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Source link: http://archive.mises.org/8796/deflation-and-liberty/

Deflation and Liberty

October 17, 2008 by

A monograph by Jorg Guido Hulsmann entitled Deflation and Liberty will be available from the Mises Institute next week, but, given the urgency of its topic and message, we have decided to release it as a PDF early.

Deflation is not inherently bad, and that it is therefore far from being obvious that a wise monetary policy should seek to prevent it, or dampen its effects, at any price. Deflation creates a great number of losers, and many of these losers are perfectly innocent people who have just not been wise enough to anticipate the event. But deflation also creates many winners, and it also punishes many “political entrepreneurs” who had thrived on their intimate connections to those who control the production of fiat money.

Deflation puts a break–at the very least a temporary break–on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch. It dampens the growth of the welfare state, if it does not lead to its outright implosion. In short, deflation is at least potentially a great liberating force. It not only brings the inflated monetary system back to rock bottom, it brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers.


Dennis October 17, 2008 at 9:44 am

On a related note, will Professor Hülsmann’s “The Ethics of Money Production” be published shortly?

jdavidb October 17, 2008 at 9:48 am

I may be wrong, but shouldn’t “puts a break on” be “puts a brake on”?

Dick Fox October 17, 2008 at 1:49 pm

Deflation creates a great number of losers, and many of these losers are perfectly innocent people [My emphasis] who have just not been wise enough to anticipate the event. But deflation also creates many winners, and it also punishes many “political entrepreneurs” who had thrived on their intimate connections to those who control the production of fiat money.

I think I am going to be sick. Mises is spinning in his grave in tears that such a stupid statement would be trumpeted by an institution claiming his name.

Not only is there the implication that deflation is a decrease in prices rather than an appreciation in the exchange value of money, but the fact that deflation is destructive is justified because “it … punishes many ‘political entrepreneurs’ who had thrived on their intimate connections to those who control the production of fiat money.”

The reasoning here is that it is okay for some innocent to die if we can punish people we don’t like.

It is such foolishness as this that keeps me from supporting an institution that honors a man I consider the greatest economists of all time.

AB October 17, 2008 at 5:42 pm


“Not only is there the implication that deflation is a decrease in prices rather than an appreciation in the exchange value of money…”

Any exchange requires two goods or services, and the price between them cannot be independent of either of them. Thus, in a monetary exchange, the “appreciation in the exchange value of money for X” can also be described as “the depreciation of the exchange value of X for money.” We may often think of deflation in terms of our present fiat money standard, where money supply contraction after an inflation tends to lower prices overall, as fewer dollars are available to bid on the same number of goods and services, and thus the exchange value of each dollar appreciates. However, this is not the only possible case of deflation. Even in a 100% commodity based money standard with no fractional reserve banking, the “exchange value of money” is subject to forces of supply and demand like any other price. Say, for example, people on average begin keeping more of their income as savings in demand deposit accounts (and thus cannot be lent out to other actors in the economy.) Their demand for other goods and services has gone down and their demand for holding the money commodity has gone up. The exchange value of the money still in circulation would on average go up for the same number of goods and services available, and overall prices of those goods and services would fall. As the exchange value of the money rises, it eventually becomes economical to increase production of the money commodity, or for competing money commodities to be more widely used, thus keeping price level movements moderate as the free market will adapt to changes in supply and demand. Conversely, if people’s demand to hold money falls and they begin spending the accumulated savings, you will see a rise in the overall price level. As prices for individual goods and services go up, increasing production of those goods and services generally becomes more economical and the prices will stabilize as entrepreneurs meet the increased consumer demand for goods and services.

“but the fact that deflation is destructive is justified because “it … punishes many ‘political entrepreneurs’ who had thrived on their intimate connections to those who control the production of fiat money.”

The reasoning here is that it is okay for some innocent to die if we can punish people we don’t like.”

