Wednesday, March 4, 2009

What Is Deflation?

An extremely short entry today, prompted by the following comment from an anonymous reader:

Hell... stop the stupid hysteria about deflation. Thus far we're talking asset deflation. You can wax eloquent about deflation when we can fill a cart with groceries at the supermarket for $50, or when crude goes back to $10...

In a fiat currency monetary system asset deflation is actually all the deflation that matters and is the direct consequence of debt destruction (aka money destruction). Consumer price deflation, i.e. lower prices for goods produced by utilizing said assets, may or may not follow depending on the balance between lower costs for capital assets reducing production costs and the actual production of goods, i.e. how many units of goods are produced by the assets.

Asset deflation is the worst nightmare of modern-day central banks and governments, inured as they are to Permagrowth. In this light, it is quite easy to understand why we are currently witnessing a constant barrage of trillion-dollar bailouts for banks and other financial firms. They are simply at the nexus of the asset-debt-money structure.


  1. Nice post.

    How do you justify calling the massive asset inflation - specifically housing and stocks - the "great moderation" whilst labelling this "asset deflation" as deflationnary ?

    This is Bernankish stuff.

    Fiat money economists should make up their mind.

    Either we've been thru major inflation recently and we now move reverse. Sound in my opinion. Or you take the Greenspan-Bernanke view that the asset inflation was not inflation. Thanks for the joke by the way. We have then just an adjustment in asset values. And a faire one. Not deflation.

    But certainly not a great moderation followed by deflation. Look at prices. Any of them. On a long term basis...

    A 100%-cash saver who saw his savings drained. With one justification, in FIAT money systems, saving is for the braindeads - and the Chinese.

  2. I don't understand why the government cannot get the permagrowth debt-dance going again.

    A hundred billion won't satisfy the liability, try a trillion, a trillion won't work try 10 trillion. At a certain point the banks are flush with cash over long-term assets, are confident that they are immortal ("too big to fail") and will start "investing" again in the next Ponzi scheme.

    Assets start to appreciate again and the government wins by depreciating its debt through inflation.

  3. Was China's announced stimulus plan a BIG DEAL....?

    Or was it....?

    Goya o Boya...!


  4. Damn I was looking forward to $3 movies again. But then again I can buy BAC for that now....I think I would rather spend the money and go see a movie.

  5. It seems to me that the enormous sums thrown at the debt have at the very least the symbolic effect of devaluating money (fiat money, but not just fiat money, the whole idea of money itself, and that is very very dangerous stuff indeed).
    So, just what WORD will you use to qualify it ?
    Thinking people manage to put two and two together (on second thought HATE that expression) and figure out that while the WORD has changed, the same practice is going on behind it...