 Walter Block just told me when I was leaving our office and said, look, try to give your talk a free enterprise line, not your usual interventionist crap. So I will try to do this now, the deflation lecture. Let's start with a few definitions. So after World War I, oh, excuse me, this is an error. After World War II, actually deflation has been commonly defined as a sustained decrease of the price level, which is therefore an analogous definition to the one of inflation, which is a sustained increase of the price level. So we talk also in this case of price deflation. The two important elements of this definition is, first, is the level. So it must be that there be a decrease of the price level, not of individual prices. And the second element is that this decrease must be sustained. Traditionally, that is, before World War II, deflation has been defined as a decrease of the money supply, which previously had been artificially increased. Here we talk, therefore, of deflation in the narrow sense. Definitions, ultimately, are just a starting point for analysis, starting point for scientific inquiry. It's important to distinguish the substantial issues in a definition of the terminological ones. There are certain Austrians who insist that words only be used in a certain sense, inflation, deflation, means this or that. I think these quibbles are very often not very fruitful. But it is important, on the other hand, to distinguish phenomena. So we have here two phenomena. One is a change of the price level here, a decrease of the price level. We need to distinguish this from a decrease of a money supply that had been previously increased, or artificially increased, which are two different things. It's not necessarily the case that the two go together. Of course, let me just highlight this word artificially increased, but it is, after all, there's also something like natural money production. For example, if we have a free market economy and we had a precious metal monetary standard, then there would always be some natural production of money that would not be inflation. And by the way, there would also be no tendency then for deflation to exist. So this definition of this traditional definition of deflation brings us back to the Latin root of the word, which is deflare, as opposed also to inflare, so inflate, so to blow up an artificial increase. Deflation then, according to this definition, brings the money supply back to its normal level. And this normal level is not necessarily the previous level. For example, you could have an artificial increase of money substitutes, as in the case of fractional reserve banking. If then fractional reserve banks become bankrupted, become illiquid, so they leave business, the money supply shrinks. But it does not necessarily shrink to the previous level. It shrinks to the level defined by the base money, that is, by money in the proper sense. These fractional reserve banks operate on a gold standard. They have increased their own issues in excess of the reserves that they hold. They are fractional reserve banks. And then it might be that during the time the gold stock increases due to the production of gold. So the money supply, the natural money supply increases. And what deflation does then is to bring back the money supply not to the previous level, but to the level defined by the underlying gold supply. Now, before I present to you our lecture out, we still need to make another little preparation by just highlighting the different points of view that economists have on deflation. Deflation is a very contested issue. And therefore it's also a very interesting issue, not only from a practical point of view, but also from a theoretical point of view. Keynesian economists oppose deflation and price deflation. And this is because, as we will still highlight in some more detail, this is because Keynesian economists believe that the spending of money is the true engine of economic growth. So if spending diminishes and it is likely to diminish, if the price level diminishes, then we are in trouble. So the economy runs the risk of suffocation. Central banks, therefore, who today operate under the virtual exclusive influence of Keynesian ideology, consider the fight against deflation of all sorts as one of their core missions. That is deflation of all sorts being defined in the sense of a decreasing price level, especially in the sense of a decreasing money supply. And nowadays, there are even some economists around who think that we should prevent that the rate of inflation ever diminish. So this is a new kind of definition of deflation. And if you have an inflation rate, let's say, of 5% year after another, then the deflation rate shrinks from 5% to 3%. This is already deflation. So if the money supply does not expand quite as fast as before, wow, this is already deflation. So central banks, this is not yet a majority opinion, but vocal expressions of this. So central banks consider the fight against deflation as one of their core missions. And we will see that this is not completely absurd. So there is a prima facie case for this. But we will also see that this case is not very strong. Orthodox monetarist economists have traditionally opposed deflation, that is a shrinking of the money supply, but not a price deflation. And Friedman, for example, has criticized the Federal Reserve Policy in the early 1930s, which, according to him, failed to prevent a shrinking of the money supply. And he saw in this failure the main cause of the Great Depression of the 1930s. And Friedman was not against permitting the price level to decline at a constant money supply, or he actually recommended that the money supply be expanded at a fixed low rhythm, some 3% or 5% per year, and would let the price level adjust freely under this policy. That is, if you increase, for example, the money supply each year by 3%, and the economy grows at a