The dangers of deflation, or why Ron Paul and the Austrians are wrong

Long story short: Though a desire for deflation, and a fear of inflation, may have some plausibility at face value, when examined from the perspective of the economy as a whole (and I scarcely doubt that anyone thinks this isn't what policymakers should be concerned most about), a categorical fear of inflation, and a desire for deflation, aka "a strong dollar," is entirely wrong-headed. Austrians, including Peter Schiff and Robert P. Murphy, have fallen for this intuitive trap.

A sudden drop in prices in the economy will cause sudden, needless unemployment and an idling of scarce resources which have alternative uses. As an aside, wealth is actually destroyed by unemployment for human and physical capital degrade over time when idled. Skills erode or become obsolete, and machines rust and fall into disrepair. What's more important to remember is that prices, especially for labor, take time to adjust and they cannot be supplied unless prices reach their market clearing level.

Though austrians have a good (though by no means unique) explanation of asset bubbles, it is simply not the case that all downturns in the business cycle are caused by the collapse of said bubbles. Any perceived crisis or panic (war, resource shock, collapse in market, etc.) can spark a deflationary recession (and the attendant needless unemployment).

The solution to this, as demonstrated during the 2008-2009 financial crisis, is to inject liquidity (cash) into the economy through fiscal and monetary stimulus.

Ron Paul and the Austrians want precisely the opposite response and advocate a set of policies that would exacerbate the financial crisis. They want to raise interest rates and institute enormous cuts in government spending. Mark Thornton, for example, called for the United States government to lower the debt ceiling last July

http://mises.org/daily/5457

In short, a Ron Paul presidency would almost guarantee a second great depression.

Category:

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• Ron
• Paul
• Economy
• Glenn
• Deflation
• dollar
• inflation
• stimulus
• mises
• institute
• keynesian
• economics
• thomas
• sowell

[wizkid2000]

god your fucking retarded

[migkillertwo]

@wizkid2000 I've noticed that you Paulbots typically have no arguments.

[nosajsmas]

"Saving money in a bank makes it available to loan, making credit cheaper, which sends a signal to producers that it is time to invest in capital goods."

Sorry, that's not exactly right. I had capital goods on the brain when I wrote it. I'll try again.

Saving money in a bank makes it available to loan, making credit cheaper, which sends a signal to producers that it is time to invest in long term projects.

[migkillertwo]

"Saving money in a bank makes it available to loan, making credit cheaper, which sends a signal to producers that it is time to invest in long term projects"

That would be true of banks were always willing to lend to businesses which were credit worthy. But in deflationary recessions, this is simply not the case. Right now, it is not the case.

[tstruss912]

@polevaultrockstr The Austrian system is based on the right-wing idea of punishment = morality. That's fine to an extent, but when you try to base a whole system on one ideology then you're bound to fail. Markets are fine and so is gov. And, you equations mean little to me. I look at results. Mixed economies work best overall. Of course, we can't simply follow the successful European countries, huh? We have to try some fairy-tale bullshit just to be different.

[polevaultrockstr]

@tstruss912 it would be "that" not "the," and it is no religion. You assume that you can predicit how random humans will think with the austiran system, enjoy running into countless "equations" that lead you to incorrect anserwers, as no one view product at an equal value. You cannot compute the value of an item that is true for all people. Do you really think the person who produces the product values it at the same price as the consumer? Why sell it then?

[ArtworkbyMosier]

YOU ARE THE DUMBEST MOST IGNORANT FUCKING ASS GOBBLER I HAVE EVER HEARD!!!! SHUT THE FUCK UP AND TAKE UP A HOBBY THAT WILL MOST LIKLY TAKE YOUR LIFE CAUSE YOU ARE NOT WORTH THE GOD DAMN AIR THAT YOU BREATH THROUGH THAT BIG FUCKING NOSE ON YOUR FACE!!!!!! YOU HAVE NO FUCKING IDEA WHAT THE FUCK YOU ARE TALKING ABOUT ITS FUCKERS LIKE YOU THAT WE DO NOT WANT RUNNING A GOD DAMN THING!!!! EXCEPT A GOD DAMN NAIL GUN THROUGH YOUR FACE!!! DUDE THATS WHY YOU HAVE SO MANY DISLIKES CAUSE YOU LOOK STUPID

[EnlightenedOne100]

@migkillertwo I fail to see why these principles are important in a time when the government already failed at stimulating the economy, and we are broke. Getting more confidence in investing in America seems to be more important at the moment. Meaning we need to lower are debt and stop our money from skyrocket inflation. Why are you so worried the pendulum will fly the other direction so quickly?

[MichaeldeParma]

Disliked the video. Due to the audio. Get a mic, it's beyond awful.

[jimmyt3411]

First of all, asset bubbles are detrimental to the economy because it misallocates resources, which leads to an eventual bust. The bust or recessions are needed because it allows consumers to save again; providing liquidity to banks and other firms to capital stricken businesses. Only from the latter can businesses return to making real investments as they anticipate future consumer demand.

[johammbass]

Idiot