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Another look at ‘deflation’

Another look at ‘deflation’

Today’s news that; 1) the increase in import prices has outpaced expectations,
2) continuing unemployment claims are at their highest level in more than
twenty years, and 3) the price of crude oil for August delivery has risen
above $31.60 per barrel (its highest price in four months and within 72
cents of its contract high) inspires me to revisit the absurd contentions
that “deflation” (the incorrect, but widely accepted term used
to describe falling consumer prices) has a possibility of occurring and
that even if it were to occur, that it would be a bad thing.

It is generally accepted than falling oil prices would be good for the
American economy. Why is that? If falling prices are bad, why are falling
oil prices good? If falling oil prices are good, why doesn’t the same
hold true for clothing, food, consumer electronics, automobiles, appliances,
toys, insurance, health care, education, rents, etc?

Some might suggest that oil is imported, and that higher oil prices are
therefore a drain on the economy. While that is true, the same holds true
for just about every product that Americans consume. In fact, the U.S.
“only” imports about half of its oil. The percentages are far
greater for many of the other product categories listed above.

The economy is weak. Many are unemployed. Is the Fed of the opinion that
a rising cost of living would some how help improve this situation? Would
conditions for the unemployed improve if they were confronted with a rising
cost of living as well? Or would their situation be somewhat less burdensome
if the prices of the things they need to buy became less expensive? If
companies are having difficulties selling their products at current prices,
wouldn’t it be even more difficult to have to sell these products at higher
prices? If companies are finding it difficult to generate adequate profits,
wouldn’t the task be that much more difficult if their costs, which merely
reflect prices paid, increased? Isn’t it true that decreasing costs help
enhance profitability? In fact, wouldn’t we all benefit from a falling
cost of living? Think about it rationally. If health care was to become
more affordable, if the cost of educating our children became less expensive,
if necessities such as food, energy, clothing, and shelter consumed a
smaller fraction of our budgets, if it became cheaper to travel, buy a
car, appliances, or toys for our children, wouldn’t these be good things?
Does the Fed really need to save us from this menace?

As I have written in the past, the Fed knows that there is no chance
that Americans will have to “suffer” from a falling cost of
living. The only prices in danger of falling are asset prices. Current
Fed policy has nothing to do with saving us from a non-existent threat
(of what is in reality a good thing), and everything to do with further
inflating the bubbles in the stock and real estate markets. This irresponsible
policy can only end in disaster, with the ironic result sending consumer
prices, the very thing that the Fed is purportedly trying to keep from
falling, soaring though the proverbial roof.

Falling consumer prices are a good thing, and are the natural benefits
of a free market economy. The fact that Americans have been robbed of
those benefits by the Fed’s continual debasement of our currency does
not alter this fact. For those of you who may not have read, or simply
do not remember, my last email on this subject, I have attached a copy
of it below. In it I debunk some of the popular explanations of why “deflation”
is bad.

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