stronger rhythm, let's say 10% or 15%, then you would get actually price deflation, and Friedman would not have objected to this. Within the Austrian school, of course, different traditions and so on, so there's one tradition that we can call the Viserian wing. This goes back to Friedrich von Wieser, one of Carmengas' pupils. The Viserian wing of the Austrian school, which includes today Lawrence White and George Selgen, opposes not only deflation, that is a shrinking of the money supply, but also price deflation, if such price deflation entails reduced aggregate spending. That is, White and Selgen would consider deflation to be non-problematic if prices shrink in a growing economy, if the total amount of money that is being spent within the economy rests at least constant. So in this case, for example, there's always the same amount of expenditure. If a savings-based growth process, and we'll consider this in more detail later, then there would be more spending on capital goods, less spending on consumer goods. So the prices for consumer goods would fall. This would not be problematic in the eyes of Selgen and White. But if, for example, we have a case of an increased demand for money, increased cash holdings, and as a consequence, the total amount of money that is spent on capital goods and consumer goods diminishes because people are holding back their money, like hoardings, or they're sucking the live blood out of the economy, this would be very harmful according to Selgen and White. Now as opposed to this, we will take the position that both deflation and price deflation are beneficial in virtually all cases. I won't go into detail about this virtually all cases. There is, in fact, a case that I would consider to be harmful, namely the case in which deflation is artificially brought about by government interventions. And this can be done in various ways. We won't address this today. But in virtually all cases that can happen in a free market economy, deflation is beneficial. So how will we go about this? We will focus on three points. We will discuss first a little bit the causes of price deflation and then go into more detail analyzing price deflation resulting from two causes, namely, in the first case, for monetary reform and then also from savings-induced growth. And if we really have much time, which I doubt, we might even talk a little bit about deflation sparrows. If you are very important, it's not actually a book. It's a little brochure, which is on sale downstairs. It's a very promising author. It makes a quite good case, actually, for the subject of my lecture. So let's look at the causes of price deflation. And here we can distinguish the immediate causes and the more remote causes. There are always more remote causes, right? Each cause has in itself another cause, and so on. So you can trace this back indefinitely. And the question, how far do you trace it back ultimately? Well, it depends very often on pragmatic considerations. And we'll just push the causal analysis so far that we can get a hold of our two main scenarios. So the immediate causes of deflation are a decreased aggregate demand and an increased production, increased aggregate production. Decreased aggregate demand, so this is what the Keynesians call, this is Keynesian vocabulary, right? Aggregate demand. So it's the total amount of money that is being spent on economic goods. This is aggregate demand. So if the amount of money that people spend increases and the amount of goods remains the same, then there's a tendency for prices to increase because different owners of money will bid up prices in a competitive process so the prices will tend to increase. If the total amount of money that is being spent on economic goods diminishes for the same reason, there will be a bidding process that pushes prices down. So if the first immediate cause, the second immediate cause is decreased production. And we might also, well, actually would have been more correct to say increased supply. Usually the supply increases only due to production. If there are more goods and services that are now being sold within the economy for the same amount of money, then, of course, there's a tendency due to competitive bidding through for prices to decline, just as inversely. If the supply would shrink, for example, due to war or due to greater laziness and no longer like to work, then the same amount of money would bid for a reduced amount of goods that were being exchanged for the prices would increase. OK, so then the question is what are the more remote causes? That is, what are the causes of a decreased aggregate demand? What are the causes of an increased supply? So we'll look at this. The causes of a decreased aggregate demand, more remote causes, are an increased demand for money. That is, demand for cash balances, also called hoarding, also known as hoarding. It is hoarding. And on the other hand, a reduction of the money supply. So again, a decreased aggregate demand means we are spending less money on the available goods and services. Why do we spend less? Well, either because the amount, the supply of money that we can spend has been reduced, or because the supply, while the supply has remained the same, we now choose to hold back more than we held back before. So less money is being spent. Aggregate demand diminishes. On the other hand, production can increase, and production can increase due to natural causes and also due to man-made causes. Now let me go one step further back. Let me trace the causal chain just one step further back. And again, we could go on, but we'll stop after the next step. So let's look now at the causes of an increased demand for money. Actually, several causes is a whole theory of the demand for money, and I'll just highlight two of such causes. One such cause is a higher uncertainty in the economic environment. For example, in the past three or four