What Is Wrong With Deflation?

Fed Chair Ben Bernanke strongly believes that deflation is a very bad thing, and is using all the resources of the central bank (even some beyond its authority) to prevent deflation from setting in.  Is deflation really that bad for most of us?  Let's take a quick look.

First, the arguments that deflation is a bad thing center around the debt burden of individuals and businesses.  The theory is that it is more expensive to repay debt with deflated money, than it would be otherwise.  As a result, businesses would go bankrupt (as they did during the great depression) because they could not handle the relative increase in  the debt burden.  In addition, deflation slows the pace of commerce because consumers delay purchases today because deflation makes goods cheaper tomorrow.

While the drum has continually beaten those arguments to support monetary policy that continually devalues the dollar, they ignore reality.  To begin with, deflation is a good thing for the 95% of our society that lives within their means.  When the price of a new car falls, that is a good thing.  Commodities are cheaper, finished goods are cheaper, food and necessities are cheaper.  I am not an economist, but it seems to me that having lower prices helps me out.  Our trade deficit keeps growing because we can't price goods and services competitively.  If prices are lower, exports may grow.  Indeed, maybe there will be a return to manufacturing right here in the States!  Creat a few jobs.  That's a thought - using American ingenuity to produce better, faster, cheaper products at home.  But, I am not an economist.  Besides, it makes all the pennies I have been collecting in my jar more valuable.  I might even spend them someday.

So, what of the argument that debt is more expensive?  The fear is that companies will be wiped out.  What the protagonists ignore is modern bankruptcy law that restructures debt.  If prices (and consequently income) falls to a level where debt can't be serviced, the debt will be lowered through bankruptcy.  Indeed, as long as we are on the path to nationalizing our insolvent banks, once we take them over, we can just restructure everyone's debt with legislation.  For years the banking industry has lobbied to make bankruptcy laws tougher, and in fact successfully convinced Congress to "reform" the bankruptcy laws by making it tougher for individuals to get out from under their debt.  It is time to rethink that strategy.  If lenders must suffer a lost from bad credit decisions, then it is more likely that they will force themselves to make better credit decisions and not lend to people who can't afford to repay.  But that is prospective.  We need to authorize bankruptcy courts to reduce everyone's debt - even home mortgages.  Better yet, just calculate the rate of deflation and reduce everyone's debt by that amount!

Deflation would not slow real consumption.  To be sure, people will not finance purchases of goods they cannot afford, but that is not real consumption.  If we have needs, we will purchase goods at market prices, even when they will be less expensive later.  I will still go to the grocery store weekly to buy food.  I will still go to the barber shop.  I will still purchase a new car when my existing one dies.  (I have 7 tvs in my house, I doubt I will purchase a new one in a long time.)  Just take a look at computer prices.  Over the past 10 years (or longer), computer prices have continually fallen.  Has that stopped the flow of money into computer purchases?  Other than cyclical demand issues, deflation has not affected the computer industry.  (Of course, the Government in its infinite wisdome ignores price declines in calculating CPI and instead imputes the "hedonistic" value of better products into the equation to make deflation look like inflation.)  Deflation in products has spurred a culture of improvement to provide more value in order to induce purchases.  To me, that is a good thing.  But, I am not an economist.