Is Deflation a Concern?

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at the confidence in the equity of the existing distribution of wealth. John Maynard Keynes

I absolutely detest Keynesian economics. The more I learn about John Maynard Keynes’ ideas, the more I think that he was either completely out of touch with reality or worse, a willing shill for the rising socialist power in Western Europe. His theories have been disproven – by logic and circumstance – multiple times, in many geographic places, under a myriad of conditions since he first began positing them in the 1930s, but like a zombie in some poorly written thriller, his philosophies never seem to die.

The most recent evidence of Keynesian thinking at the highest echelons of economics and finance came from Madame Christine Lagarde (head of the IMF) a couple of days ago. She gave a warning of a danger to global currency exchange in the face of new optimism from national economic ministers: deflation. Inflation rates throughout Europe lately have been very low (less than 1%) and threaten to dip into deflation – setting the stage for Madame Lagarde’s warning. But is deflation actually a major threat to the “continued recovery” from the long global recession?

To a Keynesian, the answer is an unequivocal “Yes!” Keynes made the case that money and credit were what mattered in determining the health of an economy. This flew in the face of the established (over 300 years of evidence at the time) economic view that the health of an economy is derived from production and trade. Keynes argued that by controlling money supply the economy could be essentially boot-strapped through recession/depression into health – driving production and trade up through monetary enticement. This idea gave rise to the use of central banks as conduits to increase/decrease monetary supply and therefore drive trade forward artificially. At the same time it gave central planners an excuse to begin increasing business regulation under the guise of 1) “creating” commerce, 2) making commerce more “fair”, and 3) because the government had a vested interest through monetarism, they should have a say in the daily affairs of business.

When you begin tinkering with the money supply while increasing regulation, the need to control inflation becomes essential. As money becomes cheaper, inflation can get out of control – leading to increased regulation. As money becomes more expensive and deflation occurs, the regulation in place can act as an anchor on the whole economy – decreasing trade and production at logarithmic rates. In other words, monetary supply is the accelerator, regulation is the brake and government is the driver.

The concern from a classical economic view is that Keynesian ideas are a 180-degree change from what has been observed for centuries to drive growth in an economy. As mentioned above, the real drivers are production and trade … in other words, the work done by the private sector in an effort to create value and wealth. Which means that the concern is not just that the Keynesian plans place money as the driver of growth, but that production and trade are inherently harmed by both the uncertainty introduced by a third party’s hands in the pot and the unnecessary costs of ‘paying’ for the trade apparatus itself.

You see, money is the vehicle for trade, not the driver itself. To a classical economist adjusting the money supply in the face of economic changes is akin to setting your thermostat at 80 degrees when its 26 outside and then declaring it summer in January. Real growth (or recovery, in this case) is the outgrowth of releasing the brakes (decreasing regulation) and keeping the accelerator (monetary supply) at a constant – and therefore predictable – rate. When these steps are taken, inflation and deflation are simply the natural outgrowth of commerce; a potential barometer for trade, but not a harbinger of doom nor a herald of success.

The problem today is that the concerns of the macro scale are then treated with macro governmental movements and interferences. But economic value is created through trillions of individual, freely-conducted transactions on the micro scale. Keynesians tend to reject the idea that value is created by Joe Schmoe buying a burger from Harry Schmarrie, even though Schmoe freely has decided that the burger he gets from Schmarrie is more valuable to him than the two bucks it cost and Schmarrie obviously believes the two bucks is more valuable than the burger. Instead they believe that Joe Schmoe’s purchase comes from an enticement by government to spend now, while his two bucks is worth two bucks, but they slow down commerce from getting out of control by making sure Schmarrie provides only the highest quality beef … while paying his cook a “fair” amount … while charging the right amount for taxes … while insisting on him displaying the right kind of yellow placard alerting patrons to freshly-mopped floors … etc. So Keynesians presume a third party – government regulators – in every transaction; decreasing substantially the speed and freedom of each trade or good produced and thereby increasing costs.

With that in mind, let us answer the title question – and Madame Lagarde’s concern: Is deflation a concern? Yes, it is a slight concern … but only because it has been made so by faulty theories applied in widespread and resolute fashion. Simultaneously, no, it is not a concern for maintaining any growth currently being experienced in the world economy because growth is achieved in spite of monetary fluctuations, not because of them.

If Madame Lagarde – and all of the national finance ministers – were truly serious about improving commerce, then the recipe is to encourage trade and production through solidifying monetary policy (decreasing uncertainty) and decreasing regulation. But this will never happen as long as Keynes is considered anything more than he was – either an unrealistic theorist or a rube with no integrity.

See: http://www.bloomberg.com/news/2014-01-26/lagarde-2008-davos-moment-haunts-imf-warning-of-global-deflation.html

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