1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/8972/should-we-worry-about-deflation/

Should We Worry About Deflation?

November 18, 2008 by

Yes, the current economics brain trust is worried that consumers will collectively show the good sense to delay purchases, pay down debt, and increase their savings. After all, this liquidation of malinvestments will likely take a while. The prudent thing to do in times of uncertainty is not to ramp up debt and spend money you don’t have.

But now, all of a sudden, “saving” is a dirty word.



greg November 18, 2008 at 8:32 am

There is no deflation. Just take the housing and oil price charts back 10 years and draw the trend line. You will basically cut the spike out caused by over speculation in those markets and see that the general trend is prices increasing. If you bought at those peaks, this is not what you want to see, but those prices could never hold.
This overspeculation in these and other markets caused prices to rise and when the speculation changed to the put side we are experiencing a rapid decline. This decline is giving the Fed a get out of jail free card and allowing them to increase the money supply because of the deflation concern. The public stands behind them because they forget about the shock when gas hit $2, but after paying $4, $2 is looking great.

Dick Fox November 18, 2008 at 8:39 am

Here we go again. The deflationists, as Mises called them, are once again running out of control at Mises.com. It is such an egregious offense as to drive me to demand a name change to the site.

Jörg Guido Hülsmann is dead wrong when he states in his just-published Deflation & Liberty: “it fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation.”

Deflationists are just as dangerous as inflationists.

Do you think I a heretic to Austrian economics? If so I accept that because I am not a heretic to the principles of Ludwig von Mises. Let him be my defense.

The Theory of Money and Credit
Part Two: The Valuation of Money
Chapter 13: Monetary Policy
4 Restrictionism or Deflationism

“Yet those who are enriched by the increase in the value of money are not the same as those who were injured by the depreciation of money in the course of the inflation; and those who must bear the cost of the policy of raising the value of money are not the same as those who benefited by its depreciation. To carry out a deflationary policy is not to do away with the consequences of inflation. You cannot make good an old breach of the law by committing a new one. And as far as debtors are concerned, restriction is a breach of the law.”

Stefan Karlsson November 18, 2008 at 8:40 am

I commented the LRC version of this article yesterday here. I commented both on some of the alleged evils of deflation asserted by Ambrose Evans-Pritchard and suggested an unorthodox (legalizing counterfeiting) way of fighting deflation to illustrate why the fight against deflation creates negative effects.

redshirt November 18, 2008 at 9:46 am

I’m confused. We aren’t talking about a deflationary policy right? This is just deflation in response to a market bubble created by bad credit policies. Prices are adjusting as the market sheds bad debts and the amount of that debt “tied up” in the product prices is evaporating. Demand is adjusting to reasonable levels of savings and expenditure and the prices are further dropping accordingly.

This isn’t deflationary policy. This is market response.

Making it cheaper for the hungry poor to buy food is a good thing.

The negative impact shows as folks lose jobs and / or salaries stagnate or drop. They have a harder time paying back debts incurred during the inflationary period. But, if people are tackling debt and building savings ahead of the worst of the deflation, isn’t that the right thing to do? It may drive some further deflation, but it isn’t a policy… it’s a reaction.


Ludwig VAN DEN HAUWE November 18, 2008 at 9:52 am

Hülsmann is wrong. No doubt about that. Letting the system implode by letting deflation run its course is not necessary to “cleanse” the system. In fact this is dangerous nonsense. I am not sure Mises is a reliable reference on this matter since he had no very satisfactory theory of depression. The present system must be replaced by a better one – no doubt about that either – but the transition must be organized in an orderly manner.

StatusQuoJoe November 18, 2008 at 10:49 am

It seems to me that again, its focusing on the symptoms and ignoring the disease. Again, the problem (cancer) is flexible money which induces such debilitating effects as both inflation and deflation.

Inquisitor November 18, 2008 at 10:58 am

How is Hulsmann “wrong”? What is wrong with “deflation”?

“Deflationists are just as dangerous as inflationists.”

Hulsmann is a deflationist? Or is he just advocating that the market go its natural way, after much government meddling? So, if he is “wrong”, how about one of you naysayers give us suggestions as how to do things “right”? Pumping money into the system?

Dick Fox November 18, 2008 at 10:59 am

Ludwig VAN DEN HAUWE wrote:

I am not sure Mises is a reliable reference on this matter since he had no very satisfactory theory of depression.


You are absolutely wrong. Mises has the only viable theory of depression. It is called the Austrian Business Cycle Theory. Apparently you have not read Mises. You need to. There is no doubt that if he is not the best economist he is one of the best. He answers questions others cannot. Just a note, he and a few others warned of the Great Depression before it happened.

peter helbich November 18, 2008 at 11:36 am

this is vienna austria where it all began, mozart mienger mises hayek etc

enter my home page and there you will see the mathematical proof of the austrian school of economics. send to all your friends and let it loose in the internet

regards peter helbich

Joshua Park November 18, 2008 at 12:02 pm

I think we should note the suffix “-ist” here. Inflationists and deflationists are not equal to inflation and deflation. I think the point is that both results of fiat currency (deflation and inflation) are bad. Inflation destroys the people with savings, and deflation destroys those with debt. The policy-makers are the dangerous ones. These are the “-ists”, these are the “controlists”, the authoritarians, the statists. StatusQuoJoe is right, as was Mises: the problem is that the policy-makers make policy.

An orderly transition away from expandable money is the goal, but we won’t see that until we get people to realize that “stopping deflation” or “stopping inflation” are band-aid solutions at best. At worst, they are hatchets.

Furthermore, I thought Congressman Paul argued that the recent bailouts would cause hyper-inflation, not deflation. Oh, wait. It’s a different part of the same bubble: the dollar bubble. Right now, we have expanded our money supply and we’re seeing the first effects: lower prices. If or (dear Lord, help me) when other countries devalue the dollar because of the expansion, we’ll see our imported capital and consumer goods rise in price: inflation.

Pierre November 18, 2008 at 12:04 pm

the transition must be organized in an orderly manner.
YES! Central planning is good!

peter helbich: naming a theorem after yourself is tacky and pretentious, you’re supposed to let posterity do it

Pierre November 18, 2008 at 12:07 pm

Helbich: additionally, “your” theorem is just recycled statistics and tenets of classical liberalism. That’s quite some grand-standing for such an unoriginal “theorem”. I won’t be sending it to my friends.

Dick Fox November 18, 2008 at 12:28 pm

redshirt and Inquisitor,

Did I quote Hülsmann out of context? Is Hülsmann not clear that he supports deflation? Does he make a distinction between pains an economy will face from the effects of inflation when that inflation stops and the effects of actual deflation? Does he not praise deflation?

He is either a lazy, careless author or he is horribly wrong. I chose to believe he is wrong rather than lazy and careless.

If you are going to write about the value of money you must be precise. Otherwise you will lead people to very destructive policies. I would say that Hülsmann would be perfectly happy with Greenspan’s deflation of the late 1990 but that gave us oil prices higher even than what would have come from the inflation of the 2000′s. The deflation created a situaton where the oil producers could not keep up with demand.

Ludwig van den Hauwe, Ph.D. November 18, 2008 at 12:35 pm

Dick Fox:

I wrote a doctoral dissertation of several hundreds of pages about the foundations of business cycle theory (University of Paris, 2005) including the Austrian theory so I certainly know what I am talking about. About the difference between a theory of depression and a theory of the business cycle, see also Garrison´s Time and Money. I repeat: THIS IS DANGEROUS NONSENSE.

Inquisitor November 18, 2008 at 12:46 pm

“Did I quote Hülsmann out of context? Is Hülsmann not clear that he supports deflation? Does he make a distinction between pains an economy will face from the effects of inflation when that inflation stops and the effects of actual deflation? Does he not praise deflation?”

No, he supports the market going its natural way. Right now that involves deflation. To my knowledge Hulsmann does not support an active policy of deflationism. Merely to let the markets proceed unhindered in liquidating bad investments. This is not problematic. And deflation understood as a contraction of a massively over-inflated money supply and its attendant fall in prices and the liquidation of malinvestments by beneficiaries of the money elite, seems good to me. If you disagree with any of that, feel free to explain why.

