Sunday, 3 January 2010

The dreaded deflation.

Deflation horror stories were all the rage a month or two ago, but seem to have subsided. Fashions change so quickly.

Of course these deflation horror stories for the most part failed to distinguish two entirely different meanings of the word deflation: 1, falling prices, and 2, inadequate demand (i.e. excess unemployment). At any rate, where the distinction was made, it seems that falling prices were in themselves a precursor to the end of civilisation as we know it. I never lost any sleep over this.

In the US between 1866 and 1897 output rose by 4% a year while prices fell by 2% a year according to an article by Samuel Brittan in the Financial Times. The sky didn’t fall in the US in these years did it? And what is wrong with an output rise of 4% a year?

And in the UK between 1870 and 1896, wholesale prices fell by 50 per cent, while Britain’s economy also grew by 4 per cent each year, according to an article by Ian King in The Times. Was the sky in a state of permanent “fall in” in this period in the UK? I don’t think so.

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