Reply To: Deflation and Property


As Joe Salerno points out there are different types of price deflations. One type is caused by economic progress which leads to increased money demand relative to the money stock. This type is benign to the operation of the economy. The U.S. experienced this so-called growth deflation in the latter part of the 19th century. Another type is an increase money demand in reaction to a previous bust. It too is benign and part of the liquidation and reallocation process that corrects the malinvestments of the boon. A third type, which is malignant is brought about by an intentional monetary deflation by the state.

The hypothetical scenarios, such as your antagonist poses, in which price deflation is at rate great enough to create social problems would never occur in a market economy. These scenarios always assume that people have no alternative to the money that is generating a long-term price deflation. But, of course, if people have selected a commodity as money which experiences price deflation, then as the purchasing power of the money rises, the profitability of its production increases which leads entrepreneurs to produce more of the commodity money which mitigates the price deflation. Furthermore, if people have selected a commodity as money for which extra production in the face of rising profitability from price deflation is insufficient to mitigate the price deflation, then entrepreneurs will offer people a different commodity as money. If gold is subject to excessive price deflation, then people will use silver. If silver becomes subject to the same problem, then people will use copper, and so on.

For the economic analysis of deflation, take a look at Guido Huelsmann on deflation: