Deflation
Deflation is a contraction in the supply of money.[1]
Deflation and falling prices
Deflation can cause a fall in prices. But calling falling prices "deflation" is a profound confusion between prosperity and depression. There are two distinct causes of generally falling prices. The leading cause of falling prices is economic progress, whose essential feature is an increasing production and supply of goods and services, which operates to make prices fall. The other is a decrease in the quantity of money and or volume of spending in the economic system. Falling prices is the only effect that they have in common. They differ profoundly with respect to their other effects.
Falling prices caused by increased production do not reduce the general or average rate of profit in the economic system and do not make debt repayment more difficult. For example, if falling prices result from the fact that while the quantity of money and volume of spending in the economic system are rising at a two percent annual rate, production and supply are rising at a three percent annual rate, the average seller in the economic system is in the position of having three percent more goods to sell at prices that are only one percent lower. His sales revenues will be two percent higher, and that is what counts for his nominal profits and his ability to repay debts. His profits will be higher and his ability to repay debt will be greater. There are lower prices, but no deflation.
What wipes out profits and makes debt repayment more difficult is not falling prices but monetary contraction, i.e., the reduction in the quantity of money and or volume of spending in the economic system. This is what serves to reduce sales revenues, and, in the face of costs determined on the basis of prior outlays of money, causes a corresponding reduction in profits. It is also what makes debt payment more difficult, in that there is simply less money available to be earned and thus available to be used for the repayment of debts. Falling prices in response to monetary contraction are precisely what enable a reduced quantity of money and volume of spending to buy as many goods and to employ as many workers as did the previously larger quantity of money and volume of spending.[2]
References
- ↑ Murray N. Rothbard. "C. Secondary Developments of the Business Cycle", Man, Economy and State, referenced 2010-03-09.
- ↑ George Reisman. "The Anatomy of Deflation", Mises Daily, August 2003, referenced 2010-03-09.
External links
- Deflation on Wikipedia