Dr van den Hauwe, explain “dangerous” please? Who is even considering implementing this for it to be labelled “dangerous”? At best one can say it is misguided.

Pat November 18, 2008 at 1:56 pm

Personally, I don’t view deflation or inflation to be necessarily a bad thing when it is not a government’s policy. The reason is because the government is subject to the whims of politics, namely the political parties in control of the government.

I understand what the author is getting at with the view that deflation is not necessarily bad, but like Dick Fox (or more likely, StatusQuoJoe), deflation can be a problem if it is a government’s policy. The risk here is to substitute one policy for another (In that case, deflationist instead of inflationist). But I suspect this was not what Mr. French or anyone on this website would be willing to advocate, unless my suspicions are wrong.

Dick Fox November 18, 2008 at 2:00 pm


Do you consider Keynes views as explaining what you call “depression?”

greg November 18, 2008 at 2:39 pm

Debating whether deflation is good or bad should not be the point today. The debate should be are we truly in a period of deflation. You could go by the CPI and the PPI, but those indexes are seasonally adjusted and adjustments are made to certain price moves. Given the PPI numbers today with drop greater than 2%, you could have the information you need. However, the core rate increased by .4% when you take out food and energy and that number signals a modest increase in prices.
We have seen huge swings in oil, wheat, corn and other select commodities that have direct and indirect ties to energy. Then you had companies that hedged these commodities and came out on top when prices continued to rise. Followed by other companies that decided hedging was a good idea, bought options at the high price and have lost big time as these select prices fell. Liquidation of these contracts put further downward pressure on prices.
So do we have a GENERAL decrease of prices? My last trip to the grocery store says no. The last truck of concrete cost me the same and I got notice that prices are going up after the 1st of the year. And with gas prices going down, the fuel surcharge is still the same.
Basically, I feel the government is using the word “deflation” to push through their stimulus packages. And I am sitting here, the Senate is holding hearings on bailing out the auto industry and my guess it is going to pass in part to the deflation idea.
Here is the real harm, a stimulus package that spends $10 and gives the economy $1 in value. Misdirection is every politician’s best tool and if you watched the rise of Obama, he is one of the best at using it.
And I fault politicians like Ron Paul that lectured the Fed Chairman today in the House Finance Committee on some off the wall points. Instead of exposing the master plans of Barney Frank.

fundamentalist November 18, 2008 at 4:03 pm

peter helbich: “…you will see the mathematical proof of the austrian school of economics.”

The page I got regressed the Heritage Foundation’s Index on GDP. Is that the proof you meant? If so, good job! I really enjoyed it.

Ludwig van den Hauwe, Ph.D. November 18, 2008 at 5:33 pm

Dick Fox:

Yes, but we are not talking Keynes here. Mises, and even Rothbard would have agreed that simply letting the quantity of money deflate is not an option. But Greg is correct in pointing out that this is not the choice we are facing today.

greg November 18, 2008 at 6:01 pm

Thanks Ludwig, I hope everyone is listening to the Senate hearing going on right now! If you are going to win the game, you must play the game.

Inquisitor November 18, 2008 at 9:26 pm

Hm I’m curious, can you offer any proof that you’re the actual Dr van den Hauwe? Anyone can just post under such a name here…

Joseph Keckeissen November 18, 2008 at 9:56 pm

French´s deflation article is superb, except at the end where he proposes reducing the money supply. Mises would have none of that. Best, Joe Keckeissen

Austroglide November 18, 2008 at 10:42 pm

The deflation TERROR felt by mainstream economists shows just how deeply pathological are their theories.

Where is their faith in markets? They act as if they are utterly blind to the possibility of spontaneous order.

It is very sad that these supposed champions of free markets are just as frightened and baffled by them as are those who have never even heard of Keynes.

David Pierce November 19, 2008 at 1:44 am

What the deflationists should explain is why deflationary disequilibria are any less potentially harmful (inefficient) than inflationary disequilibria. If it is pathological to fear deflation, why is it less pathological to fear inflation?

