–Which is more serious: Inflation or deflation?

The debt hawks are to economics as the creationists are to biology.

Which do you feel is more serious – inflation or deflation? The term “more serious” can refer to frequency of occurrence. Or it can refer to difficulty in prevention or cure. Or it can refer to its affect on the economy.

Stated simply, deflation is the opposite of inflation. As with inflation, deflation is expressed as a comparison of demand vs. supply. It is a reduction in the demand for, vs. the supply of, goods and services compared with the demand vs. supply of money.

Supply is a self evident concept. Demand is based on risk and reward. When applied to goods and services, the risk is further deflation. The reward is the inherent reward for obtaining the goods or services. When applied to money, the risk is inflation and the reward for owning money is interest.

In brief summary, deflation can occur when:
1. Money is perceived as becoming more valuable: The supply of money goes down and/or interest rates (reward) go up, while the perceived risk (of inflation or non-payment) goes down. The more likely combination is reduced money supply together with increased interest rates.

2. Goods and services are perceived as becoming less valuable: The supply of goods and services goes up, while the reward (quality) goes down, and or/the perceived risk (of deflation) goes up.

Put all these possibilities together and the most likely, deflation-causing combination is excess supply of goods and services compared with reduced money supply.

Inflation is fundamentally the opposite of inflation, so most of the causes of each tend to be opposites. The key difference relates to the supply of goods and services. In this world economy, it virtually is impossible for a broad number of goods and services to be in worldwide short supply, if money is available to buy them. For that reason, inflation rarely is the oft-mentioned, “Too much money chasing too few goods” – with one exception. Energy. Because energy costs and availability impact nearly every product and service, there is a modern historical relationship between oil prices and CPI.

All of the above leads to one interesting conclusion: While deflation can be caused by a shortage of money, inflation rarely is caused by an over-abundance of money.

If, in comparing seriousness, we mean frequency of occurrence, clearly inflation would be considered more serious. Deflations are rare, having occurred perhaps three times in U.S. history. Inflation is an annual occurrence.

If, in comparing seriousness, we mean difficulty in prevention or cure, I believe deflation is more serious. Inflation easily can be prevented and cured by raising interest rates, which increases the demand for money. There is no limit to how high interest rates can be raised.

By contrast, trying to use interest rates to prevent deflation runs into the obstacle of zero rates. Though negative rates may mathematically be possible, it is difficult to imagine many borrowers accepting negative rates. Thus, the sole prevention for deflation is increasing the money supply, which the debt hawks have made difficult.

If, in comparing seriousness, we mean affect on the economy, I believe deflation is far more serious. Modest inflation can be stimulative, in that it encourages consumers to buy today, rather than waiting for tomorrow. Deflation encourages delaying purchases, which negatively impacts the economy, and can cause a feedback loop of lower and lower prices, longer and longer delay.

All of the above considered, I suggest deflation is far more serious than inflation.

Interestingly, debt hawk commentators, who are fixated on easily-prevented, easily-cured inflation, seldom mention deflation as a threat. The reason may be that there is no debt-hawk prevention or solution for deflation, as the sole solution (increased federal spending) is considered out of the question. Yet here we are, struggling against deflation, while Congress and the media preach against the one action that can prevent it.

Next time I’ll discuss stagflation, every mainstream economist’s nightmare.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

15 thoughts on “–Which is more serious: Inflation or deflation?

  1. I am a creationist, but I agree with you on your economic theories. I find it hard to refer friends to your website, because of your views on creationists.


    1. I’m sorry, Theron.

      You object to the line, “The debt hawks are to economics as the creationists are to biology.”

      What is your objection? Creationist do not accept the science of biology. I do not consider creationism to be science, nor should you. It is religion, derived not from scientific inquiry, but from the bible. Creationism denies it is religion, and I do not understand the reason for the denial.

      If you believe a God created everything we see, just as we see it, and do not accept natural selection, fine. But don’t call it science. Call it what it is: Faith.

      And please, please, please end your efforts to have creationism and such offshoots as “creation science” and “intelligent design” included in our students’ science curriculum. The bible is not a science book. Hiding religion under a scientific banner is dishonest.

      I will give you this, however. Mainstream economics should be taught in a theology class, because it preaches faith, not fact.