Understanding that the exchange value of money, whether it was created by fiat, or became a money commodity through the free market, is dynamic in nature – i.e the price will fluctuate according to supply and demand like any other price will – it then follows that like any other entrepreneur who projects incorrectly the future demand for his good, there will be people that “lose” when the exchange value of the money goes up. Generally net debtors will be among the “losers” in this case, and net savers will tend to be “winners”. The opposite tends to be true as the exchange value of money goes down. In the case of a governmentally controlled fiat currency, those “political entrepreneurs” who have benefited from money creation will also see their financial advantage diminish. That this is the case does not “justify” anyone else’s loss; it is simply a statement of coincident result. That some “losers” are “innocent” is an acknowledgment that not everyone that benefits from inflation and conversely suffers from deflation is deceitful or malicious. Observing that honest people can suffer consequences from errors in anticipating future monetary conditions (perhaps even influenced by the actions of the central bank) is akin to observing that good people can make bad investment decisions, or good people can be terrible entrepreneurs. Markets give feedback on decision making through profits and losses, without regard to one’s “innocence” or “guilt.” That deflation tends to punish “political entrepreneurs” is certainly a benefit in the view of those who advocate peaceful free markets, as it discourages those people who would use force for personal gain. There is nothing spiteful or sacrificial in noting this effect.

Fred October 17, 2008 at 5:48 pm

Are the victims of inflation guilty?

andy October 17, 2008 at 11:57 pm

When do we get the books with some practical use?

Chad Rushing October 18, 2008 at 12:58 am

Great response, AB! I found it very even-handed and informative. Thanks for posting it!

Moral of the Story: You definitely do not want to be deep in debt — like nearly every single individual, business, and governing body in the USA — when monetary deflation kicks in.

I do not know if this is brought up often, but one interesting side effect of steady, ongoing deflation would be that starting salaries for careers would actually decrease over time as the purchasing power of money increased, all other things being equal. In other words, even if one never got an explicit raise in the dollar amount of their salary from the time they were hired, they would receive an implicit yearly raise through the appreciation of the money they were paid.

As it is now, people think they are doing great to get a 5-7% yearly raise (for example) when the monetary inflation rate might actually be 10% (or more), meaning that they still suffer a net loss in purchasing power year after year without even realizing they are being fleeced by the economic powers that be. Now, that is downright devious.

I often hear of individuals who have worked for years receiving a “market adjustment” raise which actually only brings the dollar amount of their salary up to the dollar amount of starting salaries for newhires. In other words, their real purchasing power has not gone up one bit since they were hired despite their years of experience on the job.

fundamentalist October 18, 2008 at 9:39 am

Good responses! Like others, I wonder why people don’t consider the victims of inflation. Are victims of deflation the only worthy victims?

Jim October 18, 2008 at 12:18 pm

I’ve long wondered why we don’t fix the money supply and walk away. One of the great benefits would be the very tangible measure of the growth in our wealth. Rather than “economists” using fancy (and convenient) econometrics and subjective comparisons, the average person would very clearly see the benefit he received from the progress of the wealth of society which he did little to contribute too. We could look 10, 20, 100 years in the past and clearly measure the growth in our wealth and standard of living. The only argument I have heard for not doing this is that “people like raises in wages and with deflation you would have people taking pay cuts. That would be unpopular.” The ridiculousness of this logic barely deserves comment, but needless to say this sounds a little too much like “people are dumb and they need smarter people like us to take care of them.”

DS October 19, 2008 at 9:29 am

A productive economy should produce a mild, predictable, beneficial rate of price deflation in an environment where monetary inflation is zero. This causes the value of the currency to increase. The rate of price deflation should be roughly the rate of productivity gains.

In the short run this situation will benefit savers and punish spenders. It will also punish borrowers and benefit lenders – but that is only to the extent that the deflation was unanticipated. The reverse happens in an unexpected inflation. When the deflation is predictable and expected (the same case for inflation) interest rates go down (or up in the case of inflation).