Peter van Haaren November 19, 2008 at 1:59 am

Exactly, neither Hülsmann not any of the other deflationists explain why we should fear deflationary disequilibria any less than inflationary disequilibria, supposing that we should indeed fear inflationary disequilibria.

Alois Everhard November 19, 2008 at 2:41 am

You guys, instead of qualifying anything coming out of Hülsmann as “wonderful” and “superb”, please start addressing the real questons…

Austroglide November 19, 2008 at 4:02 am

Prices in a free market embody the buying and selling preferences of the individuals in that market. Individuals’ preferences reflect, in turn, the best knowledge that each individual has about the worth of the good or service in question. Thus, free market prices are THE BEST MEASURE OF THE TRUE SOCIAL WORTH of any given good or service.

Interference with free markets simply causes their prices to no longer reflect with accuracy this worth. As a result, society is harmed by the interference.

According to Austrians, actions by the Federal Reserve regarding the money supply constitute NOTHING BUT market interference. Thus, the sooner the Federal Reserve stops intervening, the sooner will interest rates reflect the true social worth of future versus present consumption in the economy.

Therefore, suggesting to an Austrian that the Federal Reserve should fight deflation by increasing the money supply is to suggest that the Federal Reserve should further interfere with free market prices, and thus interfere with society’s freely-determined valuation of the relative worth of its present and future consumption.

It is akin to prescribing more poison as an antidote to having ingested poison. In other words, it is an absurd suggestion.

Kurmudjin November 19, 2008 at 6:54 am

Herr Helbich,

I agree with Fundamentalist. Ignore the jealous comments. Take credit for having thought of it first.

It was an elegant and powerful idea to show a strong relationship between per capita GDP, Economic Freedom, and Life Expectancy. A picture worth a thousand words, and one that is difficult to refute.

Peter van Haaren November 19, 2008 at 8:17 am


In fact this analysis is incomplete and also a bit simplistic.(Suggestive expressions such a “poison”, “absurd” etc. are no substitute for cool analysis…)
In order to move to a (more) free market monetary regime, it is not necessary to first undo everything the government, central banks etc. have done, e.g. through monetary expansion, in order to “cleanse” the system. It is not necessary to add a deflation to the previous inflation to “undo” the effects of the latter. The excerpt from Mises above is quite pertinent. To give an (imperfect) analogy, if you want to privatize the prison system you do not want to liberate first all prisoners just because they were put in jail by the state.
It is true that preventing massive deflation is costly because you cannot avoid injection effects etc.
But these costs have to be weighted against those of massive deflation, which, if history provides any reference, are almost certainly greater.
Letting deflation run its course is not simply letting free play to the market, since in the free market this kind of scenario is unthinkable.
It may be tragic, but getting out of central planning in a more or less orderly manner, may still require a little planning.

Aloïs Everhard November 19, 2008 at 8:34 am

Note also that the price level is sticky to some degree.
You cannot pass over this point by simply blaming people for setting prices to high. For whatever reasons, it is a historical-empirical fact that prices are less than perfectly flexible downwards…
So as soon as the downwards flexibility of the quantity of money is greater than the downwards flexibility of prices, you will have serious trouble…
This is no matter of jealous comments. Hülsmann is entirely free to handle his own scientific reputation as he wants…

Ludwig van den Hauwe November 19, 2008 at 8:45 am

Clearly Friedman got it right when he wrote that “in monetary matters appearances are deceiving…”
As to the quote from Mises´ TMC above, there is a similar passage in Human Action.

Inquisitor November 19, 2008 at 10:47 am

Alois, how about you answer the “real” questions I posed, eh? I still want to know what makes Hulsmann a “deflationist”. So much easier to be snide though.

Dick Fox November 19, 2008 at 10:48 am


If you believe that Kenyes theories explain depression then I understand your confusion. All I can say is read Henery Hazlitt’s The Failure of the New Economics and perhaps it will help you see why 1600s Mercantilism has never worked and still doesn’t work.

Dick Fox November 19, 2008 at 10:55 am

Any alteration to the value of money is destructive to production whether inflation or deflation. I don’t understand why that is hard to accept.

