To hear one economist after another — as one does these days! — say that a deflationary economy is a very bad thing and leading to, one infers, the death and destruction of the whole economy. It would be an economy in such a state that all of us would be suffering in one way or another.
Having just heard yet another economist proceed in this way — on this occasion a BBC economic journalist (definitely not Robert Peston I might add) — this lunchtime, let’s set the record straight once and for all. What he said is that, in a deflating economy, money starts revaluing and prices starts declining. People decide not to buy today because prices will be less tomorrow. And so on it goes — he implies — the economy sags and, before too long, unemployment grows and, before you know it, we’re all in trouble.
This is, of course, a nonsense narrative. We don’t stop buying simply because prices might be cheaper tomorrow. We all have constant wants — such as food — and we all continue to buy. For many items, we buy just as much today as we always used every day whatever the price.
What actually happens is that as the economy declines then it starts to cull one inefficient supplier after another as they go bankrupt. As we approach efficient suppliers of any one item we find tbat its price stabilises. The economy, like any physical system start correcting itself. It will be automatically searching for the ‘least effort’ route.
Over the years — that is, since the 1930s when governments started printing money — we have all been programmed to think in terms of inflation between 0.5% and 2.5% per year as being acceptable. It means that if we have cash savings then e are losing that much every year but as most people don’t have reserves it doesn’t matter. Rich people have higher returns from their investments than inflation. On the other hand, governments save enormous amounts every year by paying back bad money as interest on their debts compared with the good money that they borrowed in the first place.
A mildly deflationary economy is a desirable state to be in.