Loading ...Daily Bell: We’re going to ask you some questions based in part on feedbacks we recently received regarding some of our inflation articles. Please feel free to comment for as long as you want, but please try to keep your answers simple and comprehensible from a layman’s perspective so people can gain as much as possible from your insights. We appreciate your patience, as we know you’ve answered some of these questions before, but with such subject matter, repetition can be a good thing.
Antal Fekete: “Repetitio est mater studiorum,” says the Latin proverb – repetition is the mother of all learning.
Daily Bell: Please define deflation and disinflation from both a monetary and price standpoint.
Antal Fekete: Deflation is clearly not the same as a falling price level. Technological improvements in production cause a gently falling price level under sound money that is no deflation. Defining deflation as a contraction of the stock of money is plainly wrong. We have a vastly expanding money supply, yet a lot of economists (including myself) hold that we are in the midst of deflation. I prefer the definition of deflation as a pathological slowing in the velocity of money.
Daily Bell: We think monetary deflation over a long period of time is difficult to accomplish in a central bank, money-printing economy. Comments?
Antal Fekete: “Accomplish” is not the word. No one wants deflation any more than wanting a pathological condition in one’s own body. “Occur” may be a better word. I disagree with your assumption that central banks’ money printing is antithetical to deflation. I am in a minority of one in suggesting that just the opposite is the case: expansion of the money supply through open market purchases of government bonds by the central bank is the direct cause of deflation. I know this is counter-intuitive, yet true nevertheless. Please consider that bond speculators chime in and preempt the Fed. They buy the bonds first, only to dump them on the Fed at a hefty mark-up later. The current expression is “front-running the Fed.” Speculators are in the driver’s seat, not the Fed. It is amazing that smart speculators like John M. Keynes did not realize that there was a fly in their ointment for deflation, namely, risk free profits. The opportunity to reap them defeats the Quantity Theory of Money. “Propensity to consume” is eclipsed by the “propensity to pocket risk free profits.”
Why is this deflationary? Well, because it slows down the velocity of money. No matter how fast the Fed is printing, its output is siphoned off by profit-hungry bond speculators even faster. So fast indeed that commodity speculators, who may otherwise be tempted to buy goods with the freshly printed money in anticipation of inflation, make a volte-face and march to the bond market where the fun is – unless they stay and short commodities like crude oil, to mention but one recent example.
Daily Bell: Along with Rothbard, as we understand it, asset inflation itself leads to what seems to be deflation and disinflation. Money volume must go up to go down. Truth to this?