Busting a Deflation Myth

We are told consumer price deflation is bad. Really?

When it comes to consumer prices, our generation has been brainwashed into thinking a certain way. Rampant inflation is bad, a little inflation is good, and deflation is bad.

OK, so rampant consumer price inflation really IS bad. When it occurs, lives are ruined as life savings disappear and societies can change dramatically, in some cases coincident with or prior to revolution, devastation, and horror (Weimar Germany circa 1923 is often cited as the iconic example, but Hungary 1945, Zimbabwe 2007, Argentina 1975-1991 and Brazil 1990 are also some real horror stories).

Consumer price deflation is always bad for stocks? This myth has come about from the period subsequent to the 1929 stock market crash when consumer prices deflated alongside assets and debt, and the Great Depression followed. Ever since then, governments and central banks have sought to convince us that deflating consumer prices should be avoided at all costs. This has enabled them to print money, expand debt and extend the cold, dead hand of the state into the economy.

The stock market is a lead indicator of the economy and so, using this line of argument we would expect to see a declining stock market where consumer price deflation exists.

Well, Greece has just registered its twelfth month in a row of declining consumer prices and yet the stock market has advanced by over 30% during the same period. This blows away the myth that consumer price deflation should somehow be viewed as being “bad” in an economic sense.

Nevertheless, to allow their pursuit of an ever-expanding state and to keep the debt-bubble inflated, governments and central banks persist in their belief that a little consumer price inflation is good. Not too much, not too little, but just right. Kind of a Goldilocks scenario.

Goldilocks met three bears. Baby bear might have been in 2000 and mummy bear in 2008. With the debt bubble ripe for deflation, the next one she meets might be daddy bear.