Opinion from a Libertarian ViewPoint

Deflation: Bad for the Government, Good for Producers and Consumers. What’s Not to Like?

Posted by M. C. on April 15, 2022

Deflation is only bad for the government. In a deflationary economy, it cannot tax people indirectly via inflation and it can’t use monetary policy to artificially boost the economy and get votes before there is the inevitable recession. Consumers (mainly the poorer) and entrepreneurs are the ones who benefit from deflation (due to lower prices and larger profit margins, respectively).

Andre Marques

Governments lie about the inflation rate and benefits from it, so, it is no surprise when they talk against deflation (for the purpose of this article, assume inflation as a general increase in prices and deflation as the opposite), which would be good for consumers and the economy, but bad for the government. (While Austrian Economists define inflation as an increase in the supply of money, the net effect of inflation is an increase in asset prices, as well as a distortion of the structure of production.)

Prices fall in a scenario where the currency is not inflated and, therefore, there are more sustainable investments and increased productivity. In an economy with little or no government intervention (at least few monetary interventions and few regulations, government spending and taxes), there are more long-term investments (capital investments, for example), which increase the economy’s productivity. In a deflationary economy, the purchasing power of money tends to increase, as there is no monetary inflation by central banks and prices tend to fall. Consumers can purchase more products and services and companies have higher profit margins.

But governments do not like deflation, they are the most indebted entities. Inflation is beneficial to borrowers, as they repay loans in a currency with lower purchasing power than when they took the loan. It is even more beneficial to the government since it can expand the money supply to pay the debt. Furthermore, inflation is good for the government because it creates an apparent economic boom, which will eventually be wiped out by a recession. But, as this can take a few years, the short-term incentive for the incumbents is to take advantage of this instrument.

Two typical arguments given by governments against deflation are as follows:

“Deflation Will Cost Entrepreneurs”

The reasoning behind this statement is that, if prices fall, entrepreneurs will sell products and services at lower prices than the cost to produce them. However, this statement does not hold if we consider the fact that, in a deflationary economy, the currency’s purchasing power tends to increase. So even if entrepreneurs get less money (nominally) than what their products cost, in real terms, they will still make a profit. In addition, the prices of the inputs used in production will also fall in a deflationary economy.

Therefore, with the use of productivity and management of expenses that every company must have, it is possible to sell the products at low prices, but with the same or even higher profit margin than in an inflationary environment. (Note: even if we disregard this gain in purchase power and lower production costs, it would be possible for the entrepreneur to protect himself through future contracts). And, precisely because prices get lower, consumers buy more products and services (without going into debt) and companies profit more due to the reduction in costs that occurs thanks to deflation. This is particularly the case in the technology sector. Computers today are cheaper and much better than they were 30 years ago. Because prices got lower (due to increased productivity), consumers began to buy more, which increased the industry’s profits, which brought more investments and higher productivity.

“Consumers Will Postpone Consumption under Deflation”

The reasoning behind this argument is that if prices are constantly falling, no one will buy the products and services because individuals will always expect prices to go down. This also does not make sense, as there are always products and services that people have to purchase (such as food and medicine). Nobody starves themselves to death or does not purchase medicines because a year later they will be cheaper. 

See the rest here

Be seeing you

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: