Deflation – Who’s Afraid of the Big Bad Wolf?

Deflation is good. Err…

Deflation is the bogeyman of financial markets. Any mention of it will send shivers down the spine of fund managers and bankers alike who have been conditioned to believe that deflation is terrifying. But, like all ghost stories, the reality is somewhat different.

That is, with regard to consumer price deflation.

Prices of goods and services can fall for many different reasons. Indeed, falling consumer prices should be a natural by-product of strong economic growth. In simplistic terms, more stuff is being produced which means more supply relative to demand, hence downward pressure on prices. Don’t believe me? Look at the chart below. It shows U.S. Real Gross National Product per Capita from 1870 until 1918. The period to focus on is from 1870 until 1890. During that time, prices of goods and materials decreased in what has become known as “The Great Deflation.” This from Wikipedia:

“The Great Deflation occurred at the beginning of the period sometimes called the Second Industrial Revolution. It was characterized by dramatic increases in productivity made possible by the transition from agriculture to industrialization in the leading economies. The new leading industries were Bessemer and open-hearth steel, railroads, the machinery industry, efficient steam shipping and animal powered agricultural mechanization. The prices of most basic commodities and mass-produced goods fell almost continuously; however, nominal wages remained steady, resulting in a pronounced and prolonged rise in real wages, disposable income and savings – essentially giving birth to the middle class.”

Some, most notably fund manager Cathie Wood of Ark Investment Management, believe that what the world is going through now is akin to another industrial revolution. In a recent Bloomberg column, Wood stated:

“…we see three major deflationary forces brewing. On the innovation side, we’re in a period today like we’ve never been in. You have to go back to the telephone, electricity and automobile to see three major technologically enabled sources of innovation evolving at the same time. Today, we have five platforms: DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology — all of which are deflationary.”

So, get ready for a period of strong economic growth accompanied with falling prices and rising prosperity.


What if the next Great Deflation isn’t about consumer prices? What if the period ahead is about deflating the biggest debt bubble in the history of mankind? The expansion and contraction of money and credit is the true definition of inflation and deflation. In such a debt-deflation, asset prices and economic growth are subdued. Indeed, stock markets will very likely exhibit a return profile similar to the year-to-date return of the Ark Innovation ETF – down 30%.

The Great Deflation