War Street Journal red alert. Deflation is raising its ugly head.

We need 2% inflation. Why?

One of the basic tenets of free market economics is the market responds to demand by increasing production. This is accomplished by improving processes and efficiency. The end result is prices go down and more products are sold.

The WSJ via Paul Krugman, the New York Times resident Keynesian, says this is bad.

Krugman has three reasons to be wary of falling prices

Falling prices cause people to hold off on purchases, waiting for prices to further decrease.

Deflation makes the dollar worth more causing debtors to pay off debts with higher value dollars.

Wages decrease with prices.

Baloney. Read the rest of this entry »