Deflation Again

Dealing With Deflation
An excellent primer on deflation. It suggests that even if we experience deflation it will be of the “good” kind based on increasing productivity and oversupply, as opposed to a lack of demand. For thirty years after the Civil War we had deflation yet maintained an average GDP growth of 4% while prices were dropping. Read the whole thing.

PEOPLE like low prices. So why is Alan Greenspan worried about deflation? Cheap is good . . . isn’t it?

Yes, cheap is good. Deflation itself isn’t necessarily bad; what matters is what causes the deflation.

Deflation is a symptom, not a disease. Just as a rosy complexion can be a sign of health or of a fever, deflation can be a sign of underlying economic strength or weakness.

Falling prices can arise from too much supply or too little demand. Having too much supply can often be a good thing, while having too little demand is almost always bad.

To understand the difference, it is helpful to look at two major periods of deflation: the post-Civil War deflation, which lasted 30 years or so, and the first three years of the Depression.

The post-Civil War deflation was essentially caused by increased productivity growth. The gold standard exacerbated the downward pressure on prices: With a fixed supply of money and an ever-increasing supply of goods, prices naturally fell.

We’re experiencing strong productivity growth which could indeed lead to deflation if aggregate supply outpaces aggregate demand.
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