years, uncertainty has increased. The economy was very fragile. So there's a consequence. Many firms, in particular firms operating in other financial markets, have increased their cash balances. There have been investment firms that invested virtually all of their money in liquidity, that is, in cash balances. Not only dollars, well actually the dollar was not very popular, but also euros, and Norwegian coronas, and Swiss francs, and so on. So they have sold stocks and bonds that they owned before, and they kept the money. So they were increasing the demand for cash balances. And of course, this is a way to protect yourself. If we are in a difficult economic situation that is crisis prone, it means that the monetary value of things that we own, our house, our car, financial assets, and so on might shrink. But of course, if you hold cash, then the value of cash is what it is. If you have a $100 bill, its value will not. That is, its purchasing power might shrink, but it will always be $100, whereas your own GM stocks, let's say, it was $100 before, and now it shrinks to five. You have lost a lot of money. So people demand more cash. And this of course entails decreased aggregate demand, and therefore exercises the inflationary pressure. Another possible cause of an increased demand for money is the introduction of money of a higher quality. If we were in the United States to bring about a transition from the current fiat money system to a commodity money system, we would introduce gold or silver back as money, then we would create money, bring about money of a better quality. And as a consequence, the demand for such money would increase. Traditionally, even before the 19th century, the main technique for people to hold their savings or to save was to hoard money. It was a traditional savings technique. Why did they do this? Well, because they knew that the gold coins and the silver coins would by and large preserve their purchasing power and even increase in purchasing power. Today, of course, it would be suicidal. I do not recommend that any of you hoard dollars or euros or whatever and even Swiss francs for your savings. Why would it be suicidal? Because these monies are inflated constantly, so they're purchasing power diminishes. Therefore, nobody today saves in cash. But if we were to reintroduce gold or silver as money, then many people would start again rediscovering the wisdom of the ages and save cash. So the transition to a better quality money would bring about a transition to different ways of saving, one of which would be a larger demand for cash balances. So deflationary pressure. What are the more remote causes of the money supply here, in particular, again, just highlight such causes which are bank insolvencies. And bank insolvencies bring about deflationary spirals. If a bank goes, let's say, a city bank goes bankrupt. City bank is not in good shape right now. The city bank goes bankrupt. What does this mean? It means that from one day to another, as soon as it gets known that city bank is bankrupt, you will not, as a customer of city bank, you will not be able to pay anything with a check drawn on city bank or with a credit card issued by city bank. In other words, all the money or the bank money that has been created by city bank will evaporate. So a part of the money supply evaporates. So in these exercises, then, deflationary pressure and detailed spirals, but it won't go into this. Now, if we turn to the more remote causes of increased production, so we have here natural causes and man-made causes, natural causes might, for example, be better climatic conditions. So for example, if there is really global warming, then certain parts of the world that before were not usable for agricultural production, Greenland and so on, might become usable. So this might actually give a push to aggregate production. It would be less costly to use those lands and aggregate production might increase. This would entail a deflationary pressure. Among the man-made causes, we have in particular to mention a higher savings rate. This entails the scenario of deflationary growth, which we will talk in more detail. More entrepreneurship, which is a cultural factor, so you can have, some countries have an entrepreneurial culture and they preserve this and encourage this, of classes and so on. Entrepreneurs are perceived as something positive within the economy. And this will then entail the creation of better technology and facilitate the discovery of additional resources. And finally, let's not completely get this out of the picture. It's also possible that we get better economic policy. Might be a dream, but on logical grounds, we cannot completely exclude it and sometimes there are revolutions in economic policy brought about. And of course, policy is actually the greatest man-made obstacle to increased production. I mean, we can talk about earthquakes and floods and so on. None of this can match the destruction brought about by governments leading economies into war and pursuing stupid economic policies and so on. Okay, so in this case, two production would increase and there would be deflationary pressure. So we have now an overview of the main causes of deflation and we will focus on the following three, that is, in particular on the first one, the better quality of money, the higher savings rate, which is down, and then eventually if we have a little time on bank insolvency. So let's first turn to the scenario in which we bring about a transition to a better kind of money and therefore have price deflation resulting from monetary reform. The scenario that we are considering here is return to the gold standard, which was mean as I've already pointed out, more savings in gold, so more savings in cash balances, less money would be spent on consumer goods, less money would be invested. And it's useful to analyze this scenario under two different hypotheses