By viewing this simplistic set of rules it is easy to come to the conclusion that borrowers should want inflation and lenders should want deflation – but this is not true. Deflation tends to lead people to borrow less money since savings is a much more profitable way to fund purchases and investments – and savings grow in value without putting them at risk in stocks or other investments. Banks want inflation because it increases borrowing (the only way they make money), no borrowing, no income.

In fact it has been theorized that the banks pushed for the creation of the Fed and the resulting constant inflation because during the deflationary growth period of the late 1800′s and early 1900′s businesses were moving almost towards financing their businesses out of their own ratained earnings and bypassing banks entirely. Standard Oil was financed this way and had so much left over that it got into the banking business because it had no other good use for its cash.

Dick Fox October 19, 2008 at 10:16 am


Your response still does not justify saying that deflation is good for us.

Let’s look at the excerpt I posted with a slight alteration and perhaps it will make my point.

Deflation (Inflation) creates a great number of losers, and many of these losers are perfectly innocent people who have just not been wise enough to anticipate the event. But deflation (inflaton) also creates many winners, and it also punishes many “political entrepreneurs” who had thrived on their intimate connections to those who control the production of fiat money.

This statement is evil whether it is about inflation or deflation. Whether money is artifically over-valued or under-valued the alteration is destructive to some while it benifits others, but overall any artifical change in the value of money is destructive to wealth creation.

Do not sing the praises of deflation simply because it harms some you dislike, because it also harms innocents.

If we do not take a position that the currency must properly serve its exchange function over changes in its exchange value we will always be advocating destructive policies.

Such a statement as In short, deflation is at least potentially a great liberating force. It … brings the inflated monetary system back to rock bottom… totally misrepresents what deflation is. It is a distortion of the exchange value of money. Deflation does not cure inflation. Deflation has a set of problems that are totally different from those of inflation and under a fiat currency, as under the boom bust cycle, we find these problems being manifest and doing their damage at the same time as the economy groans back to equilibrium.

We simply have to be torn from our delusion that deflation is a necessary correction of inflation. It may be a result of inflation, but it does not correct the evil of inflation, that it is a product of inflation in no way removes its destructiveness, and so we should seek to minimize this destructiveness.

Read what Mises writes on page 487 of The Theory of Money and Credit 1952 edition.

“The reform thus consists of two measures. The first is to end inflation by setting an insurmountable barrier to any further increase in the supply of domestic money. The second is to prevent the relative deflation that the first measure will, after a certain time, bring about in terms of other currencies the supply of which is not rigidly limited in the same way. As soon as the second step has been taken, any amount of rurs can be converted into gold or dollars without any delay and any amount of gold or dollars into rurs.”

Then he contines, “Its [the monetary agency] task is to make this legal parity an effective real market rate, preventing, by unconditional redemption of rurs, a drop of their market price against legal parity, and, by unconditional buying of gold or foreign exchange, an enhancement of the price of rurs as against legal parity.”

Had Mises been understood the deflation following the Civil War would have been much less destructive, UK could have easily returned to the gold standard in 1925, and the horrors of deflation during the Great Depression could have been greatly reduced.

Dick Fox October 19, 2008 at 10:37 am

AB, fundamentalist, Chad Rushing, Fred, and DS,

In most cases the victims of either inflation or deflation are not guilty of their pain. It is the monetary authority no honoring a legal parity, as Mises puts it.

I am saddened that you only see only one side reasoning as do inflationists. Think in terms of Economics in One Lesson. If one gains from deflation, doesn’t another lose?

If the wage earner gains from deflation does his company lose as his wage increases relative to the value of his service? Do savers gain at the expense of those who have to exist in cash because they do not have the wealth to build reserves? There is more than only one side to the equation.

Those of you here at the Mises Institute who understand don’t these posts give you pause as we see responses praising gains through deflationary monetary manipulation.

fundamentalist October 19, 2008 at 8:03 pm

Dick Fox: “If one gains from deflation, doesn’t another lose? ”

Not necessarily. A sudden plunge into deflation after decades of inflation will devastate borrowers, but once deflation has become a regular feature of economic life, no one will be hurt, unlike with inflation. The reason is that deflation is natural; inflation is unnatural. If the money supply were permanently fixed at a specific amount and never increased, prices would naturally fall as production increased. That would send the most correct price signals to everyone in the market. Items growing in abundance would fall in price and scarce items would increase in price. A true gold standard is about the closest that we could come to such a system. On the other hand, inflation distorts all prices and causes a great deal of suffering, not the least of which is the transfer of wealth from the poor to the wealthy.

Mary Diane Dolan October 20, 2008 at 4:22 am

Under ANY economic condition whatsoever, there are “innocent victims.” (For example, the person who is so preoccupied about her ailing child that she fails to count her change properly and only later sees that for some reason, she has less money than she thought). The only question here is whether deflations create MORE innocent victims than the other market conditions create. It is hard to answer this question because the number of innocent victims depends a great deal upon the UNEXPECTEDNESS of the deflation and upon the UNEXPECTEDNESS of the condition used for comparison.

By the way, this discussion is priceless to me because I have never been alive during anything resembling deflation in USA but have heard much puzzling anecdote–for example, that grocers routinely gave you an extra of the fruits or vegetables you were buying. (I guess, while many stood in breadlines). My mother lectured me that much of what was put into newsreels was notoriously wholly false propoganda but was later accepted as history.

Peter Matias October 20, 2008 at 5:58 am

Should the supply of “money” really be permanently fixed as some comments here suggest?

Should the kinds of things used as money also be limited by a central authority in order to control this supply?

Should private institutions be barred from supplying money in order to achieve this objective?

libertarian October 20, 2008 at 6:23 am

In response to your comment from Robert Peston’s contemptible BBC blog article “A fairer society?”


To whoever wrote the comment, I applaud you. It is time that people began to wake up and empower their humanity, and reclaim our freedom and civil liberties which are being eroded piece by piece by our corporate-sponsored governments.

To hammer home the truth, I closely examined my UK passport today to discover an RFID tracking chip embedded within (clearly visible too). The economic markets are collapsing, and any dissent will be quelled by the threat of anti-terrorist legislation and martial law.

The NWO (new world order) is awakening. Get off your asses, obtain sources and information outside of what the technocrats are feeding you from fox news, cnn, nbc, bbc. We’ve got to get real smart, real fast.

Please, people.

Dick Fox October 20, 2008 at 7:23 am

fundamentalist wrote:

The reason is that deflation is natural; inflation is unnatural.

This is where you do not understand Mises on deflation. You are looking at deflation as a decrease in prices while Mises sees it as a decrease in the exchange value of money.

If we find a better way to produce and so increase quantity while decreasing costs and prices this does not increase the exchange value of money. If you do not understand this you are destined to repeat the deflation after the Civil War and the deflation of the late 1990s.

Mary Diane Dolan, you have lived through a deflation. In the late 1990s the price of gold crashed to near $250/oz of gold but a 10 year average (a close approximation to the real value of money) was closer to $350. Not many people analyzed this deflation but a group of us were very concerned about the impact.

The biggest result is that the price of oil fell close to or even below the production cost. Oil producers were not able to expand production or replace worn equipment and for a period of years struggled just to keep producing. When Greenspan began his hyper inflation coming into Y2K and then on into the 2000s the demand for oil to support the malinvestment being generated forced the price of oil to explode. The productive capacity could not keep up with demand and this had a direct impact on the prices we have experienced recently. Oil production was close to a maximum. It has taken almost 10 years to recover from the effects of deflation in the late 1990s.

