The fear of deflation has become the cornerstone of Keynesian economic thought. A lack of inflation has been used to explain periods of economic weakness from the Great Depression of the 1930′s, to the Great Recession 2008-2009. And now, that philosophy has been adopted as gospel by those that control the Federal Reserve and virtually every central bank on the planet. In reality deflation is cathartic, and a necessary condition to heal the economy. If deflation were allowed to naturally run its course, as it did in the brief Depression of 1920-21, depressions would be sharp but fairly short in duration. And the economy would find itself on firm footing fairly quickly. However, Keynesians view deflation as the source of a destructive cycle in which; asset prices plunge, companies cut jobs, spending plummets, and a permanent recession sets in. Therefore, the prevailing current view maintains that deflation is something that needs immediate intervention of massive monetary stimulus – you can say they have become deflation phobic. This is why I find it fascinating that Keynesians, who proliferate in central banks and in the financial media, are relentlessly cheerleading the recent spate of deflationary data. And, just to be clear, deflation has not been limited to the New England Patriots’ footballs – it is everywhere you look.
However, it is the height of hypocrisy that Keynesians use the specter of deflation to frighten us into believing we need to endlessly dilute the value of our currencies and take the rate on our savings to zero percent. But then, at the same time, take every data point that points to falling prices as another reason to be bullish on markets and the economy. Their mantras are: Lower commodity prices – a boost to the consumer, plunging interest rates – an increase in mortgage refinancing, I actually heard a commentator suggest crumbling copper prices were a boon to minting pennies – he obviously didn’t realize pennies have been minted mostly with zinc since 1983.
How can Keynesians celebrate deflation, while at the same time use it to scare us into accepting ZIRP forever? The easy answer would be, they are cheerleaders for the stock market…and I believe they are.
This post was published at David Stockmans Contra Corner on January 26, 2015.