which we consider a first case in which all companies are financed with equity, that is, no company has any debt. And the second scenario would be a debt economy in which there would be very few equity and a lot of debt. So in a pure equity economy, of course our government would still be indebted but we would have no private debt. And the implication is that no bankruptcy is possible. You cannot go bankrupt if you don't have debt. You just run out of money. That's not bankruptcy, it's different. So that's the situation that you guys face always at the end of the month. You're not bankrupt but you just run out of money. In a debt economy, all companies are financed out of credits and here then the bankruptcy is possible and even likely. So why do we make this distinction? Because it's actually only in the second case that deflation creates those problems for those it is, for which it is feared. So let's focus on the first case. First, under two, again under two hypothesis. The first hypothesis is that all prices change proportionally to the money supply. That is to the variation of the money supply and also to the variation of the demand for money. So if there is a 10% increase in cash holdings, this would imply a 10% decrease of all prices. Now if all prices change exactly by the same proportion, and this means that there's no real impact neither on consumers nor on producers. Let's say as a consumer you have a household revenue of whatever, $1,000 per month and you pay $2 per pound of tomatoes and you pay $300 for rent, et cetera, et cetera. Now if all prices, let's say, fall by 50%, your revenue would shrink to $500, you would pay $1 for tomatoes and you would pay $150 for rent. So your lifestyle, your activities won't be affected at all. It's just the monetary expression that changes. And this has been highlighted first by David Yew, an 18th century Scottish philosopher. He has published a collection of essays, and it's also the title of the book Essays. It's a wonderful collection, it's still worth reading today so I do recommend that you do this. So you important this out, right? If all prices change exactly proportionally, there's no impact actually on our life, no impact on consumers and also no impact on producer. Let's say I've been a, whatever, microphone producer and I produced these, I sold these things here for whatever, $20 per unit and I did so by hiring, whatever, 150 people and I paid them an hourly wage rate of $20. Now if there's a price deflation and all prices are cut by 50%, then I would sell my microphones for 10 and I would pay my people a $10 per hour. So I would be exactly the same, my business would be as profitable as before, with no impact on the conduct of my affairs. So in this scenario envisioned by Hume and also by some later economists, deflation, I would also say inflation has no impact on the structure of production. Economy is not affected. The real flow, the same real quantities, quantities of a number of microphones, number of cars that are being produced, would not change, it would only be exchanged at a lower price level, that's all. Now of course this scenario, this hypothesis is not very interesting, it's only interesting as a hypothetical, as a pedagogical demise. It's good to start from there. Then we can move on to a more realistic hypothesis, this is the hypothesis formulated by Richard Cantillon even before you. You've already heard about Cantillon in this week, so Richard Cantillon in his book on general considerations on trade, excuse me, the nature of commerce in general, he analyzed the repercussions of an increase of the money supply. And if the money supply increases, then prices will change subsequently across time and these prices will not be changed proportionally but in different proportions. So they do not change at the same time they change the different proportions. The consequence is always that companies and individual households will be affected differently. Some companies will experience an increase in profitability, other companies will experience a decrease of profitability. But for some companies the prices of their products rise before the prices of their factors of production rise. So these companies will benefit and for other companies the prices of their products will rise after the prices of their factors of production rise. So the costs increase first, so they're in trouble. And for households it's the same thing. Some households will experience an increase of their revenue before the prices of the consumer goods that they buy increase. So they benefit, they win. And for other households their revenue will increase only after the prices of the things that they buy increase, which is in the United States the case for most people living outside of Manhattan. So here we have an impact therefore on the return on investments of different companies. We have an impact on the relative revenues and therefore there will be a change of the structure of production in the course of creative destruction. Now the important point here is, therefore I use this as expression, creative destruction, is that even under this hypothesis there is no systematic aggregate impact. So money in this case, the demand for money is not neutral, the demand for money changes. This will have unequal repercussions on the different prices. So companies and different households will be affected differently, but there will be winners and there will be losers. We cannot say that everybody is going to lose. It's simply not true. Some people will experience a stronger decrease of their costs than there will be a decrease of their revenue so these people will benefit, they can increase their activities and so on. For others it will be the other way around. So in this case then deflation does not bring about an aggregate collapse of the economy, it just brings about a change of the structure of production, just as