      Rodger Malcolm Mitchell


  2. “Stated simply, deflation is the opposite of inflation. As with inflation, deflation is expressed as a comparison of demand vs. supply. It is a reduction in the demand for, vs. the supply of, goods and services compared with the demand vs. supply of money.”


    Inflation and deflation are not a matter of demand (pushing or pulling), they are both a monetary issue to do with the availability of money.

    Increased demand can increase SOME prices for SOME things, however ‘demand’ (which is virtually limitless) doesn’t, and cannot, raise ALL prices across the board.

    For example iPads may become valuable, reducing the price of similar systems such as netbooks. However that is merely moving demand from one place to another. When both netbooks, iPads and the cost of milk go up that’s due to extra money, ie the devaluing of existing money.

    Price-fixing the price of money (interest rates) can certainly skew the economy into malinvestments by creating cheap credit, which in turn creates extra “money” (in the form of DEBT) but it does not increase “demand”.

    There is no limit to demand, only limits on the money available.

    The idea that all of a sudden prices go up because, why the serfs are demanding more goodies, is as nutz as your soverign money idea.


  3. Sorry to revive an old thread Rodger but I have a deflation question.
    In this and your other posts you have said runaway inflation is unlikely in our global economy (at least that’s how I understood it). Their will always be enough production to meet the demand of a larger money supply.
    Now my question is: Is deflation possible? Are we at a point where the economy chooses recession rather then deflation? Buisness would rather cut labor and other costs then lower prices? Is their a situation where deflation rather then recession occurs or do they go hand in hand?
    Thanks, and keep on truckin’


    1. Yes, both inflation and deflation are possible, though less so now that we are in a global economy. We briefly were in a deflationary period toward the end of the recession: See: http://research.stlouisfed.org/fredgraph.png?g=dkf

      Inflation is prevented and cured by raising interest rates. Deflation, the opposite. But with rates at 0%, today, they would have to go negative, which actually has happened in some countries, for a very short time.

      You would pay your bank to store your dollars, rather than the bank paying you interest.


  4. Hello Rodger, thanks for the great information. This is burning question I have, and there is probably a simple answer to it, but I cannot figure out what it is.

    Given that money is fiat and is created through keystrokes on a computer, why can’t the government take the money creation power out of the hands of banks, transfer that power to itself, and then simply electronically transfer X amount of money every year or every financial period directly into the bank accounts of each individual American citizen? This would completely relieve banks of the money creation power and confer upon the citizens, equally, all of the benefits of newly created money. The citizens could then choose to spend, save, invest etc. as they see fit. Bank-like entities (like lendingclub for example) would the play the role of intermediating between lenders and borrowers… Also, because government could not fund itself by selling treasuries to the central bank, but rather would have to fund itself through taxation of the citizenry, there would be more accountability by the government to the citizenry. For example, to fund a war, the government would have to raise taxes, which would make very real to the American people the choice they are facing (i.e.: fund a foreign war or save up to put my son through college… )

    If you could provide some clarity concerning this query I would be very appreciative.


    1. Government spending is necessary to do the things the people can’t do for themselves even had direct funding from the government. Infrastructure, medical care, food inspection, financial supervision — the list is endless.

      Re. taxation preventing war, that will not work. People are willing to go to war, because the government tells them it is necessary. If thousands of young men and women dying doesn’t dissuade the people, taxes won’t.


    2. Thanks for the reply.
      I’m sorry, I don’t think I was clear in what I was asking. In theory, could the government take on the role of sole money creator, thereby removing banks from the money creation business? If so (and after the necessary government spending is complete) could government then give money directly to the people. Such that the government creates X dollars, spends part of the newly created money on roads schools etc., and then gives the rest DIRECTLY to the people?


  5. I grant government spending is necessary. I grant people will choose war. But that is not my question. My question is: Do we need banks to create money or can the government create money and distribute directly to the people of the united states sans their normal expenditures on infrastructure etc. etc.


      1. What are banks important economic functions other than money creation? Do you mean providing storage for saving, and coordination of lenders and borrowers?


  6. Many people that get these loans often have never had any
    credit, which makes it impossible to get a loan anywhere else.
    Report any wrongdoings by your lender to a state agency.
    If you provide them with the money, you can collect interest and you can charge as much as the banks do.


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