Most of us understand the boom bust cycle but what is not as clear is that part of the pain of the bust is the deflation. Once again this can be seen in history. The end of the 1970s was horrible. Reagan was elected and his tax cuts revived business and the demand for money, but FED chairman Volker did not see it coming. He followed a monetarist policy and as gold fell in price he did not support the dollar allowing deflation. The result was the recession of 1981-2. Had Volker watched the price of gold rather than following a fixed monetarist policy the recession of 1981-82 would have been merely a blip in history.

A careful reading of Mises gives us an understanding of the best policy. First stop the inflation but, once we reach stability do not force the currency back to a lower parity than exists. Stop the appreciation at the new parity and hold it there. If you do this you will only have to deal with working off the malinvestment that came from the previous inflation. But if you force the currency to a previous level you force deflation: you hinder businesses from maintaining their equipment, you force businesses that pay on installment to pay a greater real price, and other ills of deflation.

Deflation is a subtle monster that we should not intice.

fundamentalist October 20, 2008 at 8:07 am

Dick Fox: “This is where you do not understand Mises on deflation.”

It doesn’t matter which definition of deflation you use; both are unnatural occurrences. In a free society, money is the commodity that people freely choose to hold as the relatively best store of value until they are ready to exchange it for other goods. The supply of that money, e.g. gold and silver, will grow more slowly than increases in production because it is more scarce than other commodities. Therefore, prices will generally fall or at worst not rise. That was humanity’s experience for several millenia before paper money gaines wide spread use just a few centuries ago.

Dick: “If we find a better way to produce and so increase quantity while decreasing costs and prices this does not increase the exchange value of money.”

Yes, it does. The increase in quantity of any commodity relative to another commodity will reduce the exchange value of the increasing commodity. Money is a commodity. If you double the quantity of potatoes for sale in the market, the price of potatoes will fall by half. It’s the same thing as doubling the quantity of money. Economists have understood that for at least five centuries.

Dick: “The biggest result is that the price of oil fell close to or even below the production cost.”

As you wrote, Mises’s definition of deflation was a decrease in the money supply. If you’ll look at any measure of the money supply you’ll see that it never decreased during the 1990′s. When economists speak of price deflation, they mean a general deflation where most prices fall so that the indexes of price inflation decline. That never happened in the 90′s either. The money supply expanded and most prices rose during the 90′s, proving that we experienced mild inflation. The price of oil fell because of increased supply due to over-investment in the 80′s and new drilling technology. The increased supply of oil was stronger than the inflation of the money supply. Had the Feds not increased the money supply, the price of oil would have fallen even more than it did. As for gold, its price suffered from central banks selling or loaning out huge amounts during the 90′s. Again, the increased supply had a greater effect than the inflation of money.

Dick Fox October 20, 2008 at 10:44 am


I understand your monetarist leanings. Many here are more monetarist than Misian. Mises was not a monetarist. To him deflation was a change in the exchange value of money not a change in the quantity. When he did understand is that a change in the quantity usually means a change in exchange value of money but he also understood that to be conditional, not always true.

Read The Theory of Money and Credit with this distinction in mind and you will begin to understand the difference between Mises and Friedman.

fundamentalist October 20, 2008 at 12:05 pm

Dick, I have read The Theory of Money and Credit, Human Action and many of Mises’ other works, including the recent biography. Mises clearly held to the older, general quantity theory of money while rejecting the monetarist equation. His main disagreement with monetarism was not the quantity aspect, but the monetarist rejection of capital theory and the way monetary injections disrupt the capital structure. He did not reject the idea that monetary injections cause inflation. He specifically blamed increases in the money supply for the German hyperinflation of the 1920′s.

Dick Fox October 20, 2008 at 2:58 pm


I know you have read the Theory of Money and Credit from our previous discussions. What I asked was that you read it in the light of our discussion. I believe that all too many people do not understand the destructive nature of deflation and this post on the site reinforced by view. We need to undertstand deflation.