such a change would result from an increased money supply. So we can conclude on this point that the demand for money is not neutral, but the resulting price deflation does not present any particular problems for entrepreneurs. They still have the problem to identify where are the lines, which are the lines of business in which the selling receipts will be higher than the amount of money I have to put down on the table to buy intermediate products, tools, and to hire people. This does not change. So the economy is constantly, it's never stationary, right? Economy is constantly in a flux, there's always new branches of business that become profitable, other branches of business that become less profitable or become incur losses. So the task of the entrepreneur is always to withdraw capital from those sectors, from those firms that are likely to incur losses and to invest this money into those firms that are likely to have increased revenue, right? And in the inflationary scenario it would be exactly the same thing. Yesterday we've already talked about the question whether prices are sticky, do prices, is this whole scenario, is this possible? And the answer that I've given, which I will just restate now very quickly, is that yes, prices are sticky, but the stickiness of prices is not a natural constant. It's not like the speed of light and even in the case of the speed of light, it's questionable whether this is really a constant. Prices certainly are sticky, but this is a dependent variable. It depends on all kinds of things. In particular, it depends on the institutional environment, it depends on the ability of entrepreneurs to convince the people who cooperate with them, right, suppliers and employees. If we have an environment hampered by government interventions, governments prevent the prices through price controls, for example, and also through unemployment relief and public unemployment relief and so on, then prices, of course, become more sticky and this whole process is very difficult to work out. But there is in a market economy, there is no such obstacle and prices can become very, very flexible in a market economy. Okay, now let's turn to the more interesting case of a debt economy. Here, again, we can make the same two hypotheses, the union hypothesis and the Kantian hypothesis. So in the first case, we now encounter the following problem. If prices fall, that is, if our revenues fall, then as we have seen, this does not represent a problem for the profitability of our investment, of our production. Let's say we own a fern and we're producing pens or whatever and we had an annual revenue of $120,000 and our annual cost expenditure was also, it was $100,000, okay? So we invest 100,000 year-in, year-out, right? We invest 100,000, we earn 120, so we make a 20% profit, gross profit, before taxes. Now there's a deflation. All prices shrink proportionally, union hypothesis. Our company will now earn $60,000, our cost expenditure falls to $50,000. So we are as profitable as before. We still earn a gross, return on investment of 20%. The problem is now the following. Where did we get the money from that we invested before, the $100,000? Well, we took out a credit. We promised to our bank, we'll pay you whatever, 15% or 20%, even 20%, so it's a credit shark. But we could do this because we were earning, in fact, a return on investment of 20%. Now the price level shrinks. We still earn 20% on our annual investment, but we have taken out a credit of $100,000 before. So we now have an absolute return, not a rate of return, an absolute return, of $10,000. But we need 20,000 to service our debt, so we can no longer do this. See the problem? So the shrinking price level makes it, in this scenario, for all indebted entrepreneurs, impossible to service the debt that had been contracted at the previous higher price level. So we have a problem. At least these guys have a problem. So what happens now? These guys go bankrupt. There will be a change of ownership. And this implies, of course, that in the short term, we will have an interruption of production and therefore decreased real revenues. If we interrupt our production, we need to say, well, say to everybody, stop, right? To our suppliers, stop. Don't deliver anymore. I don't know whether I can pay. Say to our employees, sorry guys, give me a break or something. Let's talk again next week or next month or something. And because we need to first settle the little problem that our firm, that is me, has with our creditors. By and large, there are only two solutions that can be worked out. The first solution is we renegotiate the debt. As you don't say, look, I mean, it's impossible for me to service this debt, but nobody can service this debt. It's not just me. I mean, you will simply not see your money back. You've given me $100,000 and I'm afraid I didn't do this on purpose, but you won't see it back. All prices are way too low now. And so then the creditor might say, okay, so we'll work now. We renegotiate, for example, we reduce the interest rate that you have to pay me or we reduce the principle sum that you owe me. You owe me no longer 100,000, you owe me a 50. And that's what happens in practice. In most cases, actually. Second possibility to solve this is bankruptcy. You say the creditor says no, I mean, you owe me and if you cannot pay, then you go. And then the creditor, so either the company is liquidated, so it's sold, or its parts are sold and so on, or the creditor takes over. Now for us, what is crucial here is that the factor endowments, that is the real infrastructure of the production, structure of production, is not affected by this process, right? It's not because an entrepreneur goes bankrupt that his company evaporates. I own a pen company, so I have machines and I have a building and so on, I have cars. It's not because I'm bankrupt that this all disappears. It's not because I'm bankrupt that my employees lose their know-how, that they have forgotten suddenly how to make pens and so on. So all the real factors of production that what creates real wealth is still in place. What deflation entails in such a case is simply a redistribution of property. It's no longer the old entrepreneur who is the owner of the company, there will be new owners. Now this is of course deplorable as far as he is concerned, but from an aggregate point of view, from the point of view of society as a whole, this is not very important. It's not very important who runs the company. If he's really an able entrepreneur, it was just tough luck that he hit a deflationary phase. Well, then he probably will convince his creditors that they just renegotiate the debt and he will continue as before, right? But if he was light-hearted and operating paying high factor prices in the deflationary environment, they might say, well, you go. They will put somebody into place who is more circumspect. So this means then that in the medium and the long-term, there's no change in productive capacity, right? In the medium and the long-run, our ability to churn out consumer goods is not affected at all. And quite to the contrary, actually we have to expect now stronger growth because obviously the company was excessively indebted. This of course stifled its flexibility faced to the economy, right? So reduced debt or no more debt, right? This is the great thing of this deflation-induced bankruptcy entails stronger growth because the economy becomes less financially fragile. So these are the crucial considerations, right? The real economy is not affected from an aggregate point of view. The deflation in this worst case brings about a change of ownership, which is by and large irrelevant from the overall point of view. Things are not different in the case of the second hypothesis, right? The only difference here is that some companies or households might still be able to service their debt because they are now winners and losers of the deflation. The losers will of course be double affected. It's not only that they are no longer able to service the debt because their absolute net revenue has shrunk but they have no more net revenue at all, right? They incur losses. And others might actually still be able to service the debt. For example, our entrepreneur, right? He had before 120,000 revenue and 100,000 cost expenditure. Now the deflation hits and he might be a winner of the deflation. That is, his revenues increase relative to the cost. For example, his revenue might fall to 70,000 from 120,000 to 70,000, right? And his cost fall from 100,000 to 40,000, right? So he would still be able to service the debt that he had contracted at the previously higher price level where he would not go bankrupt. But others of course would and here the same considerations apply that we have already analyzed under the first hypothesis. So, let us then conclude, preliminary conclude this. I'm saying that even in the worst scenario deflation provides significant advantages from an overall point of view. These advantages especially to make the economy less fragile. Debt-ridden economy is fragile, crisis prone. And this disappears. Thanks to deflation. It entails aggregate disadvantages in the short term and even there, well, we could argue are these true disadvantages if you solve a problem, right? You go through a hard phase, but the hard phase is part of the problem and solving process. And there are significant medium and long-term advantages. The rejection of deflation is ultimately a special interest planning. That's what it is. Because of course, some people will be negatively affected in a debt economy. They will lose their property. Companies are entrepreneurs operating with whatever. Equity ratio of 10%, they have 90% credit, right? They are likely to lose in such an environment. They are likely to lose their company. That's hard for them. But again, if they now say, well, we have to do something against deflation, that's ultimately a special interest planning. And they say, save me from my creditors for all the people who want to buy my company before I go bankrupt. That's ultimately what it is. And we have to say that life goes on after deflation, right? Life goes on for all of them. Goes on for government. Governments, well, it's true if a really deflation in its economy and the government goes bankrupt. Government, of course, will not be taken over, maybe unfortunately so. But if they are no longer able to pay back live up to their promises, so they cannot pay back the debt, right? Debt ceiling is not increased, we default. So this means we will no longer be able to take out credit. Now, but maybe this is, well, not maybe, but actually this is not a bad thing. It's not a bad thing because, well, probably I should go into this point a little bit more detailed because I won't have time to address the other scenario anyway, if my time is running out. It's actually a good thing that governments have to live up to this reality because it would force them to live with tax revenue. If governments can no longer finance themselves with debt, they have to live with tax revenue. Now, according to the classical theory of democracy, a theory that has been articulated in the Middle Ages and then was very strongly endorsed by the American revolutionaries, this public finance, the limitation of government to tax revenue has a very important democratic function. It is, in fact, this limited budget that forces governments under the will of the citizens. And according to the classic democratic theory, if a government wished to expand its activities, it had to ask the citizens to increase tax payments. It had to make tax payments, tax hikes politically acceptable. Only then could governments increase their activities. And so the citizens could control their agents and the government by giving or withdrawing consent to the budget. Now, if governments can take out credit and if they can, even worse, just print the money that they need for their expenditure, then they can circumvent this control through the citizenry. If a government can just print the money it needs for its expenditure, or if it can, it will increase its debts, then this means that it can increase its activities, can increase its expenditure without asking consent from the citizens. That is, government, through these financial techniques, tends to become tyrannical. Therefore, the American revolutionaries were very strongly against this, or at least some of them, not Hamilton. So the point is, and this is actually a good thing, it would reinforce democratic control over the government. Life would go on also for corporate finance. Corporations would just have different owners. That's the point that would be addressed already. And life would go on also for households. Let's say if there was really a very strong inflation today in the United States, price level dropped to, what about 50% or 20% of the current level. I don't think that it's very likely, but let's see. Consider this. Then clearly, most American households that still have any mortgage debt would be immediately bankrupt. So most Americans would have to leave their house. That is, more precisely, speaking, they wouldn't have to leave their house, but they would have a different kind of contract. As you have all these houses now, that still exist. Again, it's the same argument, the same consideration as in the case of companies. All the houses still exist. What do the owners of the houses, the creditors who now own the houses, or the people who buy the houses at a very low price, what would they do with them? And they say, I'm the guy who has no debt at all and then I'm waiting for the deflation to hit and then I buy off all of my neighbors. I buy the entire neighborhood. I own all houses now in town. So what do I do with 25 or 250 houses? What do I do with them? I cannot possibly be used them for myself. So what I will do is to rent them. So ultimately, what will happen in this case, as far as indebted households are concerned, is that they would simply rent rather than pretend being the owner of the houses and pay anyway. So the payment would actually be lower and they would be renders rather than nominal owners. And so again, from an aggregate point of view, would be no substantial change, would be a change of ownership titles. Okay, I think, and this is also why I addressed this scenario of a currency reform first. I think that this is the essential, this is the essential, these are the essential considerations that we have to address here. So I will skip now price deflation in a growing economy. Oh, maybe I will do the first two charts. So this is actually, yeah, this is a nice thing. I will conclude on this. And so in price deflation, in a growing economy, so we have two takes on the causes of economic growth. The first one is the mercantilist theory that has been revived in the 20th century by John Maynard Keynes, according to which aggregate consumer spending and aggregate spending in general are the two causes of economic growth. And so the price level is there for necessarily well to stabilize the price, prevent the prices ever fall. According to the School of Thought, there is a paradox of savings. Savings are paradoxical in that they bring about greater wealth for an individual. I can enrich myself by increased savings, right? I spend less on consumer goods and whatever, I buy a piece of land or buy a firm or something else. I enrich myself, but if everybody did the same thing, then it would actually be the opposite that happens. Because if everybody saves more, then there would be a strong decline on the expenditure on consumer goods. So therefore the revenues of the firms would diminish and firms therefore would invest less, right? They would have to cut their costs. If they cut their costs, then the revenues of people will fall, they would even spend less money on consumer goods and so on, right? So we would enter into a deflationary spiral and the economy would sink into a bottomless pit. So savings work from an individual point of view, but we cannot generalize this, right? Generalizing this finding would be a fallacy of composition and something that all economic students learn in the first year would be a fallacy of composition. From an aggregate point of view, savings are very harmful. The saver is ultimately from the Moroccan to Lisk engine point of view, he's a egotistical maniac who just thinks of himself and not of the greater good. If he really cared for his countrymen and women, he would spend the hell on consumer goods. So in order to prevent that savings entails such terrible results, we have to do something. We have to prevent that aggregate spending diminishes. Let me just point out in passing again that this is also the opinion of the Rosarian ring of the Austrian economists, right? They also think that aggregate spending has to be stabilized in all price. So in the 18th century, before Adam Smith, there was actually not much that could be done to prop up aggregate spending. There were some experiments with fiat money, but in most countries, it was very reluctant to make this step. So in most countries, governments pursued trade policy. They used trade policy to prop up aggregate spending. Trade policy means I intervene into the market in order to encourage exports and to discourage imports. So if our companies export more, then more money that is gold and silver in those days flow into the country. If I discourage imports, then less money flows out of the country. So ultimately, more money will circulate within our borders, so aggregate spending increases. Wonderful. Today, trade policy is no longer used for this purpose because we have central banks who can produce immaterial fiat money today then these central banks are, wait a minute, spenders of last resort and conduct this type of expansionary monetary policy. But the causes of growth are perceived very differently according to the classical economists and to the Austrian school, which carries on the classical heritage. In this tradition, the two causes of economic growth are parsimony, the division of labor and innovation, as we've already seen. And these economists hold that the spending level is irrelevant, the price level is irrelevant, and savings are not paradoxical. So we've already seen that the price level is irrelevant and the spending level is irrelevant, previous considerations. Now let me just point out why savings are not paradoxical. So there must be obviously some error here, right? In my lecture on Monday, we have seen that savings are actually necessary, is the physical necessary precondition in order to carry out longer production processes. In order to engage in a roundabout production, we need to have saved before in order to enable consumption during the longer production process. We've seen that an economy can operate well in a deflationary environment from an aggregate point of view. Now the Keynesians make a common sense point. More candleless and then the Keynesians just warm this up. If corporate revenues fall, well then companies have to cut cost expenditure so revenues will fall and so on. So what's the error here? The error is actually the one that the Keynesians reproach to the classical economists. Keynesians say, well, you are committing a fallacy of composition. You're generalizing a result that holds true for an individual. An individual can enrich himself but not a country as a whole to increase savings. But they themselves commit a fallacy of composition because the problem they envision holds true only for an individual company. If an individual company in a market economy is confronted with a declining revenue, then it cannot cut its costs. It's a, all other companies are operating as before. My company experiences a reduced demand. I had a revenue of 120 before. Now my revenue is, shrinks to 60. Now what happens now? I would have to cut costs. I go and see my suppliers. I make a big convention of all my suppliers and all my collaborators, all my employees and so on. And I hold my deflation talk. Friends, we need to cut costs. We all have to operate with a smaller belt and so on. You've got to work for half of the money that before. And then they smile at me and say, look, I mean, we'll just go next door and work for those guys. So it will not work for me. I will go bankrupt. But here, of course, in the case of a general increase of savings, general reduction of consumer expenditure, all companies are confronted to this problem, right? All companies are confronted to more or less all right, because they're the continue effects. But more or less all companies are confronted to lower revenue. So in all companies, the entrepreneurs will make the big convention with all their collaborators and they will hold exactly this kind of talk. And then people will look around and see, well, everywhere else, the same problem exists. So we have the choice of either working at a lower monetary revenue or just not eat in the months to come. And then of course, people will do precisely this. They will accept a cut in revenue. And the economy will work as before. So even here, so then savings are not paradoxical. The Keynesians suffer from precisely the fallacy that they reproach to their opponents in the fallacy of composition. So the causes of growth are then private initiative and government interventions, hand-pulled associations of firms and encourage frivolous behavior. Okay, now very fast, oh, very fast. Okay, well, I'll switch to my general conclusions. All right, so the general conclusion is the following. This is a page like an IHR. All considerations about deflation and also about inflation must start from the following point. An economy, a market economy can work well, irrespective of the price level, irrespective of the tendency of the price level, in a growing shrinking price level. The economy can work well, irrespective of the level of aggregate spending, and it can work irrespective of the tendency of aggregate spending. It can work well, irrespective of the money supply. All else is a fallback into mercantilist fallacies. And this implies then that price deflation resulting from monetary reform or from savings-based growth and so on is beneficial. The deflation poses a short-run problem for a debt-ridden economy. The problem, as we have seen, consists in transferring assets from bankrupt debtors to creditors and buyers. And even when deflation hits such a debt-ridden economy, it provides substantial, medium, and long-run advantages. As we reduce debt, as we reduce fragility of the economy, there's a greater role for owner-entrepreneurs. Entrepreneurs who are not just puppets of the bankers who have lent them money, but who are the owners of their company, true owners. And a diminished role, therefore, for bankers and other intermediaries. These conclusions should not be interpreted as implying that governments should do something to freeze the money supply. That would be a fallacy, too. It's not because deflation is not harmful that the government should try to prevent an increase of the money supply. It does not imply either that governments should try to actively bring about deflation. So it's not the same thing either. We just have to be relaxed about these things. And of course, the political implication is that one of the main justifications for the existence of central banks, namely the fight against deflation, is pointless from an overall point of view. Central banks are the agents of special interests and robbing the general population to prevent bankruptcy of those who should, in fact, go bankrupt. Thank you for your attention. Thank you.