Doug Casey: “Deflation is actually a good thing”
Q: Doug, according to a recent article called “The Greater of Two Evils,” The Economist recently stated that inflation is preferable to deflation. What is your take on that?
Doug: It was certainly one of the most ridiculous articles that I have read in recent years. It is disappointing that The Economist is employing the same quality analysts that have populated magazines like Slime and Newspeak for so long — utterly conventional, thoughtless, and statist in outlook. Everything in this article is not only wrong but the opposite, exactly the opposite of what the truth is.
You know, it is funny. It starts off with a section title saying “Inflation Is Bad, But Deflation Is Worse.” No, inflation is very bad, and deflation is actually quite a good thing. I will explain that in a moment. But the first thing that drew my attention in the ridiculous article was a laudatory comment about Paul Krugman, who, they point out, is a Nobel laureate in economics.
My first comment is that the granting of a Nobel Prize in economics is as meaningless and arbitrary as the granting of the Nobel Peace Prize, which is really just a prize in political correctness and whatever appeals to the mob at the moment. These things are all very arbitrary. They have had excellent economists, and they have had anti-economists nominated for the Nobel Prize in Economics. It’s as meaningless an award as the Peace Prize — which has been given to criminal personalities like Kissinger and Arafat, and buffoons like Al Gore.
But let me get into the article itself. The author points out that inflation is distant and containable while deflation is at hand and pernicious.
Look, in a free-market economy, without central banks and without fractional reserve banking, both inflation and deflation as chronic events are really not possible. In a completely free-market economy, money is just a medium of exchange and a store of value. It is not used as a political football where the supply is pumped up to make people feel that they are richer than they are. It is not created by fiat encouraging people to consume and live above their means. That’s why inflation feels good at first… it makes you feel richer than you really are.
Deflation is actually a good thing, because in a deflation prices drop and money becomes more valuable, so deflation encourages people to save money. Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. In other words, by saving, not borrowing. And during a deflation, when money becomes more valuable, everybody wants money. They want to save. Whereas during an inflation, you want to get rid of the money. You want to consume. You want to spend. But you don’t become wealthy by spending and consuming; you become wealthy by producing and saving.
Inflation encourages people to borrow, because they expect to pay the debt off with cheaper dollars. It encourages people to mortgage their future.
The basic economic fallacy in this is that a high level of consumption is good. Well, consumption is neither good or bad. The problem is the emphasis on consumption financed by debt — which leads to the national bankruptcy we’re facing. It’s much healthier to have an emphasis on production, financed by savings.
The author also seems to think inflation is a matter of psychology. It’s not. It’s a matter of reality. If you double the amount of currency, you double the price level. But it’s worse than that. Some people — usually those who are politically well connected — get that new money before others do, and get to spend it at close to its earlier value. The government is the biggest beneficiary; inflation is a subtle form of taxation. It acts to concentrate more power in the hands of the state. Inflation, even a little, is a disaster.
Expectations have nothing to do with reality. Reality is how much wealth people have, how much cash people have, how many things they actually need. Expectations are written up in the popular press as being important, but expectations are nothing but a matter of psychology, and psychology is a chimera that can change totally overnight.
They point out later what a terrible thing it was that during the 1929-1933 debacle, prices fell 27%. But that only happened because the Fed was inflating the dollar for the preceding 15 years. They think that this time central banks are on the case and will prevent a deflationary depression. Perhaps they can prevent a deflation, by printing up trillions of new dollars. But the result will be an inflationary depression — like that of Germany in the early ‘20s or Zimbabwe today. All the central banks have pushed short-term rates to or close to zero and extended their balance sheets by buying debt. Well, once again, it is just the opposite of what they should be doing. Keeping interest rates at an artificially low level encourages people to borrow more, and borrowing is a sign of consuming more than you produce.
You do not want borrowing, you want savings. The emphasis should be on production, so the central banks are trying to build the house of cards even higher.
First of all, interest rates should not be set by central banks. They should float to whatever the market level is. It seems
likely to me that interest rates now, if we had a free market, would be moving towards 10%, 12%, 15%, 20%. Banks, justifiably, are afraid to lend, because they can see that depreciation of the currency is coming and they have to be compensated for that. The central banks are prolonging the situation and making it worse. In fact, central banks, like the Fed, serve no useful purpose and should be abolished. The market should determine what is used as money — probably gold — and should determine interest rates as well.
Q: To sum it up, what do you think about a serious publication like The Economist publishing an article like that? Where should people go to get better information on the current situation?
Doug: Well, I think we interpret things properly in our publications, which are philosophically very free-market oriented. Unfortunately, publications like The Economist are written by journalism students who have absorbed all types of ridiculous economic theories and put them forward, because they are kind of like the common consensus of the political classes.
________________________________________________________
Sign up to receive Doug Casey’s new weekly publication Conversations with Casey and we’ll immediately email you his special report, End of the Nation State…
…all absolutely FREE. 
Every Wednesday you’ll receive an exclusive interview with legendary investor and bestselling author Doug Casey. In every interview, you’ll get Doug’s unique perspective on the markets, politics, society – you name it. We guarantee you’ll become a better-informed investor.
________________________________________________________