CHAPTER 13 Monetary Policy

5 Invariability of the Objective Exchange Value of Money as the Aim of Monetary Policy

Thus nothing remains but to reject both the augmentation and the diminution of the objective exchange value of money. This suggests the ideal of a money with an invariable exchange value, so far as the monetary influences on its value are concerned. But, this is the ideal money of enlightened statesmen and economists, not that of the multitude. The latter thinks in far too confused a manner to be able to grasp the problems here involved. (It must be confessed that they are the most difficult in economics.) For most people (so far as they do not incline to inflationistic ideas), that money seems to be the best whose objective exchange value is not subject to any variation at all, whether originating on the monetary side or on the commodity side.

newson October 21, 2008 at 1:07 am

to dick fox:
deflation in the 1990′s because gold went down? what’s gold got to do with anything? it’s a commodity like any other, until either a currency link is reestablished, or legal tender laws are abolished. your argument sounds very much like steve forbes, who always insisted that greenspan was a deflationist during the long gold decline of the nineties.

gold may have gone down for any number of reasons: tame cpi, bullion lending, political agendas etc.
nowadays the gold price tells us nothing more than the public’s inflation expectations, not actual growth in money supply.
1929 – 33 was the last deflation that comes to mind.

fiat money and prolonged deflation are mutually exclusive terms. bernanke is right, ultimately there is no limit to the extent that currency can be devalued to preserve nominal prices of various assets.

in a true money (commodity system with 100% reserve banking) there could only be mild monetary inflation (incremental growth in precious metal stocks through current production), and no deflation.

all money growth distorts pricing structures, but species monies are the least inflationary, so the best of a bad lot.

in our paper world, you’ve got to love/hate deflation and inflation equally, because they are the siamese twins of frb/fiat money, joined at the hip with the same heart.

Dick Fox October 21, 2008 at 7:08 am

What is often missed when assessing the damage of a floating currency is the problem with deflation. Under a floating currency the exchange value of the currency can fluctuate wildly causing both inflationary and deflationary problems to exist simultaneously. The problem is clear when we see a deflationary destruction of productive capacity followed by an artificial inflationary boom.

Let me post something from a friend that may help us understand our current situation via oil and gas prices. Understand when he talks of oil going to $50 he is talking about deflation.

I think that oil is down on fundamentals of …a global economic slowdown. My main fear is that the decline in oil will overshoot below $50 and begin to destroy or suspend the production ramp up that has been underway for several years. Such a result would exacerbate the supply/demand problem in the future when growth resumes. Because oil requires such a long lead time in production ramp up and because it requires such huge dedication of capital it is particularly vulnerable to macro economic volatility which is exacerbated by mistakes at the Central Bank (Fed) level. The deflation mistake of the late ’90′s through 2002 was the antecedent cause of the high prices we just experienced…if we returned to some long term stability of monetary policy we could expect oil production infrastructure to increase in anticipation of a recovery…as it stands we are vulnerable to a whip-saw effect that will further weaken our ability to address growth in the future. Alternative energy is no help as it is just as vulnerable to this instability and it can not compete with oil or gas Btu’s in the current user price context. What the greens don’t tell you is that the alternatives require a world where we pay at least triple current prices and the greens don’t calculate any demand destruction or political push back at those rates.

I believe speculation pushes oil and strategic commodities to be overbought on the way up and oversold on the way down…that is just market psychology…but you can read it through the option and leverage activity and create your own protection. I would not blame the speculators and I would follow the value analysis for long term trend after the momentum trade breaks down.

Dick Fox October 21, 2008 at 7:24 am


How do you know when there is inflation or deflation? Monetarists will tell you that it is a change in the money supply, but they can’t define the money supply. Even Frank Shostak spend about 9 pages (if memory serves) attempting to define the money supply and ended up at the same place as most monetarists with no definition but plenty of confusion.

We cannot define the money supply because there are so many instruments in our economy that act as money and that change almost daily that any definition is obsolete the moment it is announced.

