. The idea that cheaper prices are really bad for an economy is simply not true. Russell recently wrote an excellent article expanding on why deflation is really good.
The problem comes in with the semantics of words. People hear the word deflation and associate it with contraction – a contracting economy, or a falling money supply, or lower business confidence. A contracting economy can cause great pain. The same goes with falling money supply or reduced business confidence.
The reality is that the world we live in is crushing under the weight of debt at every level of society. Overbearing debts are the problem in global markets – these massive debts are suppressing consumer demand, causing the economy to contract, money supply to shrink, and banks to strain under severe default pressure. The fundamental problem here is excessive debt. Deflation – falling prices – is definitely not the problem.
I’ve just returned back from honeymoon having been married to my lovely wife for just over three months. During that time, I popped onto facebook and saw a post that has lingered with me… It is of one housewife bemoaning the increasing prices of food – followed by the responses of all her friends. Every single one of them is struggling to make ends meet with inflation. This paints a far more realistic story than what most economists are feeding us. Far from deflation being a problem, real inflation is a major risk right now.
No hint of deflation anywhere there. Only increased prices relentlessly eroding people’s ability to buy things. Subtly making them a lot poorer than they were before. At the same time, governments around the world are using the deflation fallacy to justify creating money for themselves, which only causes prices to rise further. The tragedy is that the people who lose out are ordinary folks like you and me.
Think about the monthly cost of your own groceries. How much have food prices increased for you? Is your grocery bill escalating anywhere near the stated government inflation rates? Average prices for the man on the street are going up and making ordinary people poorer.
The best people to assess whether prices are rising are individuals who buy things in the stores. We have a twitter campaign about the real effect of rising prices on people living on the ground. Tell us how prices have affected you – are they rising, or falling? Use the hashtag #GetRealinflation – let us hear your story.
Book Launch: We have just launched our book, When Money Destroys Nations on Amazon in the US and in the UK. In addition, we have had great feedback from the recent Peak Prosperity interview, as well as our interview with Robert Kiyosaki author of Rich Dad Poor Dad.