Richard Ebeling: Don’t Fear “Deflation,” Unless Caused by Government

By Richard Ebeling

It was the five years of easy money policy and interest rate manipulation between 2003 and 2008 that created the unsustainable housing, investment, and consumer spending booms that finally came crashing down in 2008 and 2009. The Federal Reserve’s 50 percent increase in the supply of money and credit in the banking system between 2003 and 2008 generated the illusion that people could do more and spend more than the scarce resources of the society could actually fund and cover.

The recession was a symptom that numerous sectors of the economy had been thrown out of balance during the years of easy money, and that markets needed to rebalance to restore sustainable full employment and long-term wealth-enhancing growth.

Instead of leaving markets alone to find their own levels for that rebalancing of supply and demand, the Federal Reserve continued to pump in even more money into the financial markets – over $4 trillion more into the banking system – and the Federal government went on an even larger than usual deficit spending binge – over $4.6 trillion worth between 2009 and 2013.

Rather than assisting a post-recession recovery, these policies – plus other market-harming government interventions, regulations, and manipulations including ObamaCare – have made this the most sluggish recovery, especially in terms of employment, in the entire period since the end of World War II in 1945.

At the same time, the Federal Reserve leadership has argued that its “quantitative easing” policies were necessary to prevent the economy from experiencing any significant “deflation,” defined by the monetary authorities as a sustained and continuing fall in the general level of prices.

This is what is behind the unofficial Federal Reserve policy of aiming for a “target” of two percent price inflation, that is a sustained and continuing rise in the general level of prices.

What is considered to be so “damaging” in a general decline or fall in prices throughout the economy? For many economists, including, seemingly, those at the helm at the Federal Reserve, falling prices is considered a sign of economic “bad times.” After all, how can businessmen be making profits and maintain employment if their selling prices are going down?

It is possible to distinguish at least three causal reasons behind any observed general fall in prices, or “price deflation,” and it is worth understanding the affects of each one.

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