The only way to know whether the currency is deflating or inflating is to look at so measure of overall goods and services, but again that is an impossible task. So let’s do a little thought experiment. We create a basket of all the goods in the economy at the proper quantities and price them. This gives us a base. But since this is impossible to know our best option is to work the basket of goods down to a useable selection of goods.

As we remove the most volatile we can see that the basket gets closer to a stable base. Once we have removed every volatile item and finally come to a stable commodity to use as an indicator we find, to the surprise of some, that looking at the most monetary of commodities, gold, is the best indicator we can use. Even though gold is not legally considered money today, gold is still assumed to be monetary (consider the gold held by the US government. For what reason?)

The very best indicator of inflation or deflation is the price of gold. Though gold is not perfect all other indicators fail in comparison. The spot price of gold does not predict the future but it does tell us the tendency and if the spot price becomes a long term price we see the signals gold sends become manifest in the economy.

I do like this sentence in our paper world, you’ve got to love/hate deflation and inflation equally, because they are the siamese twins of frb/fiat money, joined at the hip with the same heart.

fundamentalist October 21, 2008 at 8:28 am

Dick Fox: quoting Mises, “Thus nothing remains but to reject both the augmentation and the diminution of the objective exchange value of money. This suggests the ideal of a money with an invariable exchange value, so far as the monetary influences on its value are concerned.”

How does the value of money change? What makes the exchange value of money variable? As Mises repeatedly wrote, it’s the change in the quantity of money relative to goods. But Mises also understood that the value of money in exchange can never be invariable. That is a total impossibility. If the money supply remains fixed, then changes in production will change the value of money. Increases in production relative to money will cause money to gain value. Shortages of production, as a result of war or famine for example, will reduce the value of money. What Mises fought against all his life was state manipulated changes in the quantity of money via credit expansion or printing paper money.

We can track changes to the money supply, the cause of changes in the exchange value of money, through the TMS that mises.org publishes or through the Federal Reserve’s published data. But which ever one you use, you’ll see that no deflation of the money supply took place during the 1990′s. None at all. So when looking for the causes of low oil prices or low gold prices, you have to look somewhere beside deflation.

newson October 21, 2008 at 10:16 am

to dick fox:
whilst there is active debate about which aggregate is the truest representative of money, i think you’re missing the point. whichever of the m’s you prefer, the gradient is upwards over the medium/long term. this is in marked contrast to the 29-33 episode, where money supply shrank by one third (and was easier to measure, with far fewer financial artifacts).

gold is completely outside the price determination mechanism, and this has been the case since nixon closed the gold window. that central banks still hold gold is purely window dressing to satisfy popular imagination (fort knox and its pile of ingots is ingrained in the public psyche). many central banks (like my own, here in australia) have pared their gold holdings massively, and have done so in the face of public apathy.

deciding whether inflation or deflation is occurring by looking at prices leads to a blind alley. ok, so gold goes down in the nineties, idem for oil, but financial assets roar ahead, especially technology shares. which prices do you include?

out of the money transmission, gold now reacts not to real inflation, but to the public’s perception of the inflation risk. the flat cpi/ppi figures of the nineties, central bank gold selling, and the widespread use of hedging by miners are the most probable reason for gold’s decline in that period.

KAZ December 14, 2010 at 11:15 pm

The paragraphs of the article quoted above speak to a laughable incompetence in monetary theory. They shouldn’t be associated with the name von Mises.

Deflation shifts money away from production, exactly as inflation shifts it toward production.

BOTH are bad.

Malinvestment is a term that would fairly be used in both cases, because pricing is distorted either way.

Hayek was correct to note that:

“On the first issue — whether to use one’s money or whether to hoard it — there is no important
difference between us. It is agreed that hording money, whether in cash or in idle balances, is
deflationary in its effects. No one thinks that deflation is in itself desirable.”

See his full 1932 article, opposing Keynes on the Depression, here:


And see a lengthy analysis of why deflation is a devastating attack on capitalism, here:


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