Storm wrote:
I've never heard of deflationary prosperity. Deflation, by it's very nature, encourages people to save money, since a future dollar is worth more than a present dollar. This discourages spending and the economy stalls. Not a very good recipe for prosperity.
I'd certainly be happy to be proven wrong. Can you think of a period of time where any country has had deflationary prosperity?
Yes.
Deflation as in the 1930's is bad (a deflationary recession). Deflation in general is not bad but the normal state of growing prosperity with free market competition. Your general theory is incorrect and illogical and also typical of a Keynesian perspective. Check out the Austrian school of economics for how free markets really work.
Details...
Keynesian theory that deflation is bad holds only for conditions caused by inflationary stimulus. That inflationary stimulus must be brought about by an external (to the economy) force such as bank creating money out of nothing, and the consequence of that stimulus being diminished either thru an actual reduction or natural accommodation within the economy to the level of stimulus being applied is the prototypical Keynesian deflationary recession. Keynesian theory then holds that more stimulus must be applied to cure and/or prevent the recession, and the Austrian school points out that logically the stimulus must end at some point and the recession will cure itself if left alone.
Absent the application of inflationary stimulus, deflation is the natural order. As techniques improve efficiency increases and costs will come down. This is what we have seen with electronics and computers and automobiles and farming and everything, barring or in some cases in spite of inflationary stimulus. Such natural deflation is and always will be a good thing.
Deflation only encourages people to save money if they are uncertain about the future and in that respect it is much like any other time. If not fearful, whether inflation or deflation, people will spend what they have available. During deflation consequently they will buy more with their money because prices in general are falling (so they get more for their money every time they buy). Buying more goods and or services is good for the economy and prosperity grows. During inflation people will get less for their money, so they buy less, and buying less is bad for the economy and people become less prosperous.
Due primarily to the Fed, the most recent examples are only in specific sectors... Deflation in electronics then computers has been constant for at least 50 years. Yet people still buy electronics and computers and I cannot understand anybody claiming that area is not booming. Deflation in automobiles caused many more people to buy automobiles in the early 20th century and again, that industry was booming.
Deflation was common as an overall trend in the wider U.S. economy for the first 150 years of the U.S. and apparently before that as measured by the prices and availability of goods and services, yet the U.S. was booming during those same times. When the deflationary trend was broken was when the booms also broke (several isolated and short periods, the worst of which was the civil war which was followed by a very sharp deflation and a corresponding boom).
There were a few inflationary stimulus booms during that 150 years in the U.S. and they were followed by deflationary recessions but both were very limited in area and/or time. (failed banks and a couple of attempts at a central bank.) There were also some inflationary booms caused not by money from nothing stimulus but by actual new money when large gold and silver deposits were found in the Dakotas, California, Nevada and Alaska. The new money found did create inflation which led to a boom, but because it was not a stimulus created by money from nothing, the new money 1) actually existed, 2) was limited, and 3) consequently was absorbed into the economy thus ending the inflation without causing widespread deflationary recession. (Tho obvious by the "ghost town" phenomenon, there was still deflationary recession in the area where the money first hit the economy.) (The same effect hit Spain when the looted the gold and silver of the "new world". It flooded their economy with real money. In that case, there as so much new found money relative to the size of their economy that when it came to an end, things got really bad.)
The U.S. deflationary general trend was broken for the last time in about 1914 when the federal reserve was created and proved able to keep a continuous inflationary stimulus boom going for much of the past almost 100 years. During that time the dollar has lost 95% or more of its original value as the money from nothing stimulus dilutes the existing supply of dollars faster than growth in the economy creates new goods and services for those dollars to purchase.
At this point we either need to 1) boost stimulus even more (exponential growth is needed) and postpone the day of reckoning, 2) let a deflationary recession bring us back to equilibrium, 3) some theoretical balance struck by luck which lets production catch up with dollars while narrowly avoiding a deflationary recession.
"[Federal Reserve stimulus] must always end in a crisis and a slump, and ... worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of capitalism." --Henry Hazlitt, 1960
Ludwig von Mises writes, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
and, "[A boom as the] first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted... people still believe that prices one day will drop... they restrict their purchases and ... increase their cash holdings... it is not yet too late for the government to abandon its inflationary policy. ...then, finally, the masses wake up... The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within ... a few weeks or even days, the things which were used as money are no longer... They become scrap paper. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear."
"You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold." --George Bernard Shaw