Inquisitor, I gave you a direct quote from Hülsmann where he supports deflation. That makes him a deflationist. And my quote is only one of many in his book where he sings the praises of deflation. What is it they say if it walks like a duck…..

Inquisitor November 19, 2008 at 12:26 pm

What you quoted was the effect of the market correction. Is Huelsmann wrong to say the market should be allowed to cleanse itself? He did not advocate a policy of shrinking the money supply, as far as I can tell. Just: do nothing.

Austroglide November 19, 2008 at 2:40 pm

Peter van Haaren,

My point is a theoretical one: namely, the Fed shouldn’t have ever been in the market to begin with. From a theoretical point of view, the Austrian case, based on an analysis like the one I provide above, is in my opinion profoundly compelling.

Practically speaking, I’m not equipped to provide an analysis of the specific relative merits of more inflation vs. deflation. However, in no way do I subscribe to the view that the Fed should allow a period of deflation in order to somehow make markets more free. Such a view, in my opinion, is naive

Also, practically speaking, you use the phrase “massive deflation”. Is this really what we’re facing? Can anyone know the magnitude? Regardless, I agree with you that history can be, and perhaps therefore should be, a guide. We should probably be discussing the specific history in order to gain something of an empirical basis for this discussion.

David Pierce November 19, 2008 at 3:13 pm

To Dick Fox:

In defence of Ludwig: At least Keynes had a theory of depression, however imperfect. But the monetarists, the monetary disequlibrium theorists etc. have one too.
Only the Austrians haven´t. The confusion is on the part of the Austrians here. A theory of the unsustainable boom is one thing. A theory of depression is another.

Austriglide: no, of course, there is no general deflation. But be prudent: the history of the episode must still be written. We don´t know very exactly what is going on. We know more about, e.g., the Great Depression because Friedman and Schwartz wrote its history…

van Haaren: of course you are right. It´s naive. Also how would general deflation be possible without monetary contraction? If inflation is always and everywhere a monetary phenomenon, so should be general deflation. Still we can have, say, deflation of housing prices, which even Krugman predicted, but I don´t think this is what Hülsmann has in mind. It´s always possible to be “original” if one is prepared to risk one´s scientific reputation.

Austroglide November 19, 2008 at 3:26 pm

Alois Everhard,

Isn’t the Federal Reserve the arbiter of the flexibility of the quantity of money? If so, and if prices are sticky, as you say, to the downside, then the Fed becomes responsible for coordinating a quantity of money that accommodates the stickiness, no?

Austroglide November 19, 2008 at 3:54 pm

David Pierce,

What does “prudence” call for? For guarding against depression by preventing ALL deflationary pressures from running their course?

By what standard do we define “prudence”? Relative to the standard of the Depression? This seems out of proportion to me.

Aloïs Everhard November 19, 2008 at 11:40 pm


Yes, that is the logic of the system. You can consistently do either of two things:
- replace the system by something totally different;
- leave the system in place and act according to its logic.
What you cannot do without badly screwing up things is maintaining the system but trying to negate its logic. It seems to me that a deflationary scenario à la Hülsmann is precisely this.

Austroglide November 20, 2008 at 12:22 am

Alois Everhard,

I agree with your conclusion that we have but two choices regarding the Federal Reserve system. As per the second choice you identify, namely, leaving the system in place and moving forward according to its logic, I’m not sure what you have in mind when you use the word “logic”.

By “logic” do you mean the Fed’s manipulation of the quantity of money? Or instead do you mean the Fed’s twin goals of avoiding deflation and promoting full employment? In other words, is your use of the word “logic” here in reference to Fed means, or instead to Fed ends?

Tony November 21, 2008 at 3:13 pm

Inflation encourages borrowing. Deflation encourages saving.

Deflation would be good for the U.S. economy, if it weren’t for all of our debt. Deflation will make it even harder to pay existing debt, which unfortunately doesn’t deflate with everything else. So deflation will result in a whole lot more defaults and bankruptcies. There is a global re-evaluation of assets taking place, and it needs to occur. Too much credit has driven up prices for too long. This is going to get messy.

Austroglide November 23, 2008 at 11:18 pm

Nothing from anyone?

Comments on this entry are closed.

Previous post:

Next post: