Tuesday, January 18, 2011

Price Deflation, by Dr. Fekete

The subject editorial can be found at:


I was going to go through a point by point commentary of this editorial. I cannot. As is usual with Dr. Fekete's writing, it is not very comprehensible to me. Make of that statement what you will: I have a feeling that there will be two camps with opposite and strong opinions of this as it relates to my competence.

It appears that the good doctor is saying that the actions of the Fed and other central bankers in the world will result in the purchasing power of the dollar and other fiat currencies to increase. If so, this would be a first in history to my knowledge. No wonder he is a self-proclaimed lone voice on this subject.

Of course, as with all discussions of inflation and deflation, one item missing here is a proper definition – or at least a definition that the doctor would like us to use. Is he speaking of prices as measured by the CPI? Is he speaking of asset prices? Is he speaking of the money supply? Left unsaid, an Austrian would assume the topic refers to the money supply. I have no idea what the good doctor is referring to, but he seems to be discussing consumer prices as he refers to targets the Fed is aiming for. In the common lingo, this is consumer prices.

To varying degrees, the Fed (with and through the banking system) has been creating money since 1913, accelerating since 1971 and supercharged since 2008. Yet, other than perhaps one year in the 1950s, there has been price inflation continuously. I wonder: is there some reason we should expect something different now? Why hasn’t this great deflation that is so certain in our future happened at any time since the end of the war? The same practice has been going on for decades, without deflation. But somehow it is different this time. Let’s get this one out of the way now: don’t go back to the depression; the money supply shrank because of the lack of FDIC insurance. That isn’t a problem today.

Now, it is quite possible we will see a deflation in asset prices, especially assets propped up by leverage in the banking system as currently configured. But a lower CPI? Highly unlikely.

The Fed wants people to watch the CPI. As long as it is benign, it is all systems go for money printing. As has been true with all money printing (or coin shaving, or whatever you want to call it), the money will eventually fail. I do not see how this can result in that same failed money gaining purchasing power.

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